Weatherford International PLC (WFRD) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2005 Weatherford International earnings conference call. My name is Mika 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 conference, Mr. Bernard Duroc-Danner. Please proceed, sir.

Thank you. Good morning. I will turn the conference call to Lisa. She will do the financial review, and then I'll have my prepared comments, and we'll take questions as usual. Lisa?

Good morning. We reported diluted earnings per share from continuing operations of $0.46. This excludes the gain from our sale of the universal common stock, as well as the restructuring and tax charges related to the Precision acquisition. I will address the nonrecurring items further after a review of our operating results.

Before I discuss the sequential earnings growth, I will point out that this is our first quarter that includes the full three months of the Precision results. The third quarter had one month in it. I won't discuss the impact of the acquisition, since quarter on quarter it is not comparable. The fourth quarter will serve as a reference point for the consolidated entity here forward.

The $0.46 was a 24% sequential improvement over the $0.37 reported for the third quarter and a 64% improvement over the $0.28 per share for the same period last year.

Our $0.09 earnings per share improvement over the third quarter can be summarized as follows. Sequential improvements in our Completion & Production division and our Evaluation, Drilling & Intervention division, excluding the impact of the acquisition, contributed $0.03 from the Eastern Hemisphere, $0.02 from Canada, $0.04 improvement in the U.S. and $0.005 from Latin America. Precision Energy Services contributed an additional $0.015.

Those increases are offset by a $0.01 decline due to a higher tax rate -- we had a 28.5% tax rate -- and a decrease of $0.01 due to lower other income.

On a Company-wide basis, revenues increased 385 million or 36% as compared to the prior quarter. The Precision acquisition contributed approximately 247 million to the increase. Excluding the impact of the acquisition, sequential revenue growth for legacy Weatherford was 14%. I'll address the geographic trends, excluding the impact to the Precision acquisition -- that is, the following discussion excludes the impact of Precision from both the third-quarter and the fourth-quarter results.

The North America revenues increased 15%. The U.S. revenues improved 12% and the Canadian revenues increased 24% from the third quarter. Eastern Hemisphere revenues increased 13% sequentially, and this was led by an 18% improvement in the Middle East/North Africa region. Latin America revenues increased 15% sequentially, led by Brazil and Venezuela.

Operating income increased 78.7 million in the fourth quarter. Company-wide, incremental margins were 21%. There were three negative factors impacting the incremental margins. The first is the acceleration of certain expenses in our drilling operation due to their transition to U.S. GAAP documentation requirements. Historically, these amounts would have been amortized over the four-year life of the contract.

The second is we had an excellent quarter from Completion & Production. This division has the lower margin of our two divisions. And it grew at a faster pace than Evaluation, Drilling & Intervention.

And the third is the inclusion of the full three months of Precision Energy Services results included in our results for Evaluation, Drilling & Intervention. Precision Energy Services has lower operating margins, and therefore, by having three months as opposed to one month at the lower operating margins, that depresses our incrementals.

Excluding the impact of the acquisition, operating income rose 45 million. The ex-acquisition incremental margins were 54% for Evaluation, Drilling & Intervention division and 24% for Completion & Production. On a blended basis, excluding the acquisition, the incremental margins were 33%.

Now I will address the results for each division. Evaluation, Drilling & Intervention -- the divisional revenues increased 38% as compared to the prior quarter, inclusive of 183 million of incremental revenues from the acquisition of Precision Energy Services. Excluding the impact of Precision Energy Services, revenues increased 9% for this division.

Revenue improvement by region were -- Canada, 37%; Latin America, 20%; Middle East/North Africa, 8%; U.S., 6%; Europe/West Africa, 5%; and there was a decline of 10% in Asia. This division's consolidated -- that is, including Precision -- operating profit margin was 25% in the fourth quarter. Incremental operating income margins were 30%.

