Weatherford International PLC (WFRD) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter two 2005 Weatherford International earnings conference call. My name is John 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.

Thank you. Good morning. I will turn it over to Lisa for financial comments and my comments, and we will open up to questions and answers. Lisa?

Good morning. This morning, we reported diluted earnings per share from continuing operations of $0.64. The $0.64 compares to $0.59 last quarter and it compares to $0.40 for the same period last year. A breakdown of our sequential $0.05 earnings-per-share improvement can be summarized as follows. First, we had a $0.135 degradation to the earnings. $0.10 was due to the spring break-up in Canada. As a reminder, Canada as a percent of total revenues was 19% in the first quarter of 2005. The $0.10 decline this year is higher than the $0.06 decline we experienced in the prior year due to the fact that we started from a higher base level, especially in Drilling Services.

There was also a loss of $0.02 on a project in the Republic of Georgia. There was a $0.015 decline attributable to startup expenses for projects in North Africa. We have recouped this $0.135 plus an additional $0.05 through the following. U.S. contributed $0.075, Eastern Hemisphere contributed $0.10 and of that $0.10, North Sea contributed $0.05 and the Middle East Asia-Pacific contributed $0.05.

Equity investment in the Middle East contributed an additional $0.01 and this amount is included in our equity and earnings line. Lastly, higher research and development expense and a higher tax rate were offset in full by higher equity and earnings in Universal and other income.

On a companywide basis, revenues increased 80 million or 9% as compared to the prior quarter. North American revenues were up 17.7 million. The 17% increase in the U.S., which was $54 million, was offset by a 23% decline in Canada for $37 million which resulted from spring break-up. Eastern Hemisphere revenues increased 60 million, or 20%; Europe Caspian regions driven by the strong revenues in the North Sea contributed 30 million of this improvement with the Middle East Asia-Pacific region contributing the other 30 million. Latin American revenues increased 3% sequentially.

Now I will move to a divisional discussion, starting with Drilling Services. Revenues increased 10% as compared to the prior quarter. North American revenues were up 5 million with a $27 million increase in the U.S. being offset nearly in full by a $23 million decline due to spring break-up in Canada. International revenues increased 16% with all regions posting double-digit percentage increases. As I noted in the prior quarter, the revenue trend in the North Sea was particularly positive. This continued into the second quarter and Europe-West Africa region had a $20 million sequential improvement.

On a product line basis and ranked by size, second quarter revenues broke down as follows. Well Construction 35%, Drilling Tools 24%, Drilling Methods 21% and Intervention Services 20%. Operating profit margins were 22.7%. The incremental margins of 19% were lower than average incrementals for this division. Three factors caused the lower incrementals. High fixed costs and the repair and maintenance work through done during the slow period in Canada, start-up expenses of 3 million in the North Africa region, the deferral of $4 million of revenue on a project in CIS. All expenses related to the CIS project were recognized. However, the revenue will not be recognized until the customer dispute is resolved. We do not expect the project to have a negative impact on the third quarter as we are now demobilizing from this project.

Excluding the impact of these three events, EBIT incrementals for this division would have been a strong 39%.

Now turning to Production Systems. This division posted record level revenues of $404 million, an increase of 9% over the first quarter in spite of losing $14 million in Canadian revenues due to spring break-up. The U.S. North Sea and Asia posted improvements of 27 million, 11 million and $13 million, respectively. Second quarter revenues by a product line were Lift 54%, Completion 34% and Production Optimization 12%. The seasonal decline in Canada, which comprised 28% of this division's revenues in Q1, impacted Production Systems' operating income margins. Excluding the impact of Canada, incremental operating income margins for this division were 22%.

Now I will turn to cash flow and balance sheet items. We announced the call for a redemption of our zero coupon convertible debentures on August 29. We will fund the $578 million redemption price with cash on hand and the remainder with short-term debt. The securities are convertible into 9.1 million shares of Weatherford stock and the shares are included in our diluted weighted average share count on an if-converted basis. Calling the convertibles should be accretive in 2006, approximately $0.11 per share.

Capital expenditures in the quarter net of lost in hole (ph) were approximately 105 million and 172 million, year-to-date. We initially expected expenditures to be in the $280 million to $300 million range during 2005. However, due to forecasted growth in 2006, we now expect capital expenditures to continue at its Q2 rate of approximately 100 million per quarter for the remainder of the year.

During the quarter, we also completed two acquisitions for a total of $23 million. One was for an artificial lift located in Brazil and the other was for drilling services in the Rocky Mountains. Working capital -- we continue to focus on working capital and as of June, working capital improved four days since March. More specifically, our days sales outstanding improved six days over the prior quarter. Net debt to capitalization, inclusive of our zero coupon convertibles, is 24.3%.

The third quarter should continue to show strong operating results. Obviously, we will benefit from the seasonal recovery in Canada and we have strong growth forecasted in the Eastern Hemisphere. Although the following is guidance and by definition not precise, we forecast the following deltas in Q3 as compared to Q2.

First, the activity in Canada in the third quarter is typically not as strong as the first, so we estimate a recovery of approximately two-thirds of the decline in Canada; that is, approximately a $0.06 recovery. We will benefit $0.01 sequentially by not having the expenses related to the Republic of Georgia project. As stated earlier, this project had a $0.02 dilutive impact in Q2 as compared to Q1 as well as compared to our expectations for Q2 and Q3 as compared to Q2 will benefit from no expenses as we are de-mobilizing this project.

Third we expect, we expect growth primarily in the Eastern Hemisphere which should contribute $0.04 incremental. However, we do expect a slightly higher tax rate, about 27%, and this will lower earnings-per-share approximately $0.01. That is not exact. Some items may be slightly better or slightly worse. However, we do estimate earnings for the third quarter to be in the $0.73 to $0.75 range. Now I will turn the call over to Bernard.

