Weatherford International PLC (WFRD) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Weatherford International third quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Bernard Duroc-Danner. Please proceed sir.

As usual Lisa will read our prepared comments. I will do the same and we will take questions. Lisa.

This morning we reported diluted earnings per share from continuing operations of $0.74, excluding the charges related to our zero coupon convertible and the Precision acquisition. I will address the charges further after a review of our operating results.

The $0.74 compares to $0.64 last quarter and it compares to $0.49 per share for the same period last year. A breakdown of our sequential $0.10 earnings per share improvement can be summarized as follows, $0.07 came from Canada, $0.025 came from the U.S. -- now this is net of a $0.055 loss due to the effect of the hurricanes -- $0.01 accretion from the one month of Precision results. Nonoperational results net impact was $0.01 resulting from foreign currency and sales of assets. The above increases were offset by $0.015 decline. That decline was due to lower earnings in Latin America, as well as a higher tax rate. The tax rate this quarter from our operational earnings was 27.3%. That is our rate excluding the charges, was 27.3%.

On a Companywide basis revenues increased 140 million or 15% as compared to the prior quarter. The Precision acquisition contributed approximately 100 million to the increase.

Now I'm going to address the geographic trends, excluding the impact of Precision, because Precision was in this quarter for only one month. North American revenues were up 50 million or 10%, the U.S. revenues improved 4.3% in spite of 17.6 million negative impacts of the hurricane. Canada revenues increased 26.9% from the seasonal low in the second quarter. International revenues decreased 2.5% from the record level revenues recorded in the second quarter. This was primarily due to a decline in the Latin America region.

Now I will move to a divisional discussion. Our Evaluation Drilling and Intervention Services. This division is the legacy Weatherford drilling services which now includes Precision Energy Services. Divisional revenues increased 18.6% as compared to the prior quarter, inclusive of 83 million of revenues from the acquisition of Precision. For comparability I will review the geographic and product line revenue trends, excluding the impact of Precision.

This division's North American revenues increased 21.8 million led by an increase of 32% in Canada. I would like to highlight that in spite of losing over 9 million of revenues due to the hurricanes, the historical Weatherford product lines increased revenues 5.6% in the U.S. International operations decreased 3%. The primary decline was in Latin America, Brazil in particular. Eastern Hemisphere revenues were essentially flat with a slight increase in the Middle East, Asian region, offset by a marginally lower North Sea revenue. The Middle East results were strong for this time of year.

On a product line basis and ranked by size, the third quarter revenues broke down as follows, Well Construction 36%, Drilling Tools 25%, Drilling Methods 18%, and Intervention Services 21%.

Now I will turn to the operating profit margins and I will look at those on a consolidated basis, that is including Precision. This quarter they were 23%, slightly below second quarter. And there are two reasons for that. Impacting the margins were the hurricanes and the acquisition. The hurricanes negatively impacted this division 9.3 million of revenues and 7.7 million of operating profits. High detrimentals on the lost revenue are due to the ongoing personnel expenses during the storms, insurance deductibles, and an under absorption of the manufacturing plants.

The most impacted was our cementation plant in Homa (ph), which is one of our largest manufacturing facilities and it supplies our worldwide cementation products. It was completely shut down during the hurricane due to power outages, and then again during the second hurricane due to flooding, for a total of 10 days. Communication issues impaired operations for an additional 14 days.

As expected, the precision product lines also depressed the operating margin. Although the newly acquired products have margins that are similar to this division's historical margins in North America, the start up nature of the operations in the Eastern Hemisphere depressed the margins significantly. On a worldwide basis, the Precision product lines have on average lower profit margins than the historical Weatherford Drilling Services margins. They were 20.4%, excluding the research and development expenses and the overhead that is included in corporate.

Excluding the impact of the hurricanes and the acquisition, EBIT incrementals for this division would have been a strong 40%. That is 4 0. Completion and Production Systems. This division posted record level revenues of 430 million, an increase of 6.4% or 26 million over the second quarter. And this was led by strong performance in North America. Canada's revenues improved 22.6 million sequentially, even surpassing the first quarter levels by 8.6 million. The U.S. posted sequential improvements of 6 million in spite of the negative effect of the hurricanes, which adversely impacted this division's revenues and operating income by 7.2 million and 3.3 million respectively. International revenues declined 3 million, or 2%.

Third quarter revenues by product line were, Lift 57%, Completion 30%, and Production Optimization 13%. Incremental operating income margins for this division were 49%.

Now the non-recurring charge -- as I mentioned at the beginning of the call, we recorded non-recurring charges related to our August redemption of our zero coupon convertible and the acquisition of Precision. In connection with the zero coupon convertible debentures we expensed 4.7 million of unamortized debt issuance costs.

In connection with the consolidation of Weatherford's Drilling Services division, and the Precision Energy Services division, we recorded a $97 million restructuring charge. This charge consists of the write-off of purchased in process R&D, facility closures, asset and inventory impairment and severance. We estimate that we will record another 20 to $30 million charge in the fourth quarter related to the restructuring, as the facility consolidations are continuing into the fourth quarter and you expense those as incurred.

The quarter's capital expenditures net of lost in whole (ph) were approximately 120 million for the quarter, and are 292 million year-to-date. We expect capital expenditures to continue to increase. Fourth quarter will approximate 140 million. And the first and second quarters of 2006 should be in the 150 to $160 million range. Our net debt to capitalization as of September 30 was approximately 23.9%.

Now looking towards the fourth quarter. The fourth quarter should continue to show very strong operating results. Although the following is guidance, and by definition not precise, we forecast the following deltas in Q4 as compared to Q3. We expect to gain $0.02 to $0.03 in the U.S., and that is primarily the partial recovery of the $0.055 that we lost from the hurricane. Second is the additional two months of Precision should add $0.03 to $0.04. And in growth, primarily in the North Sea and the Middle East, should contribute $0.05 incrementally. Strength in Canada should contribute another $0.03.

We do expect our tax rate to continue to creep up this year to about 28.5% in the fourth quarter, and we will have increased research and development expenses. Those will lower earnings per share $0.01 to $0.02. Obviously, that is not exact, some may be slightly better or whatever. Rolling all that together we expect -- we estimate earnings for the fourth quarter to be $0.85 to $0.87 per diluted share. And now at this time I will turn the call over to Bernard.

Q3 earnings of $0.74 were $0.10 higher in than Q2's 64. It is just under a 16% sequential improvement. The specific P&L effects of the hurricane, as Lisa said, were $0.055, which translates into just just under $0.80 ex hurricane quarter, for a $0.155 higher improvement and 24% higher sequential improvement.