The strong incremental margins of each individual product line were masked by the full-quarter impact of the Precision acquisition. The incremental margins for the legacy Weatherford product lines were 54%; the Precision product lines had incremental margins in North America of 36%. Consolidated incremental margins for Precision were 25%.

As I mentioned in last quarter's conference call, although the newly acquired products have margins that are similar to this division's historical margins in North America, the startup nature of the operations in the Eastern Hemisphere depressed the margin significantly.

Now I will turn to Completion & Production Systems, which had an excellent quarter and is also an easier discussion, thankfully, since the Precision acquisition does not impact this division.

Completion & Production Systems posted record level revenues of 518 million, an increase of 20.7% over the third quarter. This was led by a 39% growth in the Eastern Hemisphere. Middle East revenues doubled, Europe/West Africa revenues increased 39% and Asia improved 14%. The U.S. and Canada revenues were also very strong, with growth of 16 and 18%, respectively. Latin America increased 4% sequentially.

On a product line basis, all product lines grew in double digits. Completion tools and sand control, including expandable sand screens, stimulation and ESP all grew in excess of 30% sequentially. Incremental operating income margins for this division were 24%. EBIT margins improved 160 basis points sequentially and 360 basis points year to date. We forecast incrementals to be in the 30 to 35% range for this division throughout 2006.

Other operations -- as a reminder, our other operations consist of our [fledgling] Pipeline Services Group and our drilling rig operations. The other operations increased revenues 68 million. Operating income was essentially flat.

The decline in operating income margins is due to the transition of the small drilling rig operations to U.S. GAAP documentation requirements. This transition accelerated certain expenses of approximately $7 million that would have otherwise not been in the quarter. They would have been capitalized and amortized over the life of the contract.

Nonrecurring gains and charges -- as I mentioned at the beginning of the call, we had a gain on our sale of the 6.75 million shares of universal common stock. That was $115 million, and there were no taxes due upon sale.

We also completed the restructuring associated with the Precision acquisition in the fourth quarter and we recorded a $17 million restructuring charge and a $24 million tax charge. The $17 million restructuring charge consists of facility closures, asset impairment and severance. It does not include the $7 million of accelerated expenses in other operations that I just mentioned.

The tax charge is the write-off of certain foreign tax credits due to the integration of Precision legal entities into our tax structure. Through the integration, we gained tax efficiencies that will yield a payback of the charge within a year and a half and will provide an efficient tax structure well past the payback period.

This quarter's capital expenditures, net of lost in hole, were approximately 180 million for the quarter and were 477 million during 2005. Capital expenditures for 2006 are expected to be in the 600 to $650 million range.

Our net debt to capitalization is 20.1%. We believe that debt to capitalization of 25 to 30% would provide us with a balance between managing our cost of capital and maintaining financial flexibility. In this regard, at the December meeting, our Board of Directors approved a $1 billion stock buyback program. To date, we have been in a blackout period, so we have not yet executed purchases under the program.

Now let me turn towards guidance. The first quarter of 2006 should continue to show extremely strong operating results. Although the following is guidance, and by definition not precise, we forecast the following deltas for the first quarter as compared to the fourth quarter.

We expect to gain $0.02 to $0.03 in North America -- U.S./Canada. Growth primarily in the Eastern Hemisphere should contribute $0.03. Higher operating income in the other operations should contribute $0.01 to $0.02. And higher equity compensation expense will lower earnings $0.02.

We also will have lower equity in earnings due to the sale of our universal shares, and that will reduce earnings approximately $0.01. We do expect our tax rate to be about 28%, and this is essentially the same, so there is no delta coming from tax.

Now, this is not exact, and some areas might be slightly better or slightly worse. However, we estimate earnings for the first quarter to be in the range of $0.49 to $0.51 per diluted share.

As you look out to the second quarter, we expect a seasonal decline in Canada will be offset by increases in the Eastern Hemisphere. So the second-quarter earnings should essentially be flat with the first quarter. The continued startup of the Eastern Hemisphere projects, coupled with a seasonal recovery in Canada, will accelerate growth in the second half of the year. Therefore, we see a full-year 2006 -- our estimate of earnings to be in the $2.15 to $2.20 range.