Thank you Lisa. As Lisa said, Q2 earnings of $0.64 were $0.05 higher than Q1's $0.59, which is about 8.5% sequential improvement. Traditionally at Weatherford, the second quarter does not -- is not that much stronger than the first (indiscernible) historically. On a historical perspective for Weatherford, this is good. Sequentially, revenues grew by almost 80 million or 9% increase over Q1 and we grew by 9.2 million, a 7% increase over Q1. Although clearly strong growth as highlighted by Lisa, this was suppressed results. As detailed below, we had a triple handicap of traditional Canadian breakup costing $0.10, loss of $0.02 on a project in Georgia and specific startup expenses I think we did mention last quarter in North Africa of 1 $0.015.

More details on it. We did not record revenue of about 4 million of receivables related to the defunct project in Republic of Georgia. All of the operating costs, including de-mobilization and re-operations were expensed in the quarter, so this is something that should never have happened and is behind us.

Project startups in North Africa accounted for about $3 million of identifiable direct cost to the P&L. This was wholly expected and discussed in the Q1 conference call; that is not a surprise. The third and by far most important, Canada's breakup, also not a surprise. What may surprise you a bit more is how big Canada is (indiscernible) a Weatherford and we talk a lot about Eastern Hemisphere because that is the big expansion that's coming. But historically, we're very grounded in Canada. Canada counts for 17% Weatherford's business in '04 and 19% in Q1 '05. We're probably the highest exposure in Canada of our peers or very close.

Historically, Weatherford has severe Canadian (indiscernible) in Q2. This Q2 was no exception and it was worse than usual. The rains I will talk about in a minute, but particularly in the heavy oil segment, which is normally is sheltered, the service segment of the heavy oil is normally sheltered the breakup (inaudible). Canadian revenues dropped in Q2 by about 37 million, EBIT was reduced by just under 22 million and the incrementals (ph) were a high 59%. This breakup was particularly harsh with flooding in the South, the sort of flooding you have not seen in Canada in 200 years, and an unusual severe frost impact on heavy oil service operations. The drilling site was of course impacted, as is always the case.

Also with the expected fast (ph) ramp-up in the second half of '05, '06, maintenance cost on demobilized equipment was extremely high, which is actually a bullish thing because we tried spec all equipment back to operating readiness as well and fast as we could based on client indication. They wanted to go back as soon and as hard as the weather would permit. By comparison, the loss of revenues and associated decremental (ph), the Precision Drillings Tool and Technology divisions soon to be acquired by Weatherford were as high or higher -- we're about 50% as it turns out.

Ex-Canada, the Company had a sequential revenue growth of 116 million, or just under a 17% increase over Q1. And EBIT ex-Canada grew by 31 million, a 35% increase over Q1 and incremental revenues 27%, that is without taking the (indiscernible) project loss or the startups in consideration.

More details, Drilling division. The Drilling division posted a sequential increase in revenues of 47 million or 9.6% growth. The sequential increase in revenues ex-of Canada was just under 70 million or a 16% growth. The EBIT increase quarter-on-quarter was 8.8 million, or incrementals of 19%. The EBIT increase ex-Canada quarter-on-quarter was 22 million, or 31% incremental. (inaudible). In the prior four quarters, the average incremental in the drilling division was 38%. Adjusting for the Georgian project startup expenses and ex-Canada, the EBIT incrementals in Drilling division are 29.2 million, or 39%, which is wholly consistent with our track record.

Following is a review by major regions with trends into the second half of the year. The Eastern Hemisphere had the highest revenues growth rate with a $37.2 million sequential increase, or a 17.6% growth rate sequentially. U.S. was second-largest mover, with 27 million and a 16% sequential growth rate. Within the Eastern Hemisphere, it's kind of a tightly grouped. Middle East and Europe North Sea showed the greatest sequential revenue increase of 22% and 20% respectively basically the same. The Middle East and North Sea grew by 20 or 22% sequentially. Asia was comparably strong, North Africa was flat, which is not surprising (indiscernible) startup mode. Latin America was up modestly. Overall Eastern Hemisphere's margins were strong. They are historically always strong.

Middle East, Europe, North Sea, West Africa, Asia-Pacific and Latin America all had operating profit margins in the high range of 20 to 22%. The highest operating margin was actually North Africa with 23.7% which should not surprise you in spite of the start-up expenses. That sub-region has historically been the most profitable period at Weatherford. The European region, which included Russia and Georgia would've had the Company's highest margin with EBIT margin of about 25% for the quarter. It was (indiscernible) receivable write-off.

The U.S. was outstanding. Revenues had the second highest growth rate after Eastern Hemisphere and very close to it. The EBIT margins though were higher at almost 29%. Canada went in the opposite direction, I think we talked about it already, revenues dropping by 22 million or about 38%; operating profit dropped by 13 million, or about 65% for decremental of 60%.

(indiscernible) in the U.S. is further strengthening. The drilling divisions gained about 3% net price increases (indiscernible) Q2 across the board. The differences (indiscernible) of course. We (indiscernible) to gain more from pricing in the quarters ahead. There isn't any particularly significant in the quarter for the product service line standpoint, especially (indiscernible) in tandem showing similar growth rates.

The Production division also posted substantial increases in revenues of (indiscernible) 33 million or a 9% sequential growth rate. The EBIT increase quarter-on-quarter was modest, the sequential increase in revenue ex-Canada was 47 million or a 17.5% growth rate. The sequential EBIT increase ex-Canada was 10 million or a 22% incremental, which is consistent with the division's targeting performance of 25%.

So to Drilling 40, Production 25 is sort of what we both target and go back historically what we achieved. Geographic trends of production were consistent with the Drilling division. There's not much more to add there. But in the product lines though, there are some differences. Completion (indiscernible) the best responsible for about half of the division's growth and with the strongest incrementals. The second half of '05 should see further growth in Completion Systems, more particularly intelligent completion systems which now has for the first time a backlog of significance. That would be fiber optics, primarily. Lift Production, Optimization and Pressure Pumping, the young Pressure Pumping segment, will also have strong second half performance based on that backlog of products and projects.