Consolidated revenues grew by 114 million, just under 16% increase over Q2. EBIT grew sequentially by 32 million, generating Companywide incrementals of 23%. Ex hurricane EBIT grew sequentially by 44 million, and the incrementals become 28%. And of course, if you just look at the incremental the original Weatherford segment ex hurricane, the incrementals actually were very strong, 43%.

Adjusting for the specific P&L effects of the hurricanes, the quarter was on the high end of our expectations. Now the quarter was earned clearly in the U.S. and Canada through volume growth in pricing. The Eastern Hemisphere was flat. Latin America was largely down quarter on quarter. The Production division increased its EBIT almost 60% year-on-year, and posted what is for them a record EBIT. The inclusion of Precision's assets, although marginally accretive, had a negligible effect on the quarter's earnings per share.

Now I'm going to add to my commentary on the Drilling division a few thoughts about the integration process underway. And I will comment on the Production division in the usual way. And also what I'm going to say on the Drilling division will exclude Precision. I will talk about Precision a little bit after, just for clarity stake.

So first is a discussion of legacy Weatherford's Drilling divisions. The Drilling division pre-Precision did post a sequential increase in revenues of about 12.9 million, or 2.5% growth. EBIT was flat quarter on quarter. This is misleading. The hurricanes were a determining event. Adjusting for the their effect, a specific effect, the EBIT increase quarter on quarter was 9 million. On that basis the EBIT incrementals were 40% -- 4 0. Underbalanced gained the most traction throughout the quarter.

The U.S. grew by 10.8 million or 5.6% sequentially. And the balance (indiscernible) the strongest growth rate, while construction was down, reflecting the impact of the storms and its traditional core on the shelf and deepwater markets.

Pricing in the U.S. is strengthening. I will talk to you more about pricing later on. The Drilling division gained about 2% net price increases in the course of Q3 in the United States. We expect to gain more pricing in the quarters ahead. Canada increased seasonally by 11 million or 32% growth rate. Performance was evenly spread through all the traditional service and product lines for the Drilling division, and very typical of a strong post breakup recovery. The Canadian market looks strong coming into Q4. Pricing comments for the U.S. region apply also to Canada. In effect they are North American comments.

The Eastern Hemisphere revenue growth rate was essentially flat quarter on quarter. Middle East, Asia-PAC was up, but marginal. On Q2 I think a bit under -- not quite 1% -- so not worth mentioning. This is not unusual. About 25% of our business in the Middle East, Asia-PAC is products and 75 is services. For those of you who know the Middle East and North Africa, you'll recognize what I am about to say has been completely true. The summer months invariably experience a stiffage (ph) in Parks (ph) business. People work less in essence.

The Service segment of our business is unaffected. It continues to grow in the quarter on quarter, but the product slippage is a historical fact. And traditionally the slippage is made up in Q4. This is about as predictable as a Canadian breakup, but of course much, much, much more minor effect. Which means that the rate of expansion will accelerate in Q4, and of course Q1 '06 in that particular part of the world. Furthermore, as many of you know, this region has start ups underway. As of mid-September Algerian, the big project we were starting up in up and running, while Qatar Libya, Azerbaijan and in land China -- it is an interesting project, our undergoing start up. Saudi Arabia and Kuwait will follow shortly thereafter, just to be specific.

What is more -- so none of this really surprises us very much at all. What was more unusual, if I'm going to point out to something in the quarter was the North Sea, which for us was down 5%. It was unusual. It is normally a strong quarter the third quarter, and the business is growing there. A number of projects were deferred due to unexpected lengthening of platform maintenance work. Much of the issue appears to be the problem and challenge of extending the platform's longevity. As a corollary though not all is lost. We expect to see a stronger Q4 than seasonally normal in the North Sea, and continuing secular move up.

Pricing in the Eastern Hemisphere is strong. And it is taking hold in enough projects contracts and regional markets to be very meaningful in '06. Latin America was down 6 million for no particular reason, other than quarter on quarter noise, primarily in Brazil. And quarter Q3, notwithstanding the drop, higher pricing initiatives were taken throughout the region. This should be partly reflecting Q4 results, but most have (indiscernible) in the first half of '06 throughout Latin America.

There isn't anything of particularly significant in the quarter from a product service line standpoint for the Drilling division, the legacy Drilling division. They essentially moved in tandem, showing similar growth rates quarter on quarter with two exceptions, while Constructions was uncharacteristically lower. I think I touched on it for the U.S. And on the balance continue to exhibit faster growth versus the other service product lines.

Word about Precision. A reminder, the segments acquired were Precision Drilling's PES, as it was called, or two on (ph) technology as we call it, and PDI, the international land mix. Precision's first month of operation, the month of September as far as wells heads added for PES' Tools and Technology $82.6 million in revenues. Just for taking mention the international rigs added $18.1 million.

My comments here will concern exclusively the Tools and Technology segment, which is the one we integrated into Weatherford's legacy Drilling division. Not surprisingly, most of the PES segment, the Tool and Technology segment, were actually in excess of 85% was the Western Hemisphere centric, completely consistent with historical trends. They are essentially a Western operation. About half of the revenues were wireline, which is itself split 60/40/ That is in case haul and open haul. The balance was essentially directional drilling in all of its forms, leaving about the standard 15% for Underbalanced or managed pressured drilling.

On a forward-looking basis the thrust is clearly to increase distribution of Precision's Tools and Technologies in the Eastern Hemisphere. I think you know this. The operational integration of Precision to Weatherford fall into three categories, consolidation, organizational structure and deployment. Obviously, they all had different timeframes.

Consolidation is well underway. At last count there are 23 facilities under consolidation in the U.S. and Canada. The overlapping product service lines, which is case hole wireline, thick line, directional services, MWD, drilling motors, the MMWD, and cross sections of Underbalanced Services are proceeding with an orderly rationalization and integration. I say these things as if they were easy; they're not, but they are orderly.

The redundant R&D programs have been curtailed, shutting down about $5.2 million of annual spend. A lot of them were in wireline, directional and underbalance, actually all of them were redundant.

The '06 R&D will be rationalized further. Now the net spend in '06 for R&D may be as high as a pro forma combined Weatherford and (indiscernible). That is a reflection of the scale of growth underway. That is all it is really. The combined R&D expenditures will not have redundant waste, and will carry by definition a higher return on investments, having no redundancies.