That concludes my comments, and I will turn the call over to Bernard.

Thank you, Lisa. I will recap some of the financial and I will go through more geographic and product line details. Q4 earnings of $0.46 grew by $0.09 over Q3, which is a 24.3% sequentially improvement. We think this is a higher performance than most of our peers, at least to date. Year on year, it is a 64% increase.

A study of our quarterly earnings in '05 will show that the sequential growth rate, as well as year-on-year comparisons, are signaling a consistent acceleration throughout the year.

Consolidated revenues grew sequentially by 385 million over Q3, and operating income grew sequentially by 78.7 million. Neither revenues nor the operating income are meaningful comparisons quarter on quarter. As Lisa mentioned, we are comparing three months of Precision operations to only one September in Q3.

Segregating the effect of Precision operations, revenues for the Weatherford legacy businesses grew sequentially by 138 million or 14.1%, with incrementals of 33%, Q3 on Q4. Precision operations, and this is using our best estimate numbers for July and August, because it was still part of a different company, Precision Drilling -- probably had something like 21% sequential growth, Q3 on Q4, and that would be essentially the Canadian market.

The incremental of Precision's operations in the quarter are hard to measure for three obvious reasons, and I am repeating some of the things Lisa said here -- one, the impact of purchase accounting; two, different owner in most of Q3; and three, the sequential EBIT decline of the [raise], which, as Lisa explained, was caused by one-time adjustments of their accounting to what we feel are proper GAAP reporting standards.

On a related thought, our $0.46 quarter was earned without adding back any expenses on the theory that they are unusual for one-time. We couldn't help notice the earnings are getting adjusted for self-defined one-time events. Being the same for the adjustment to U.S. GAAP, a rig mobilization expense, which is clearly a one-time type event, would have resulted in taking credit for earnings of $0.47 to $0.48.

All in all, the quarter was very strong. Now, forward view -- the integration of Precision into Weatherford is essentially complete. The Company is set to drive its top line and margins through expansion in '06 and beyond. The deployment of Precision's remarkable technology throughout the Weatherford infrastructure has started.

Eastern Hemisphere will yield the highest growth rate for Precision's product lines. In fact, Company-wide, not just the Precision acquisition, Eastern Hemisphere, the U.S. and pockets of Latin America will drive the growth in '06 and '07. I'll give more detail later on.

In the remainder of my prepared comments, I will now cover geographic trends, product service line trends, and finally a few words about price, cost and incrementals, in that order.

Geographic trends. For the sake of clarity, I will break down the Company's results between Weatherford -- let's call it Weatherford legacy, which is ex-Precision -- and Precision. The good news is this is the only quarter you'll see me do this, because beyond, we will have a frame of reference, meaning from Q1 2006, we will have the fourth-quarter metrics to benchmark everything -- revenues, margins and incrementals.

Weatherford legacy, or ex-Precision, grew sequentially 14.1% or 138 million. Except for Canada, which had a strong seasonal growth of 23.6%, the Eastern Hemisphere grew the most by over 12.5% or 43.1 million. The Middle East and North Africa represented half the growth. Russia, Caspian and West Africa made up the balance.

The U.S. came close to manage to grow 11.6% or 45.2 million. And this is in spite of the fact that the Gulf of Mexico remained a fraction of what it was in the months prior to the hurricanes.

Precision's tools and technology businesses in Q4 were, as expected, essentially North American, at just under 197 million or 74.2% of that total revenue -- basically, almost three quarters.

Latin America for Precision's tool and technology business came in at $24 million or about 9%, leaving the Eastern Hemisphere with just over 16% of that total, predominately spread between the European and near-European markets and Asia, where Precision had established small beachheads prior to the merger with Weatherford. Other than the seasonal move in Canada, there wasn't much change in Q4 in the relative compositions of Precision's tools and technology business' geographic mix.