Prognosis of both divisions into second half of '05 from the base of Q2. In the U.S., we expect further volume increase in Q3. U.S. operations, Weatherford typically trail the U.S. rig activity by three to five months. So therefore with the Q2 rig count rise, we will have further increases in the Drilling division.

Second, we expect further growth in the U.S. drilling activity. I add the comment albeit modest, and it is difficult to argue for more than 20 to 30 rig moved up in the U.S. land markets from Q2 levels. I don't want to be misunderstood. I'm not suggesting that we don't think that the U.S. market has some more room to grow. I think there is a demand for more activity so that the number of 20 to 30 is on the low end, probably a number as high as 100 would be more accurate. However, if equipment is hard to come by, people also are hard to come by. People can be trained and they are being trained. Just takes time. So all I'm suggesting is that although the trend is correct and the amplitude of the move is correct, always remember things take time. There is a lag. And we're talking six months, nine months, no more.

Third, the Gulf has a more defined positive prognosis. The driving force is a small to medium-size independent (indiscernible). This appears to be as much workover as it is drilling. South America, modest growth, particularly in Brazil and Venezuela. Venezuela in particular looks strong. It is not risk-free, but it looks strong. Mexico flat in '05, not expected to grow until '06.

Moving east, substantial growth in the North Sea across the board in by the UK and Norway showing double-digit growth in the second half of '05. The North Sea, starting with the UK Norway and even Holland, will strengthen further in '06 and '07 more than we and people originally assumed. As reference in Q2, Weatherford's combined North Sea revenues in UK, Norway, Holland and Denmark were just under $87 million, or 9% of the total Company revenues, which is a fraction of the 13% of revenues that the North Sea accounted for in '01.

Strong growth of our multiyear period in Eastern Hemisphere ex-North Sea, the rest of the east. This will be powerfully, and that word is chosen on purpose, centered first in the Middle East and North Africa. It will spread later to West Africa, sub-Sahara Africa, (indiscernible) Asia and of course Russia. It will be powerfully centered in Middle East, North Africa initially. Middle East North Africa region will drive our growth (indiscernible) in '06 and '07 as well as into '08. That region's business we expect it to double in size by '08, and perhaps even earlier.

(indiscernible) outlook. Prognosis is stronger across the board. In the U.S. and Canada, realized pricing for Weatherford Parts and Services is likely to move up further. This will be true for both divisions. We expect additional fall to 6% increases to be phased in the second half of '05. In the international market, pricing is showing strength. From the UK North Sea through Asia, new contracts have been signed with an average of 8 to 10% higher pricing. In some instances, pricing has been 20% higher. This is not across the board or simultaneous but over time, it will build a much higher margin plane (ph). In addition, existing contracts, particularly for two to three years worth of work as time goes by, contracts issued in prior years with substantially lower pricing and terms will come for renewal. I think you all understand that. Certainly some of the contracts that are being negotiated now are longer than two to three years.

A few words about Precision, the pending acquisition. One, the regulatory agencies in the U.S. have approved a transaction, so we're waiting on the Canadian and Mexican agencies. As a consequence, the closing date on or around Labor Day, which we initially targeted, appears reasonably reliable. Q3 is likely to include one month of combined operations.

Two, the organizational structure that combined Weatherford and Precision businesses is being worked on companywide. We will end up postclosing with three divisions. Precision's tool and technology business, probably called PES, will be folded into Weatherford's existing Drilling Division. The larger division will be led by John King (ph). John is currently running the PES Division for Precision Drilling. Gary Warren (ph), who is running the existing Weatherford Drilling division, will retire at closing.

The international rigs will be run as a stand-alone division. Ian Kelly (ph) will lead this division and report directly to me. Ian is currently running Precision Drilling's international contracting division. Lee Colley (ph), who runs the Production Division, will continue without any change. Subsequent to closing, there will be a specific onetime charge to cover discontinued product line -- product service lines, inventories, facilities, in-process R&D, redundancies and severances. We don't know at this time the dollar amount of the charge, and actually there's no way we can know as there needs to be rigorous specificity to it. Numbers will firm up or will be defined between now and quarter end and we will report promptly.

I will be happy to field any questions on the manner in which we intend to integrate geographic and (indiscernible) management when both organizations are combined. It's probably best left for Q&A.

Lastly, overall outlook, pricing -- strong across the board in all geographic regions well into 2006. Technology becoming more and more important. Technology (indiscernible) improved reservoir, field productivity will be increasingly well. There is a hunger for technology in the marketplace. Land rig (ph) activity will flatten out in North America by 2006. Bear in mind that what I mean by that is that increases activity will take longer in the U.S. simply because of shortages. It's not all bad, it strengthened in the first point (ph), which is pricing. The Gulf of Mexico may be an exception; it's showing life.

Notwithstanding the North American market, the international market is the one that will really blossom in '06, '08, as our clients make a push to develop secure productive reservoirs. Within the international markets, the Eastern Hemisphere will stand out as the strongest market. And within Eastern Hemisphere, at least North Africa will stand out in scale and scope. The North Sea is well into a strong multiyear recovery phase.

The next several years, and we feel it's the next several years. We never thought it was a normal cycle looking back 20 years. We at Weatherford the strong topline growth. The addition of the young, the technologically advanced product line of Precision, should increase Weatherford's growth rate for years to come. In that sense, we remain at our core growth culture. Capital discipline, this growth will produce increased returns and rising financial results on the back of the technology and footprint investments already made.

That concludes my comments, prepared comments. I will turn back the call to the operator for questions. Operator, could you please start the process?

(Operator Instructions) Jim Crandell, Lehman Brothers.