At the corporate level consolidation of accounting, insurance, information technology, procurement and other corporate functions is well underway. We should be essentially finished with most of the consolidation rationalization work by the end of Q1. Cost-saving should add up to $30 million per annum -- 3 0. That is the measurable cost savings. The cost savings will be masked, of course, by the surge in activity, but they are real.

And you really can remeasure it properly from the outside, as of there is no change, and there is a significant volume increase that is afoot. The organizational structure of the new division reflects a combination of primary, geographic leadership, and primary product line leadership that varies depending on look and share maturity for the particular product service line.

The new structure has been defined, communicated internally. At this time about 95% of the management positions are set. The organizational structure of the new division combining Precision's PES division with Weatherford's former (indiscernible) division should be completed by year end, if not before.

Deployment is a different kettle of fish. This is a longer-term thing. Deployment of Precision Tools and Technologies is underway in a number of selected markets, with five markets identified as priority. For competitive reasons we would rather prefer to keep these side markets confidential.

The growth rate of market penetration for -- globally for Underbalanced, Wireline and Directional is likely to match or exceed the 25% growth target. That is at least what our market indications suggest. The base for that '06 target is current, almost recent Q3 '05 levels.

Beyond the measurable progress on consolidation in the organizational structure, the integration of two cultures isn't easy, nor is the process organizational digestion a short-term event. The integration though is proceeding as well and as fast as we could have hoped for, certainly I could have hoped for. I will be happy to field any other questions on the manner in which we are integrating geographic and product service by management for Precision's PES businesses.

Moving over to the production division. Production divisions posted a substantial increase in revenues of 25.7 million sequentially, or 6.4% growth rate. Adjusting for hurricanes, the numbers rise to 32.9 million, an 8.1% growth rate sequentially. The EBIT increase quarter on quarter was 12.5 million, or a 48.5% incremental. Correcting for the hurricane effect the increase in EBIT rises to 15.8 million. Clearly the incrementals are materially ahead with the divisions targeted performance of 25%.

The geographic trends will consist of the Drilling division. I don't want to be redundant, so I will leave at that. Within the product line of the Production division, completion, intelligent completion, progressive cavity pop and the small stimulation perform best, and were responsible for most of the division's growth and were the strongest incrementals.

Q4 and first half of '06 which as seen further growth in completion systems or particularly in (indiscernible) systems, and of course expandable Sand Screens. Lift also have (indiscernible) strong Q4 and Q1, our performance based on the backlog of products and projects.

The prognosis of both divisions are promises to Weatherford really, from a base of Q3 into '06. In the U.S. land market we expect marginal volume increase, significant but modest. The tight gas market should be particularly strong. The Gulf remains sluggish in Q4, as our clients get organized the repair work at hand. I will remind the audience that about 60% of producing wells are closed, remain shut down at a time of this writing.

We don't know how to precisely measure the financial effect of the Gulf's continued temporary slowdown. Our best estimates is a range of a $0.02 to $0.03 shortfall in Q4. And Lisa covered that in her numbers. We expect -- by Q2 '06 and thereon a catch up in Q3, Q4 earning shortfall. Obviously Q1 will be somewhere in between.

Latin America shall provide Weatherford with good upsides in Venezuela and Brazil in particular by Q1. Venezuela looks very strong into '06. Mexico is not expected to grow substantially until mid '06, but it could could show real strength there for Weatherford.

We expect Q4 in the North Sea to be stronger than Q3, which is historically unusual, but it appears to be the case. Both the UK and Norway will show firm (ph) in '06. Our clients in the North Sea struggle for the scope and scale of the work at hand.

Powerful growth is underway in the Eastern Hemisphere. It is secular type growth. This will be centered to the Middle East and Asia-PAC. This is now well-known. Probably the key markets are Algerian, Libya, and Saudi Arabia, not to minimize the others. The Middle East North Africa region will drive our growth in Eastern Hemisphere in '06 through '08. That region's business is expected to double in size by '08.

Pricing. The prognosis is stronger across the board. In the U.S. and Canada realized pricing for Weatherford's products and services are likely to move up further. This will be true for both divisions. We expect an additional 2 to 4% increase to be phased in by Q2 '06. In the international markets pricing is also strong from the UK, North Sea through Asia new contracts have been signed with an average of 8 to 10% higher pricing. Existing contracts are typically for two to three years worth of work. As time goes by contracts issued in prior years at substantially lower pricing and terms will come for renewal, building gradually a higher margin of base.

The pricing trends are occurring concurrently with contractual adjustments for raw materials and legal costs inflation underway. We are trying hard to recover most inflationary pressures contractually. This is important, as I think we as an industry -- this is not a Weatherford comment, it is an industry comment -- are experiencing significant cost inflation.

In our particular case about 40% of our business involves the sale of products and the balance is rendering of services. Cost pressures of raw materials is an issue across the board for carbon steel alloys and all nonferrous metals. Of course oil and gas prices, heating to chemical and the last of the feedstock, while also raising freight and utility expenses. Lastly the cost of fee fall (ph) is also rising in all classes of employment, whether hourly, salaried, technical, technical management, and even administrative management. The rate of increase varies by position, location and field of work -- it is rising nonetheless.

Of course, we're not taking this lying down. First and foremost, the contractual protection from our clients which we seek. And second, beyond the contractual process, which essentially passing cost inflation along to our clients, we're doubling up on our supply chain management efforts.

Third, we recognize the people management issue as completely strategic, and one of our greatest challenge and perhaps one of our greatest opportunity. The HR function is treated as a strategic function, and will be worked on as such.

The tone of the market into '06. Client volume increases planned for '06 and '07 are on the high end of our expectations. Both the NOC and the IOC -- the IOC are playing aggressive catch up -- are placing orders and working on projects that on the whole exceed our expectations. They also exceed the people and equipment resources Weatherford commands in the near term. Obviously we're expanding our people, manufacturing and equipment capacity aggressively, but methodically. We're acting as quickly, but responsibly as we can. The real challenge in '06 and beyond in our minds will be operational, not capturing share or capturing markets.

Notwithstanding our efforts and the ongoing thrust of the oil field service industry as a whole, the reality is that the length of time needed to execute the industry's planned growth will be stretched. The corollary is that we expect strong growth in our markets and top line to be sustained for a very long time. The text says through '08, which is a very long time. This is an interrelated reflection of the scale of projects -- very big, structural shortages of people and equipment, which I think is well advertised, and the current acceleration of reservoir decline rate, which (indiscernible) see as the most important factor of all.