Good morning Bernard and Lisa. I have some questions about the Precision Drilling businesses you're acquiring. First of all, how has Precision EBITDA tracked I guess versus your expectations here recently, and how do you feel about the '05, '06 projections now that you've gotten into it deeper?

I think they should speak for themselves, but I think they did in Q2 better than I unexpected, although they are by temperament very conservative people and we're not going to change that. What I see for the second half of '05 and certainly '06 is also better than I expected.

So you would still expect this acquisition to be accretive by 10% or more at the current time?

In '06, indeed. You know our numbers are moving up. Theirs are also, so it's like how their lines are moving up together so that does not change the arithmetic. I also think that -- I hate that word synergies, but for lack of a better word, the synergies between the two or the ability for us to make a little bit more money for our clients and for ourselves together than individually. Those (indiscernible) appear as great or greater than I had anticipated. Also, the quality of their people is very high.

So all of this is not an easy process; it never is. But I have not had any unhappy surprises.

Bernard, I know you've been in the Eastern Hemisphere almost nonstop recently. Can you comment on Precision's competitive position in the various Eastern Hemisphere markets and the challenge/opportunity of increasing their sales in these markets where Weatherford is strong, which I'd say is virtually everywhere, except for Russia?

Yes. That's going to be an easy answer and I don't want to offend any of my Precision friends who might be on the phone, but (indiscernible) Hemisphere, the (indiscernible) very little there. I'm not wanting to diminish the efforts of the team on the grounds, not at all. It's a question of scale. Scale are very, very small, both infrastructure wise and resource wise. So I think that you can pretty much expect that they will the traction everywhere except Russia really where we do not have a strong infrastructure as of yet. And I would say probably the places that will be the most important will be the Middle East, North Africa, Asia-Pac I think will be the most -- and West Africa also. I don't think the North Sea will be a place where they will focus on originally. I think the resources will be focused on the rest of the Eastern Hemisphere. (multiple speakers) I don't know how much traction they will get; it's hard to tell. The percentages are silly because when you start from the small base, I can come up with percentages that are not meaningful because they're too big.

More importantly, they have on their own before big Weatherford came in, they have established a client credibility, I would say client loyalty for the not only the technology they have, but the service tradition they have which will blend so well with the service tradition at Weatherford. So they have done very well for themselves, but on a small-scale. What they really need now is something that is a facilitator, an infrastructure facilitator and (indiscernible) all Weatherford is going to do, not a lot more than that. So they should do very well, not only in those (indiscernible), but beyond.

And now in the Middle East and North Africa, do you see them primarily selling their products in service on a stand-alone basis, or do you think that in fairly short order, you will be able to provide an integrated package of rigs and underbalanced and LWD in those regions?

I don't think a client always wants integrated or bundled as it were offerings. So you have to discriminate for that. But first, the integration of -- meaning the joining of forces of Precision and Weatherford in those regions and you take the Middle East and North Africa, that is a good one -- that is happening before closing. So there's already allocation, office space allocation of base space, discussion of logistics support for one, one for the other. So you should presume that (indiscernible) faster than most acquisitions and acquisitions are not easy. Within I would say 90 days after closing, you would presume that it functions not as one organization quite yet, very close to it which I think is about as good as you can expect.

You should all therefore so expect that we will (indiscernible) decline not with one lift (indiscernible) services and a separate list, but the joint list immediately. And you will find that we will co-sell, co-service not necessarily the whole suite, because again that is a case; that is not the only case as in rigs, directional, underbalance and support (ph) -- that is a very critical case, but it is not everything. You will find that we will combine two or three parts and services of which maybe one is Weatherford, two Precision, or two Weatherford, one Precision. Of course, Precision and Weatherford will become one, but I'm just distinguishing this here for clarity. We will be co-selling these things almost immediately.

I think probably the biggest obstacle for us is nothing more but the old-fashioned how fast can you grow people, how fast can you grow equipment. It's not a logistics support issue because we have that. It's not the client credibility because they have that. And if they don't, we can provide it. So it's really the execution. It's execution of growth of people and equipment in those markets more than anything else. It's not organizational dynamics and how well we work together and integration all that sort of thing; it's not in Eastern Hemisphere.

Good quarter, Bernard. Thank you, we will stop there.

Ole Slorer, Morgan Stanley.

Thank you. Bernard, you almost invited this question because this is the first time I've heard you talk about pressure pumping in your remarks. And I just wondered if I can get a little bit more color here, because clearly the companies that so far this earnings season who have performed by far the best have been the pressure pumping guys. If I look at the market, we've heard that the U.S. market is about 2000 horsepower or thereabouts. And if I look at market statistics, it looks to me as if you will go from about 130,000 horsepower at the beginning of this year to maybe about a little bit more than twice that come the middle of next year. And if you looked at the big three (indiscernible) revenue per horsepower, they achieve of about 2000, that indicates they'll usually be having (ph) about a $550, 6, 7, million (ph) business towards the middle of next year. Could you just confirm whether those numbers are broadly correct or not, or what you're seeing there in terms of profitability?

Presumably the pressure pumping comment was a regrettable typo in my conference call note. To the most part, we have been discreet about that particular segment. But be that as it may, it is true that we have grown organically pressure pumping really because the desire to, one, have the competency in-house; two, because the returns are good, and three, because of the ability to do it was within our grasp. It's also true that the horsepower size of the operation, I think you said 130,000 horsepower, you're within the range of where we are today.

It's finally also true that it is growing. I'm reluctant to confirm where we're growing it because I think it's best to just do it and I don't think competitively it helps very much. But hat it is true, we are growing it. I will try to help on one question you asked, which is what is the profitability. It is a very high return business, it's (indiscernible) undeniably. When you are growing as fast as we are from a very small base of course, clearly the margins are going to be less than when you are already mature and essentially enjoying life.