Three direct implications. We're hiring, training. Training is a huge issue at Weatherford -- and mobilizing talents at all levels of the reorganization with 24,500 employees at the end of September. We expect to increase this number by at least 10% within the next 12 months, probably a higher number. Manufacturing-wise we are operating at a rate of about $8.5 million hours right now. 7 million hours is internally done, 1.5 million are farmed out all over the world.

Our plan is underway to increase internal capacity to 9 million hours, while raising the farmed out commitments to 3 million hours. The location of the expansion covers both hemispheres depending on the level of manufacturing sophistication required.

CapEx, as per Lisa, will rise in '06 to about $150 million odd per quarter. Significantly above the '05 level. This number may go up further in the course of the first half '06 until we assess what is feasible and what is also reasonable.

Closing comment. For the next several years our industry should experience strong growth. When you experience a lot of growth there is invariably a pocket (ph) peaking effect. The reverse issue is true too. When there is a major decline there is talk of bottoming at some point. Our view is that peaking is truly premature. Peaking will occur when substantial excess hydrocarbon production capacity is on stream, or is clearly going to go on stream. And that capacity appears sufficient to provide a cushion for fears of demand growth however high or low the demand growth, and short-term swing requirements in the event of industry cost pressures. There always is a crisis in our industry at all points in time it seems, somewhere in the world.

This will take three to five years in our view at a minimum to be substantially evidenced. During this period of time the market oilfield service will grow year-on-year for the next three years, and then perhaps the next five years will be growth years for the oilfield service industry.

As our last closing thought, we don't intend to just ride the market wave. Weatherford should experience above market growth. And of course the addition of the young technologically very advanced product line of Precision should increase Weatherford's growth rate for years to come above the market rate. I suppose in that sense we remain at our core growth culture. Capital discipline. This growth should produce increased returns, rising financial results on the back of the technology and footprint investments that we have already made.

I will now turn the call back to the operator for questions. Operator, please.

(OPERATOR INSTRUCTIONS). Bill Herbert of Simmons.

Lisa, you said that fourth quarter versus third quarter incremental contributions from the North Sea and the Middle East the expectation is for $0.05?

That's correct.

How much about is from the, I guess maybe the East region?

From the Middle East region?

Yes.

That is a degree of precision that I'm not sure we have.

I guess what I'm getting to it is this, that we have been relatively optimistic with some justification with respect to a ramp up in activity in the Middle East. We have seen it from a contracted rigs standpoint. And we have been prophesying the start ups of some relatively significant projects in the second half from which you were going to benefit. We had a relatively subdued result in the second quarter -- in the third quarter rather. And I'm wondering what the change in visibility is right now relative to what we have seen that gives you confidence with respect to the ensuing quarters?

You still see the start up happening? That is happening. What you saw in the third quarter is a decline in product sales, which if you look back to prior years, you had that same trend in the third quarter. It typically dips in the third quarter.

I can show you -- I can show you data impact about five years -- I don't have any more than that -- where invariably, if you breakdown services as product, invariably you'll dip a little bit in Q3. And if you go -- if you travel throughout the Persian Gulf and North Africa, what you find is you have half of the governments of these various countries are simply not at work. Nothing happens. Everything is slow. It is a small thing. And so that is one thing. It is climatic, if you will.

As the results, when you have worked within the five. Oh, I suppose everyone likes to look out like three or something like that. (multiple speakers). Do you see what I am saying?

It is a little bit more coming from the Middle East than we see coming from the North Sea.

Secondly with respect to -- we didn't talk much about the contract drilling segment. And I recognize that it is early days, but can you share with us any insights with respect to either realized or, I guess, potential symbiosis between the contract drilling and the service segment?

The reasons why we don't talk about it is that it is rather small. I think at last count it is lumped in other with pipelines. And whether from the top line or from EBIT standpoint, it is probably less than 5% of the Company. But that is not really what you're asking.

Two things. One is the Contracting division itself is very busy right now moving about, if I recall, seven or eight rigs from the Western Hemisphere to the Middle East and Asia. You've got, last time I looked at it -- you've got two rigs going from Venezuela to the -- is it Algerian or -- and you've got three rigs going from Canada actually. They are part of the purchases going to Australia, and so forth. That is going on right now. And so that is step one.

Step two, projects who were co-mingled -- the Tools and Technologies and the rigs -- I think you'll find that it will be sometime around the second quarter of next year for the first projects to emerge, perhaps the third quarter. And I expect one or two projects of size where we will co-mingle gold out of them. And I think one will be in the Middle East, one will actually be in Asia.

And then finally, the last question is -- and we are witnessing this across the spectrum with respect to your oil service peers -- so we are looking at a relatively significant increase in capital spending '06 versus '05. Can you give us a sense as to where that is being directed?

You mean geographically or by product and service lines?

In terms of your businesses.

You mean by division?

Yes.

It follows just about the same percentage of the revenues. I know it is not intuitive, but when you look at the numbers it is about the same.

It is is it an expansion in wireline capability or underbalanced?

It is wireline capabilities. It is tools on the drilling side. It is underbalanced capabilities, some manufacturing there. And when I say (indiscernible) abilities I mean mostly tools that are rich in electronics type capabilities that are very expensive, as you know. That would sort of be it.

On the production side you have substantial amounts that are going also for manufacturing. You have a fair amount that is going in for the (indiscernible) pump product line and the chemicals service line. Yes, there is some that may go for the simulation side. It is sort of balanced.

What would be displayed in terms of North America vs. non?

You have to be careful. Some equipment will get ordered and possibly booked in North America and then deployed elsewhere. So although I think when you look at the split you'll find that it looks as if there are the North America amount will be less than the percentage as they are affected by the revenues. In other words, the geographic mix will look as if we're spending less in North America and more overseas. The reality will be even more that, because there is a segment of what will be purchased and prepared and booked ultimately in North America initially as a CapEx, which ultimately will be sent overseas.

If I was to guess, I would say that, without the data in front of me now, the CapEx would be I would say -- would follow the geographic mix of revenues, but understated to the tune of maybe 75 to 80% only in North American revenues, and then the balance will go overseas? Am I making any sense?

Yes, you are.

Jim Wicklund of Banc of America Securities.

Significant start up costs for Precision and the Eastern Hemisphere. Can you give us some idea of what the costs are and what significant means?

The way they are run -- at the time of the acquisition of course -- they had to incur a lot of the overhead expenditures and the support expenditures on essentially a very small base of business. There is no way around it. You've got to start somewhere. And I think the second statement, which will be fair will be that we should be able to remedy that. So that the month of September was indeed a typical month for Precision, as if they were still stand alone. Nothing had happened really.