But if I could take a quick look at the numbers now, the operating profit is somewhere around 25%, operating EBIT a little bit more than that, between 25 to 30% for that particular segment, which I think is probably -- I have not looked at the numbers of the big players in pressure pumping. We actually don't focus on that. And presumably, they are higher than that. But it's a very high return business.

Having said that, the market will only be able to absorb so much equipment and so forth and so on, and we will be responsible. But other than that, your question on where we're growing size-wise, you're directionally correct. As to how much we represent revenue-wise and the rest of it, that's arithmetic I best leave to the analyst community.

Bernard, the profitability number, just quickly, you sort of indicate that 30% plus margins times $2000 a bit horsepower once you become fully operational and at a lag (ph) because of the people. You're talking about a dollar a share of earnings for the second half of next year at some point.

There is some logic to the arithmetic, I'll tell you that much. But again, it's better to just actually let it unfold and do it rather than sort of crunch the numbers and decide that the cat is in the bag and declare victory. I say again, the volume that you indicated is roughly correct. It is true that as you grow, there is a lag, which is normal. (indiscernible) you're better off not growing than growing because when you don't grow, you have higher margins and when you grow, you have lower margins; that is nothing new under the sun. But then again, we are growing simply because we want to have a competent deep bench in that particular type of work and we're getting it, including R&D facilities and the rest of it. It is also true that at the and of the process, it will be a modest to sizable operation and it is to the extent the business remains as lucrative as it is, it is true. There is a buildup of incremental earnings which is powerful, it's true. I do not want to engage in arithmetic.

Is it safe to start through the second quarter this year, we can add back Canada plus some of the other things (indiscernible) you could see conceivably getting towards (indiscernible) in the fourth quarter, plus Precision for next year, plus this and you could (indiscernible) very big numbers (indiscernible) come into the second half of next year.

It will be so much better because we just reported a very good number, and then you told us how good we are rather than the (indiscernible) for things like this. And then what happens, then ultimately we (indiscernible) invested in that. So I'm not going to argue with your logic. I understand what you're saying and if everything goes well, maybe you're more right than wrong.

Thank you, Bernard, (indiscernible) try to hold back.

I don't -- I think there is a great deal of value in remaining cautious and conservative, your assessment. Every time we have followed that rule, I think we have done very well.

What could go wrong, Bernard? If you start just adding up synergies and numbers, it could get very big. But what could go wrong here? From an operational standpoint, if it is assumed the market is as good as it looks?

Well, I think a lot of the issues that I'm going to mention you are familiar with already. People, I don't want to -- people is an issue but people is time and money. It is true that we are -- the whole industry is short of people. This is -- and not only people in North America, people elsewhere. It is also true that when the market is short, what is the tiering mechanism within supply and demand; well, it's pricing. That means you have to pay people more, which is a cost push (ph) incidentally. So it's a fact that over the next 12 or 18 months, the cost of people in the industry is going to go up, which is normal. It's not hard doing it, it's not my saying it, it's actually academic. We're passengers on the train. The train is going in a certain direction.

So pricing will help create people, then you have to train people and there are different levels of training. There is short training and there's long training, so you have different (indiscernible) lags. So I think the real issue is leads (ph) and lag, and by the way, the clients are the same way. Clients are the same way. One of the mistakes perhaps that has been made from a perception standpoint is that there's a tsunami of business that's going to come towards a selected few in the industry in places like Middle East, North Africa, et cetera, Asia-Pac and so forth. So the realities of the clients there are ready to scale up to varying degrees. They all have an urgent and I repeat urgent need desire to scale up, and to scale up to a degree which I have never heard of or seen in my lifetime in the industry. This is all true.

However, some are far more ready than others and I would have to say, the ones who are ready are few. The ones who are not ready are many, and what slows them down is the political process. The sheer operating burden of preparing all of the work that goes into a major expansion; these are companies that never had to do this sort of thing, because over 20 years (indiscernible) longer than that. Many of them don't have a longer existence than 20 years. (indiscernible) they have never had to do this stuff. And it's very challenging and they (indiscernible) get it done and get it done very well, but it's very challenging.

So the leads and lags is your biggest risk and the leads and lags are not only a Weatherford operating risk as in will we have enough people, will they do well enough and (indiscernible) -- what about the equipment, did we order enough equipment, (indiscernible), a procurement question. All true and we're well aware of it. But the other sort of lag is (indiscernible) decline (indiscernible) wants but is not necessarily ready, will be ready. And so it's not all bad. I've always felt that absent the catastrophe, this is going to be a multi-year phase. I know we're always quick to want to peak. This word peak comes up all the time, and then you cross your peaks and you keep on having higher peaks and the peak is always around the corner. And I suppose as long as we feel this was way, I suppose the industry remains a place to invest in because we're wrong. This is a multi-year process because the headroom and capacity and the rest of the decline rate is not a one-year process. It is a five-year process, it is a 10-year process, and I really believe that.

So the leads and lags at Weatherford are shared by our peers and by the client, and it's not all bad. I know you like to have everything in one quarter so that when one makes a gazillion dollars per share and everything collapses afterwards, it will be the trade of the century. But the reality of it, it is much more industrial than that, much more secular than that, much more gradual if powerful than that. And that is how it is going to play out.

You did not highlight the Precision integration (multiple speakers).

I think that's a good point, Ole. I think it is a risk by definition. I find out after all of these years of doing acquisitions, I like them less and less. I find them harder and harder. However, there are some natural fits. When there is a natural fit, it helps a great deal. It's not contrived. There are really things that one can do for the other and the other can do for one. So it fits together, it plugs together easier. I think Precision Weatherford is really falling (ph) in that category. So it's not all peaches and cream, and certainly for people who would listen to this conference call who are part of the organization, they might say well it's easy for him to say. And that is a very legitimate comment. But with my experience, it is going as well as I have seen a large scale acquisition go in terms of integration.