As time goes along, clearly a lot of the support costs that have a hard time being absorbed will get absorbed much more easily, because they will be part of the Weatherford infrastructure. So I think the start up, what is referred to as the start up or any inefficiencies in the Eastern Hemisphere for Precision, are things that will go away.

Inside of that going away, the type of margin, the magnitude of margin improvement you would expect to see -- I know I'm asking leading questions, but if we're trying to figure out -- revenue runrate is one thing, trying to come up with what the margin runrate will be is another. Let me ask it a different way then if you can't answer that way. The 25% incremental that you guided us to, should Precision's business once integrated, should those incrementals be up or down?

They should be up.

Should be up, yes.

They should clearly be up.

One of the issues at Precision is it depends on the one thing that I think probably frustrates everyone with companies when one prices the analysis, which is service mix, product mix. The ultimate sort of answer, but it happens to be true here.

If you look at the breakdown of what they have, a couple of comments. Certain classes of services are much higher margins than others. This is no big secret. Second, they're terribly dependent on absorption. Meaning absorption means identity of business in a particular market. That is not the support part as in -- just the amount of sales and technical support and so forth. It is actually just the cost of the tools and the people there to service them. The direct labor, if you will. (multiple speakers)

You saw the decrements in the Gulf of Mexico in the quarter.

Right.

Bingo, there you are. So these are the sorts of things that will have an enormously and material effect on their margins. But I think this is not something that we did not know. This is completely, not only predictable, this is healthy. They're coming in the way they are. And they have got excellent Tools and Technology. They obviously need to grow in certain markets. We need to do -- we, as in the owner, Weatherford, needs to everything they can in order to make it easier, cheaper, faster.

And so therefore it doesn't take a lot of thinking to conclude that the opening margin of Precision, notwithstanding the service mix issue, which I want to remind you -- I bet you know this -- the service mix issue -- the mix of services they offer -- notwithstanding that. Clearly when we are six months older or something like that the percentages will be different. This is completely normal. In fact even from the issue of where the market is going, where pricing is going, etc., etc., which affects everything -- which presumably will affect the course of Weatherford, so maybe the relative difference may remain the same, absent what I described before, which is they will have an easier time.

Again, like you say, you expected it, frankly we expected it to happen. I'm just trying to figure out some gauge of magnitude of where we will be in six or nine months. And this is something you have actually done before -- not in the last couple of years -- but done before. So that is really not an issue. I'm just trying to gain a little bit of magnitude help here.

You know why I'm reluctant to give you too many percentages?

We will hold you to it later?

Precisely. And the second (indiscernible) for any time and work you try to get done. I think your logic is impeccable. There's no doubt about it. Neither Lisa nor I would actually argue with you at all. You're completely right. And so (indiscernible) will go up. The only thing is I'm reluctant to say, well, we think blank and blank. But for two reasons. One is that the number can vary quite a bit, and numbers look very promising. Since time is one that I -- I don't want to get locked up in time for too much. That is really all.

I understand. My follow-up -- and you talked about growth -- you mentioned in your comments that the growth rate for Precision Energy Services should exceed the 25% that you had originally expected, etc. Can you tell us a little bit more about -- you talked about how your internal productions and people had looked at what growth would be, can you talk a little bit more about that?

It is really has to do with two things. And it is -- some of it will be self-serving. The technology they have, and I mean the technology as in market ready, not as in the lab with people with white coats -- the technology they have, the market ready technology they have, as we really get close to it is more promising then I would have originally thought. Maybe because we learned to be conservative over time.

Second, the trial -- the run -- in different parts of the world for their technology was also, I think, more successful than I would have thought initially. And so now the judgment on the number of markets where we can push products and services help them and grow them. And the speed at which we can grow them looks easier. The market is also very strong, but I think we know the market was going to be strong. How strong we did not know, but we knew it was going to be strong. I don't think it is that so much.

It is that we have a greater level of confidence. It doesn't mean we didn't have any confidence before, but a greater level of confidence that the trials and tribulations that Precision went through over the past six years, was really worth it. And what sort of service lines that give me the greatest sort of pleasure as it were, I would say RSS, their LWD and the open hole wireline. That is really it. But greater confidence in what it can do for the client. So it is easier. Definitely can do more faster.

Kurt Hallead of RBC Capital.

I think probably I have a number of different questions, but let me start with the -- I will keep it short. The question I have specifically is on the pricing in the U.S. market vis-a-vis pricing in some of the international areas, it appears that U.S. pricing progression seems to be a little bit more muted. I just was wondering if you could provide some color on that?

That is probably because in the U.S. I talk about sort of realized pricing as opposed to posit pricing. So I think it is too many numbers around, so I think in the case of the U.S. we indicate what we think we can get. When I say 2 to 4, maybe we go for 4 to 6. But just go for what you think you can get.

Internationally it is a little bit different, because it is not across the board, it is contract by contract. So you look at weighted averages. And so it is a onetime thing. And that is it for a couple of years or three years, and you are set. In the U.S. you just keep on having these waves of pricing increases where you nibble at it. Over a period of time you actually have more.

So two things. One is numbers appear low because they are realized as opposed to hoped for. In other words, that is what I think we will get as opposed to saying we're moving pricing up by X and we will get Y. Second, it has happening every six months to nine months. So if you compare nibbles of 2 to 4 twice a year for two years to the more spectacular 8 to 10 onetime two to three years, which one is the better one?

Another way of saying it, international is your gross increase.

International is lumpy. It is lumpy in time and in volume. U.S. is a continuous function really. I mean continuous -- as long as you can do it, every six months or so. Not quite that, but it is different in nature. As you know it is more of a spot market in the U.S.

And then one of the other commentaries you mentioned talked about increasing your manufacturing capacity or capability. Does that mean you're going to be adding roofline or is there something else going to (multiple speakers)?

There is roofline being added. Yes, there is roofline. There are very few instances of brand new plant as in greenfield. They are all extensions of existing plants. It is true that on the farm outs there are new farm out candidates that are joining in. Meaning there are new places around the world which will start joining the supply chain. But in terms of what we own, it is really extensions more than -- it is extensions period.

It is all extensions.

Are the extensions -- can you tell us where they are geographically and what the product line areas are of emphasis?

Oh, gosh, they are across the board, so I would be hard pressed to tell you which ones are not -- which ones we will not do in terms of manufacturing. In other words which are the product service lines that will not seeing manufacturing expansion. Any really -- before -- two sort of subcategories in simple terms. It is not one 100% true, but it is essentially true. The more sophisticated the manufacturing, the value-added the manufacturing, the more alloys being utilized, the more likely you are to see them in North America. The less they fall into that category, the more likely you are to see them in Eastern Hemisphere and in South America. Not a lot on an European basis. It is predominately related to North America, South America and Eastern Hemisphere. Eastern Hemisphere would be essentially Asia, some in the Middle East. We have a big manufacturing base in the Emirates, which is building.