(indiscernible) I think there might be some bumps and everything else, but if there are some, it will be in particular regions for particular personalities, so forth, things like that. But far the most part, no, I don't think it's a high-risk; I really don't. I did maybe a few months ago, almost instinctively, I think it's a much lower risk.

Okay, Bernard, thank you very much.

James Jones, UBS Warburg.

Lisa, in your comments about the guidance for the third quarter, the mass that you went through, there was really no statement about incremental or sequential improvement in the U.S. market, yet you're talking about maybe 3 to 5% pricing improvement and the rig count obviously, even with your three to five month lag, the rig count is going to be substantially higher in the third quarter than it was three to five months ago. So I'm just trying get a sense as to, is that just conservatism or is there something else there that is leading you to kind of thing that that number's relatively flat Q to Q?

No, there's not anything else there. I do tend to be conservative. I think that we benefit from being that way in the long run. At 4% growth, I said Eastern Hemisphere, or $0.04 growth, I said Eastern Hemisphere, but of course, there will be growth throughout the world and the U.S. in particular.

So that $0.04 you think is probably a pretty conservative number against all of the other things that are lining up in the U.S. market?

Yes I do.

And secondly, Bernard, several quarters go, you talked pretty optimistically about the second half of this year in the Gulf of Mexico, not because the jackup rig count was going to pick up, but because you had contracted startups on a number of deepwater projects either where you were for the TRS business or the completions business. And I'm wondering if you could just update us on that and how you see that -- is that on schedule? Is that playing out in the second half the way you thought?

We had palpitations, because we have massive amounts of work on the (inaudible) structure. And for a while, I thought that it was going to be adjourned and so forth. But it seems that the delay in things like that are going to be de minimus at the end of the day. And so the answer is yes. Everything is on schedule except the poor (ph) Thunder Horse (ph), where we have -- you have very good memory (indiscernible) services liner hangers (ph), cementation (ph), drilling tools for extended reach and also some fishing (ph), as I recall.

So it's all on schedule, indeed. Thunder Horse I think is not as bad as it could have been, but it's going to be a little bit delayed, so maybe that is pushed back a quarter. I don't think these things make a lot -- I mean, the more, the merrier, but I don't think these things make, at the end of the day, make a big difference to us because you have a lot of moving parts anyway in any given quarter.

But yes, the various deepwater projects in the Gulf are going to happen. No, (indiscernible) Thunder Horse -- it was supposed to be turned (indiscernible), so there will be some delays. But it's not as bad as it could have been by far, by far since the structure seems to be sound.

With respect to the Gulf per se, platforms and barges and the few remaining jackups, which are obviously, the mechanical ones are mat (ph) supported. There is volume that wants to come in the Gulf. It's just one of the areas that has lagged. It has recovered some, it has lagged, and there is -- if you add up what the clients are telling you and you do your math, the market (ph) want to go up be 10 to 15% in the Gulf. When you put all categories of (indiscernible) together.

Will it? I think it all depends on really much on what a client wants to do, but on whether there's enough -- whether it's service rigs or drilling rigs available to get the work done.

The second half in the Gulf will be good. The second half in the Gulf will be better than the first half in the Gulf. That is a fact.

I would think it would be almost substantially better just given the deepwater additions relative to what you had in the first half.

Indeed, indeed, no arguments at all.

And then are there is specific -- you talked in generality about the pricing trends that you're seeing or that you're expecting to see in the second half of the year. Are there some specific product lines where you're seeing better than above-trend pricing and other areas where you're seeing below trend? And can you just perhaps differentiate that for us?

I think list invariably is below trend, because it follows sort of a different part of the business. I think -- so, that's the first thing on the negative side that comes to mind. Let's look on the various product lines, let's go down the line, down the list with you. Well construction probably has the best pricing upside. (indiscernible) for us is (indiscernible) some things. (indiscernible) hangers. Solid expandables tube is too small to be a real pricing issue. And I think also underbalanced is priced (indiscernible) the pricing changes so much for the complexity of the job that -- although the pricing is moving up, I cannot just be quite -- can't make the same comment. Certainly even traditional drilling tools, rig tools, fishing, wireline, customer strength in pricing in wireline, do they move less than (indiscernible) construction? Not very comparable. Completion, strong pricing in completion, very recent. Strong pricing in completion. Completion, which if you think about it, is a drilling derivative at the end of the day, in terms of market, was not particularly strong until the latter part of this quarter. Strong pricing in completion.

So I will isolate the (indiscernible) as the single villain who does not get as much pricing elasticity (indiscernible). We get some, mind you, but not as much. Bearing in mind that since I was asked before that this small Pressure Pumping segment is within Artificial Lifts, which obviously we need to pull out of it, and we will by year-end, give you some visibility. It's just too small to be worth your while. And of course within Artificial Lifts, that segment has strong pricing, it appears to have strong pricing also. So it is the pure artificial lift which is not as strong (indiscernible). In the rest (indiscernible).

Okay. That's all. Just Lisa, can you just run through with us the financing of the PES (ph) deal, the cash portion, along with the financing of the calling of the convert and how that's all going to play -- and where all of that is being structured from?

Yes the converts, that's about $580 million, and we will finance that with cash. We have $300 million of cash at the end of the quarter, and then the remainder will be on our line of credit. The cash portion of the Precision acquisition is approximately 900 million. And since that will be funding approximately the same time we will issue come term debt, the majority of that will be with term debt. There may be a little bit more that's put on our line of credit from that, so probably an 800/100 split. We have not decided the terms, the length of time for the term debt. But there will -- we have some maturities coming up next year, so it will probably be five and 10-year debt.

Five and or 5.2 (ph) ?

Five and (multiple speakers) it will be multiple.

Multiple tranches?

Yes.

Okay. And what is your overall capacity on your bank line?

We have 450 million. It's a $500 million line, actually we have about 475 currently available to us.

Okay, thanks Lisa.

You're welcome.

James Wicklund, Banc of America Securities.