I would assume some of that obviously is in your increase in CapEx going (multiple speakers).

Absolutely. I think we gave an indication of where it is going. One also has to have some due process, which falls under the category of budgetary work. Within the matter of really two weeks we should have nailed the projects that we will or will not do. So give you much better percentages then. But we know what the envelope is going to be. That is why we're giving you an early warning.

If I may, just one last one here. You talked about business -- I will phrase it more broadly -- business prospects exceeding your expectations as a Company. What were those expectations and by what magnitude do you know see those being exceeded as you go into '06?

It is all intangible. It is all intangible. Meaning that if I give you a percentage, I'm afraid of the consequences.

You maybe don't have to give us an absolute number then give us a percentage, and then we still have no idea.

I want you to have an idea, but I have learned to be careful. It is the -- we find ourselves in a situation where -- it is too strong of a word -- but where there is a phenomena, almost a scarcity, which is developing. And we do not have scarcity. But there is -- there is sort of a feeling of scarcity developing. Now what I mean by that is that we are truly in the mode of thinking where are we going to allocate people and equipment, as opposed to, oh my God, how are we going to keep our people and equipment busy.

Bear in mind that we have had 18 years of the latter, and the former is quite foreign. But it is truly a different frame of mind. It is not one that you decide to have. It is one that sort of creeps on you when you realize what you're really doing is saying, oh, well, I'm not going to try to penetrate that market, although I am invited to do so, and the runs are good, and this and that, because I can maximize over here. They are saying, didn't you always do that? We were always in the position I think too much of having -- it was just always not starving -- that's an overstatement -- but hungary.

And now we have a situation where it is clear utilization will strain capacity. It is strained also that in the event that the comment that I read suggest that we're going to be sort of blindly aggressive. We're not. We're going to grow capacity, but the word methodical and discipline were put there for a reason. It is going to be methodical and disciplined. It is not going to be sort of a blunt, blunt sort of take no prisoners type of expansion. Be very careful. So therefore notwithstanding the rig expansion, we will run out of people and tools. Therefore there will be an allocation. That is why I think the exceeds expectations. I would not have -- that is not a thought I would've had nine months ago.

It seems to be a consistent theme the last couple of days in terms of being able to pick and choose the projects with the best return. Would you agree with that assumption?

Yes (multiple speakers) it is true. One shouldn't exaggerate either, because we still -- some of us still end up being competitive and things like that. You still have to have some of those instincts out there. It is not all peaches and cream. But that is absolutely correct, from everything I see that is correct.

James Stone of UBS.

The first question is just on the base Weatherford business, particularly in Completions this quarter, you had very strong incremental margins. And I'm just wondering if you can perhaps give us a little bit of guidance on how you see that playing out, particularly as we go into 2006? And whether or not that was a particular mix issue in the quarter? Was it just better execution? Just sort of kind of where you would lay the blame, if you will, on that. And not like blame --.

And then my second question is with the PES revenues right now being so heavily Western Hemisphere oriented, how long is it going to take you to get to a more balanced revenue mix where the Canadian seasonality doesn't really have much impact on the PES quarterly results?

I've got good answers to the first and not so good for the second of your questions. On Q3, if you would breakdown all the numbers, you would find sort of everything did well. However, what stands out is product lines like Intelligent Well Completion. I am not saying this because it has got a higher IQ, not at all. You have to understand that because they absorb all the R&D they support, and a lot of engineering, the are terribly volume dependent. And to get volume they need to have product lines on the market ready to sell, and need to find buyers for them. It is pretty simple.

When you build up organically businesses like that, which is hard, quarter after quarter you have losses. When you start having some breakthroughs, commercial breakthroughs, which they have, you go from a loss to a handsome positive, because their margins are excellent with volume. That is a huge swing. And if you are to take that one aside and talk about Completion, that would probably -- that would stand out the most in the division. The rest -- everything did well -- everything did well sort of aligned.

And what happened in Intelligent Well Completion is not an accident. There is a back log. So they are breaking out of their commercial shell, if you will. That is probably the single biggest thing I can point to. And it is very rewarding, particularly when you have the patience, one would say the sort of pain and suffering of seeing it -- during the right things from a work standpoint -- from doing absolutely the right things, but having to put up with erosion of earnings quarter after quarter, which was buried inside the numbers. And they're not small. The swing is a big number. So that is one. I think that is the biggest one I can point to.

I will add also that the -- I suspect that the Production division, which has sort of always been in the sort of shadow of the Drilling division, which made all the big swings in terms of earnings -- you'll find that in that in '06, well, time will tell, the Production division will do very well from a competitive standpoint. Meaning where it was. In other words, incrementals will be far better there than we had anticipated.

The second answer, unfortunately until such time as we should develop a strong presence in the electrical submersible pump business, which other forms of lift and also depression optimization, you'll not build as big a business in the Eastern Hemisphere as you have in the Western Hemisphere for the Production division. You will continue to build some, but you'll continue to be lopsided. Not only Cananda, the U.S. also, and Latin America incidentally. Meaning that Latin America, Canada, U.S. or Korea are terribly important for the Production division. Eastern Hemisphere less so. What I am trying to say is that you'll not see that being balanced until such time at which you carry the ESP product line which is biggest driver.

I'm glad you answered that question, but that wasn't what I asked though. (multiple speakers) I thought it was pretty interesting.

I'm so sorry, I thought you meant the Production division.

No, the second question was on Precision's business which is 85% (multiple speakers).

(multiple speakers) a couple of years or something like that, maybe even a bit less. Oh, no, no, no. You will find that PES actually at the end will be larger in the Eastern Hemisphere than the Western Hemisphere. Actually, no, that is very straightforward. I thought you were asking about the Lift people and (indiscernible) people, sorry.

No, but that was useful information though.

Yes, it actually was. No, no. PES is very straightforward. It is I would say anywhere from -- a year from today you will find the split will be already quite different. It will have grown quite a bit. If it is what we said 15 vs. 85, I would be very surprised if a year from today it didn't look more like what -- 25, 35 -- 30, 70 and on your way to certainly being balanced. Eventually the (indiscernible) timeframe is relevant to you and I. They should get more business in Eastern Hemisphere than in the Western Hemisphere. That one is straightforward. I'm sorry.

You talked -- just to clarify on the intelligent completion business, obviously going from a loss to a profit quarter to quarter, would generate very high incrementals for you -- for the overall division. And you said that it is looking sustainable. Are the incrementals sustainable or do the incrementals come back to a more normal level that you see across the rest of the division within the ITS business?

That is a very good question. And I think that intelligent completion business appears to have enough of way a momentum and a backlog -- these are not big numbers, but within their realm it is big numbers, to where the Q3 event is not a onetime event and it is sustainable. It is normal. It is the evolution of -- commercial evolution of a product line. It is completely normal. Or put another way it is desirable.

But to be fair incrementals won't be as high for that particular product line, of course not because for obvious reasons. Now with respect to the overall division it can't be as high on an ongoing basis. They were close to 15%, for God's sake. They will not be as high. However, we have to revise our views as to what is the target, because clearly 25% for them is too low. So it is somewhere in between -- I don't have that number as I talk to you today (multiple speakers).

It is clearly higher (multiple speakers).

It is clearly between those two. It is too high to be sustainable. That is clear. (indiscernible) to intelligent well completion, which God bless them, but they can only do so much, and (indiscernible) incrementally won't be as much from a differential standpoint. It is between the two. And we will endeavor to sort it out for you. In fact it will be sorted out again as far as the budgetary process.

Geoff Kieburtz with Citigroup.

I wanted to come back to one of your more qualitative comments, Bernard. You really emphasized the people aspect. I think you described human resources now as a strategic element of your business plan. And I wondered if you could elaborate a little bit on that? You've got some fairly healthy growth. You talked about the manufacturing hours up -- the target of raising them close to 30%, although I'm not quite clear what the timeframe is on that. Can you tell us a little bit more about what you're doing to achieve those rapid personnel growth targets?

First, I think we should be reminded -- we should remind ourselves that it is nothing to be proud of to decide that HR is strategical all of a sudden. It is always strategic. At the end people are everything, everything, everything. I mean equipment and technology and so forth, patents and know-how and brand names. This is a comment that most people will make and they just basically shrug because it is so obvious. But HR -- I should have made that comment five years ago. So number one, I certainly don't get a high grade for just saying it now, as opposed to then. That is one.

Two, it is not an empty comment. We intend to be zealous about some things and we put our hearts to it -- training, internal promotion -- promotion from the inside, meaning looking at 24,500 employees. Try to do a far better job of promoting from internally up the ranks. That means training everywhere. That means not only in the United States or in Aberdeen, that means virtually everywhere. I take note that in our third large supporting base we had eight other satellite bases in Algeria. I take note that we have put in a training center that I think can train just under 250 people at a time, in the middle of the Sahara Desert. It is an example, but it is not the only example.

It means also a widespread set of relationships with universities around the world in order to get to know students and summer internship on a broad basis, and taking segments of classes coming out of technical schools and the like. And building the awareness inside the Company that continued education is a terribly important part of what we want. It is a culture. It is a series of programs. And also giving a lot of time and energy to a connectivity, human resources, which normally is kept to -- I am going to use a terrible word here -- it was always kept to just hygiene, making it clean. Which is much what most people do -- most organizations do. Meaning we follow all the rules and regulations, and we should have to of course. And you follow them religiously and it is great. But that doesn't get you half of what the function can get you. So it is an attitude. It is a lot of different initiatives. It is a lot of resources also being expensed. And I don't see how we can avoid it.

Let me just clarify in your earlier -- your initial comment. Am I interpreting your comment as being a change? Is is a continuation of something?

No, it is a change. I have to be fair. It is a change.

Are we seeing in the performance of -- the earnings performance here to hold cost of that change yet, or is that (multiple speakers).

You are worried about the cost? You have to be --.

I'm not worried. There is good cost and bad cost.

No, no there is only bad cost. We both know that. I don't think that -- it is not an R&D type issue where we decide to have a technological conscience and, oops, the R&D is doubled. No, no. It is not something that would register on your screen. Really it is more --.

It is slight. It is a slight increase going into next year, but it is not a material one.

I think had we not said anything, you would never have known. So no. You have to understand that one chuckles at the other end because all the good initiatives cost, therefore they are bad. This one doesn't cost too much.

So that is helpful.

Kind of a related question I guess is when you talk about the pricing increases that you are kind of 2 to 4% in North America and 8 to 10 internationally. Is that net of your cost inflation or should we subtract from those numbers --?

That is an excellent question. The answer is I hope it is net. I can't guarantee that. And it is an excellent question. I put those couple of paragraphs on the cost aside at the risk of singling out Weatherford as having that issue. No, it is an industry issue. If other people don't talk about it, it is because they don't want to. It is a global issue. It is normal.

Look at the spot markets for all of the steel, steel related and nonferrous materials. It is public information. And so you draw the conclusion of what happens to people who are bashing tools, and there you are. And people, you know what is going on in the energy market in terms of scarcity of people. So it stands to reason.

The risk one has, and it is the real risk, is that there is a contractual effort underway. It is as widespread and comprehensive as you can have to try to get protection from their clients. The question is how good is your safety net? Are you going to catch every single one of your clients, everyone of your contracts -- probably not. No one ever does. And therefore there is some slippage. How big is the slippage? I don't know. Hopefully as small as possible. And how well protected will the contractual terms make you? Again, you are going to have slippage there. So the risk of slippage is real. We watch it like hawks. It is a legitimate issue.

And in addition to which there is this dynamic. You've got cost increases or fluctuate depending on inventory cycles. They can be -- they have leads and lags. And there again you can have pieces of time where you are unusually in a good position, because you are protected when the cost doesn't hit entirely and vice versa. So it is not -- one has to keep a certain discount in mind. I think is what I would advise you. But I can't tell you what it is, because if I knew I would tell you.

Jim Crandell of Lehman Brothers.

Where are we now what the combined Weatherford decision on a runrate in Underbalanced Drilling. And is your expectation for growth going forward the same as they were when Weatherford was a stand-alone unit in Underbalanced?

I think on the latter question the answer is absolutely yes, subject to the same constraint as some of the other fast-growing forms of services, which is that we are constrained with people and equipment and the like. As to the runrate, it is between --.

Precision adds about 10% of their revenue to our Underbalanced. That is the pickup in that area.

So that would put you about where on a combined basis?

Our Drilling Methods this quarter were 18% of the divisions. And then that is before Precision. And then you can add about 10% of Precision's revenues.

Not all, but most of it is Underbalanced.

Right.