Hey guys. You had startup costs in Algeria, you were shipping two underbalanced spreads to Saudi. At what point do the front-end logistics -- setting up operations, shipping equipment over -- when does that all of turn into a time slice of everybody working full out with their head down?

(indiscernible) I actually think this quarter, the Q2, was probably the one where -- maybe the only one where we identified things that are related to startup costs; I'll tell you why. Every quarter or every two quarters or so, they're going to get project that all get started up in places like the ones we identified. And meanwhile, the prior products will be working and making a living. I think sort of the rolling-in of people and equipment will become more of a routine and that the cost involved and maybe the fear and the anguish of nonperformance we don't do everything properly becomes more routine.

Bear in mind that in those countries, we have big bases and so forth. But bear also appear in mind that we have not had to put in 30, 40, $50 million projects with new sort of equipment and new people in waves the way we are beginning to do it. So it's kind of the quiet scale, if you will.

So all of this to tell you that I, although that we continue to start up projects the next two years really, the best I can tell, I don't think that we are likely to say or to single out a particular cost on the basis that oh my goodness, getting all of this done, cost a gazillion, and that is the way it is (MULTIPLE SPEAKERS) I think so, I really think so, Jim. It's really a learning experience. We know the countries and you identified Algeria and you identified Saudi. In fact, so many of them were really Algeria-related, if I count my beans, which I did before the call on what was started up, it was about $100 million worth per annum. The total contract were more like 250 million because they were two to three years, so say 2.5 years, $250 million. So about $100 million worth of contracts that is being started up or has started up, of which the Saudis actually are not in that number. They're really all of them are either Algeria, Libya or Egypt, and really 80% are Algeria.

Okay. When Saudi Arabia says, okay, that's great you're sending us two underbalance drilling spreads, can you send us 10 more; what do you do?

That's a very good question. It's a good question because it's a very real question because it's a very realistic, meaning it's something that's in one form or another will happen or has happened.

I mean nobody wants to tell Saudi Arabia, sorry, we don't have enough, but if you don't have enough equipment made or you have rob from Peter to pay Paul, what do you do?

I think you cannot lie to the client, particularly not that client. I think first your heart beats much faster. I can speak for that in firsthand. Second, when your palpitations sort of calm down because it's highly unusual, you just take a pad and start looking at how you can spread it out the least poorly or the most optimally, and tell the (indiscernible) the truth. And there are ways. There are ways you can schedule things so that we get you this first and that later. Maybe how does that fit with what you want to do? Yes, you think try to probably promise more than you should because if people want to sell, but you try to stay close to the facts because it's just too serious of a business, Jim, to be anything but very responsible. But you just accelerate your procurement, you accelerate your training, you promise but you that you promise within reason and you stage it. And the thing that is actually daunting in all of this is that, you mentioned Aramco Saudi. It's a very, very good client to pick. The reality is that within 12 months after the big wave coming from Aramco, the rest of the Persian Gulf and the Middle East -- not North Africa -- will followed suit and I just --.

Constantly stuffed pipeline, I realize.

I think that is right. And the mode you will be in of just feeding the people and equipment wise is something that will be going on for years unless something stops it. A demand crisis (indiscernible) or China doesn't consume anymore, and you understand this better than most. So that all of a sudden things are interrupted. But the scope and scale of what will happen in Saudi Arabia is unthinkable. The scope and scale of what will happen afterwards around Saudi Arabia and the other countries are behind -- is unthinkable also, at least to me.

Last question. The rigs that you bought, while we all think of them in an investing point of view as being Canadian rigs; in reality, they've been owned for most or forever by the Kuwaitis and operated out of Dubai. Do you think that gives you a real, being -- you're not even an American company -- do you think that gives you an advantage in the Middle East having a Middle East drilling company to base off of?

Yes, yes. Bluntly, yes. Whether you actually use it as in a contract -- I think one of your peers was asking me about integrated contracts on the balance (indiscernible) -- is absolutely my dream. And I promise you I will have it one or two instances a year where we either get it or we come close to getting it, and it will -- period, it's real. But it is not the rule.

So other than your direct example, a concrete example if it happens, there's the intangible. I can speak to it with experience. The fact that we are -- we're not Canadians, (indiscernible) piece (ph) with the Canadians; we're not Canadian in our rig competency, we're actually -- if anything, we're led by Scots (ph). And it is a Middle Eastern operation.

Will John King live in Dubai?

No, John King will line between Dubai and Houston. It's going to be an interesting trio of operating talents. One will be in Dubai, one will be in between and the third will be in Houston.

Okay.

So I do not know where John will want to -- I have some idea, but I will let him finalize his plan (indiscernible) actually is a very good idea.

If he'll host an analyst meeting, we will suggest a spot. Thanks, guys, I appreciate it.

Michael Lamotte, J.P. Morgan.

Thank you, good morning. Question for you, Bernard, sort of on the idea of bundling and if you could tie in the Georgian contract a little bit; in particular, the notion of turnkey. First of all, was Georgia a turnkey? And second of all --

Not at all. It was a straight, plain vanilla day -- sort of per diem type work, and period -- there's nothing special about it.

Just client dispute?

It was not that. I think that Georgia is a difficult country from an infrastructure standpoint and so forth. It's one in which we do not operate normally. And I think part of the reason we did what we did is the desire to put our flags in more countries, which is completely unnecessary when you think about it. We're in plenty of places. It's a difficult place to operate in. What was being tried is not that difficult. I think the well bores (ph) of what we have been tried (ph) were a little bit more complex and a little bit more unknown, in terms of architecture than what was expected. But what the client wants to do and the scope and scale of the work is and of itself, it's not that big of a deal.

Okay.

It's not a turnkey at all. We're being very prudent, Michael. The contractual commitments to the clients are clear and they will be pursued when the time comes. The fact that we wrote everything off is simply -- and we flagged it because it's unusual, is just because we're been cautious. But there's nothing more to be said about it. Maybe everything will be nice and tidy, all bills will be paid, in which case, one of these quarters we’ll have an extra couple of pennies. That's all; there's no more to it.