Second question, Bernard, will 2006 represent a breakout year in revenues for Solid Expandables, and will it represent a breakout year for Intelligent Well Completions in terms of --?

On a relative basis, yes, to where they come from. There are so many other moving parts that our grow in terms of dollars with bigger numbers that they may get lost in the shuffle. But in relative terms, yes. Meaning that --.

Couldn't it be -- could we see -- what were the beacons that are fairly dramatic growth either one or both?

They are coming from a small basis is the problem. It is very dramatic growth. You may exceed the 100% mark. But the problem is -- you know what the problem is, is that what would you rather have -- 25% on 400 million is 100 million. Or would you rather have 100% on 10. I'm not saying they are 10. You understand what I am saying. So there will be a breakout, I think, I hope. Certainly on Intelligent Well, and most likely on Solids, depending on product completion, meaning on engineering completion.

I just don't know if they will make as much difference as it used to make. One day it will, but you've got too many other larger moving parts. We haven't abandoned at all our drive and everything else. Look at Intelligent Wells. We haven't talked about it in eons. We just keep on taking losses until we are bring it to market. So we don't give up. It is just that -- I am not quite sure what quarter I will be look to go up and say, you know, we've had a gazillion in this particular product line, and by God we have worked long enough to get it. Which is sort of what I said on Intelligent Well Completion.

Let me ask I this way. In terms of your best guess, when would Intelligent Well Completions and when would the Power Expendables be a $100 million business each of them on a stand-alone basis, not by quarter, but by year?

I was going to say a number, but I am afraid to. I think that we have to be a little bit patient. I think once you used the number '07 and not '06 for that, because we won't get there.

To what extent will Underbalanced be the vehicle under which you penetrate the Eastern Hemisphere through the LWD product line? Do you expect largely to piggyback LWD on to your Underbalanced product line (multiple speakers) market?

Actually, I think it comes in different forms and fashion. I think you have cases where -- it is a number of different cases. You have cases where Underbalanced indeed provides the lead competency and all of the directional capabilities follow. And you have cases where it is the other way around. But the other way around I think it is more likely to be the RSS tool that provides the entree, more so than the LWD. Again, it depends on what markets. I'm not favoring one versus the other.

What is also interesting is there are some open hole wireline capabilities. I didn't understand that before. That sit beautifully with the Underbalanced process. Not during Underbalanced process obviously. But are uniquely equipped from an open hall wireline comment to deal with Underbalanced wells, meaning wells that are being drilled Underbalanced, are being completed Underbalanced, and they're going to be logged in an Underbalanced state. These are sorts of things I didn't really understand. I made a commentary on that (indiscernible) as a combination looks to be more, I think, more hand in glove than I expected, and now the technology will probably will carry its growth rate more easily than I had expected. Some of it has to do with understanding better our (indiscernible), which surely comes with time.

Last question. Weatherford has been right at the top of the industry, along with Schlumberger in terms of R&D spending as a percentage of revenues. Precision is well above that. Where would you think in 2006 as a percentage of revenues your R&D spending would be?

We are still defining it right now as we speak. It will be somewhere between 2.8 and 3%. But we don't -- that is still being defined as we speak. In other words, it is an aggregate of different projects.

That is one of the things that we are covering in the next few weeks, so we will be able to define more clearly -- I guess give me three weeks.

That doesn't mean that the project we're shutting down did not get shut down. It is one thing to have redundant R&D, which is basically wasteful, which we have. It is another to, after shutting it down, to decide I'm going to invest another 5 or 10 million in these things, which I was not going to do otherwise. That is two completely different things. The shut down of redundant project has been done, and that was just wasteful. Not because we are a wasteful organization, because we were separate.

I'm sorry. You are saying that the total R&D of the combined Company would be 2.8 to 3% of revenue? (multiple speakers)

Yes, that is the range where it is likely to be. We don't know whether it is going to be 2.8 or 2.9 -- don't know yet.

At this point it may approximate pro forma R&D numbers. So if you took the R&D of Precision added to Weatherford, it may approximate that. Although we have cut some projects, there may be other projects that we deem (multiple speakers).

Once we're finished with our plan, we may end up with a R&D around 2.8 all the way up to 3. I don't know which one it is going to be, high or low. Added to the fact that we had R&D running around 2.8, 2.8, and here R&D running about 5% of their revenues, if I remember correctly.

The first thing we did is we looked at both R&Ds in detail, and we eliminated a number of redundant projects. And the point is that has been done. That is going away. Now as a separate decision, we may decide to spend 5 or $10 million more, something like that, in new things. And the point being made simply is wherever we end up it is not a question of just taking the two R&D projects together and not cutting everything back, no, it is eliminating the waste. But then again, given the scale of what we're doing, you may decide to spend 5 or $10 million or more on different R&D projects. You may, but that doesn't have anything to do with the -- that doesn't take away the decision and the fact you have removed waste from the two organizations by eliminating the redundant projects. Am I making any sense?

Okay. I will follow up with you at a later point. Thank you.

Dan Pickering of Pickering Energy Partners.

In the interest of time, I'm going to go ahead and follow-up later. Thank you.

I guess one last question, if there are any.

Michael Lamotte of JPMorgan.

Real quick, with the return (technical difficulty).

We are losing you, Michael. I'm sorry.

With the kinds of returns that Neighbors has talked about this week, getting three-year payback on contracts (technical difficulty) new rigs, and the fact that the opportunity sets a pretty unique scale for things now. With the scale that you have (technical difficulty) grow it?

I will tell you -- let me tell you what I think I have heard, because for some reason there's some static. I have heard that Neighbors talked about having returns of three years on -- I don't know if it is cash back or cash the return back on new construction for land rigs. And if we attempted to go down that road? Is that the question?

That's correct.

I'm sorry, we certainly do have some static. I think the answer is no, unless there is a very good synergistic reason to do so. So the answer is no. I think the land rig operation is small targeted, and it is where we want it to be. And we have no desire to move from a tool and technology competency over to a rig competency. It is there for a reason, which is we think it is very helpful in enough instances to make it worth our while. It is a very good operation. In fact it is an exceptionally good operation. I am even reminded that they won the Royal Dutch Shell Rig of the Year Award paradoxically. I say paradoxically because we're not rig contractors. So it is a very good operation. It is like a jewel. We have no desire to grow the jewel. We have a desire to use the jewel in a synergistic manner, not often, because there are not a lot of instances, but the few that are out there strike us as being worthwhile. So the answer is no.

Thank you.

I guess that will be all. Thank you very much. Bye-bye.

Ladies and gentlemen, this concludes the conference. You may now disconnect. Have a good day.