On the U.S. side, revenue growth year-over-year, the revenue per rig actually looks up to be very nicely. I'm sure some of that is a little bit of price. I am wondering how much of it is new business like the stimulation business and how much of it perhaps mix, Gulf of Mexico coming back a little bit?

I think both. Pressure Pumping is not that big yet. This is like, I've talked more about it in this conference call than anything else, but it's not that big. Your colleague earlier on was mentioning the number of some 100 and some change thousand horsepower; you can do the math easily, it's just not that big, yet. But it's certainly so incremental, so indeed. But I think the U.S. in general has done well from a broadening the breadth of parts and services they're selling; there's no doubt about that.

And (indiscernible), this all true, Michael. I actually, you don't not need me. These are not offers (ph).

On the CapEx side, Lisa, two questions there. First, can you give us a sense as to where the incremental spending is coming from products and service-line wise? And then secondly, as we peek into '06, what the need for growing the tool base, for example, in PES in the Eastern Hemisphere, what that will add on top of a $100 million per quarter run rate?

On the CapEx, it was predominantly on the Drilling Services side, as compared to production systems. And on the --.

Is it underbalanced mostly though, given the kinds of -- (multiple speakers).

I lot it was, yes. And about 70% of that was spent on the Eastern Hemisphere. So that is from a geographic perspective. And going forward, I think we have put out -- gave the information that you are looking at about 150 million of CapEx forecasted to the Precision -- annually forecasted for the Precision businesses; that will go up.

I think it will go up to 200, but (indiscernible) swag (ph) (multiple speakers).

It will go up, but it's, you know, the detailed plans on how quickly you can put the equipment out there and have the people and in those new regions will drive that and we need to work on.

They're beginning to add up as real numbers because 4 times 100 is 400. And it is 200 for Precision, we begin to look (indiscernible) I think almost. Not quite, not quite. But it's the real numbers, but that is presuming a very strong level of growth.

And understandable.

We don't need to do that at all, and it's just (indiscernible) basis, not even a fraction of that.

Very good, thank you.

One more question maybe operator, then we will leave I think our audience alone.

Michael Urban, Deutsche Bank.

Thanks, good morning. I wanted talk a little bit more about the infrastructure spend. You have quantified the startup costs in Algeria and I presume we won't hear about that again. But how far along are we? I assume there's at least some ongoing process there, but is there much more you need to do on the built-out side? Is this kind of toward the end of it?

Just to clarify, the buildout is not infrastructure, per se. We have the basis in place in the infrastructure. We had one base that we were completing during the second quarter, and that was the last one of all of our infrastructure expansions. It is truly focused on equipment for projects and the growth.

You have mobilization of the equipment, you have people, you people that are on the payroll for a good period of time before they start the project, you have the training and then you have the start-up process itself, which is invariably, it takes one or two weeks to get everything to function properly at which point, (indiscernible) starts. That is really all it is. It doesn't have a lot to do with the real estate. In Algeria, you (indiscernible) this is right. The last big base was finished, what, three or four weeks ago. You now have two very large, very large bases in the oilfield headquarters (indiscernible) and you have, as I remember, seven satellite bases from the various areas of the desert that are being fed by the two large bases. One of the two large base (indiscernible) has a test rig where there's some R&D which will be taking place and more importantly or equally importantly, some training. We will build to train 300 people at the same time in one class.

And I can't really address how the bookkeeping, all of this is done. All I know is that, when you have as many projects starting up as we did, that alone finishing bases (ph) as we did (ph) also, it tends to be a little bit punitive (ph). No (indiscernible) you won't get startups all the time and not another fig leaf either that we choose to hide behind, not of all. It's something actually that we announced ahead of time of time that was likely to happen.

These projects incidentally in Algeria that got started were a little bit unusual. For example, one of them concerned taking a very well-known piece of equipment called a Galileo, which is a (indiscernible) unit which was owned by Baker Hughes which is an experimental (indiscernible) on which they saw all sort of robotics, buying it from them, they were good enough to sell it, and then changing it completely in order to accommodate the substructure of the (indiscernible) unit to fit the underbalanced package. And then having putting some brand new underbalanced package together with that, training some people, and off we go doing what is a classic work which is re-entering vertical well bores, catching windows and the minute you cut the windows, you go on the balance (ph) and then you sweep the reservoir horizontally. Which is going to be the reentry business, it's going to be a huge business of the way in which the Middle East, North Africa and Asia-Pac and of course Russia eventually will be able to increase production rates and also capacity, that is sweet, using the existing vertical well bores.

It's a little bit unusual of a project, and there is going to be in Algeria at the end of the day three such projects. Not all three of them with (indiscernible) units, but others with jointed pipe. You have two coiled tubing projects like that and then one with jointed pipe.

That's very helpful, thank you. And last question for Lisa is, one, does your guidance contemplate any impact from the storms that you've seen in the Gulf of Mexico so far? And then I guess also, are you assuming anything further, any cushion in there for some additional storm impact?

That sounds like an excellent reason why we're keeping numbers conservative.

(multiple speakers) I wish you had asked that question earlier on; I would have thought of that.

There's always a surprise, there's always a country where there's an issue or a storm and I like to take those into account.

For example, there's flooding going on in Mumbai -- Bombay -- area, we have operations in India, so there you are. There's always something.

How should we think about -- what does it cost you per day if get a big storm going right through the heart of the Gulf of Mexico?

I think we will be -- both Lisa and I will give you an honest answer -- we don't know.

It has varied in the past, depending on how much (indiscernible) (multiple speakers).

Just trying to figure it out if we see one. Thank you, that's all for me.

Thank you.

That probably concludes our call. Thank you very much for your time. Operator?

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