On a forward-looking basis, and applicable to the whole Company, we expect the following for '06. Weatherford should average 30 to 35% top-line growth, 2005 on 2006. This is, of course, adjusting, best we can, for full-year ownership of Precision in 2005.

Eastern Hemisphere -- we expect Eastern Hemisphere to have the highest growth rate Company-wide, and that rate will increase throughout the year. In other words, the later in the year you are, the higher the growth rate.

The fastest-growing individual markets in '06 should be North Africa, Russia, Saudi Arabia and India. This is for Weatherford. There are also an unidentifiable number of other markets in the Eastern Hemisphere that are about to start their way to growth, but they are more likely to move in '07 and in '08. But we can feel a staging of growth.

The U.S. will continue to see strong growth in 2005 and 2006, and this may actually be more weather-specific than industry-wide. We expect to catch up in the Gulf, most likely in full by Q3, and as you'll recall, in the United States we have a large presence in the Gulf.

We expect also further growth in unconventional hydrocarbons, heavy oil, CBM and tight gas, and share gains in sand control, ESP -- electric submersible pulps -- and stimulation.

We will also add that the old Weatherford core, which is one of the first two cores of Weatherford going back more than 50 years ago, fishing, is showing a remarkable strength in the U.S. and is likely to grow strongly in 2006.

Finally, pockets of strong growth in Latin America in '06 are specifically Argentina, Brazil and Venezuela, and this assessment is really contract-based.

The geographic prognosis detailed above applies to the whole Company. I'm sort of being laborious about it. I want to be clear, because we segment the Company so many times, it's hard to know if we're talking about the whole or a segment of it. We're just trying to be clear. So this applies to the whole Company, and to be as clear as possible, although the drilling division will have a very strong year, with accelerated revenue growth in the second half of '06, we do expect the production division to match its sister, percentage for percentage, which is why the geographic outlook is essentially the same for both and applies Company-wide.

Moving over to a view of the Company and the forward look on the particular product service line aspect of things, I will start off with the Evaluation, Drilling & Intervention division, of which you can just call drilling.

In the legacy Weatherford segments, looking at Q4, that's the pre-Precision product line mix, drilling method, which is essentially underbalanced, had the strongest sequential growth rate Q3 on Q4, with 16.4%. Drilling tools was the runner-up, with 10.9%, particularly Weatherford's proprietary drilling tool line.

With the integration of the Precision tools and technologies, the size and configuration of the drilling division has changed. The division had total revenues of $838 million in Q4. The restructured segments ranked by size are directional and underbalanced, or if you will, a much larger drilling method, if you will -- $242 million for the quarter or just about $1 billion annualized.

Well constructions, 200 million, is now the second-largest and not the first anymore. Wireline, 152 million. These are all quarterly numbers. Drilling tools, 148, and finally, fishing, just under 100 million.

Directional and underbalanced became Weatherford's largest single service line or product line Company-wide. Directional and underbalanced and wireline segments, looking out, will have the strongest growth rate of the division in '06 and most likely '07 and thereon. In fact, much of the Eastern Hemisphere growth will be led by the drilling division side by either directional, wireline and underbalanced.

And we do expect these service lines to further accelerate their growth in '07. The growth is obviously fueled by the low market shares outside of Canada for those technologies and the availability of Weatherford's infrastructure, particularly in the Eastern Hemisphere. This is clear. But this tells only part of the story.

The breadth, depth and substance of the technology Precision added to Weatherford is a feedstock of untapped top-line and margin expansion for years to come. It blends powerfully with Weatherford legacy investments in underbalanced, drilling with casing, re-entry technologies and expandables, while the reservoir [BUSI's] capabilities blend equally powerfully with Weatherford's investments in pressure optimization software and fiber optics technologies.

Just a few words on Precision's technology. The LWD system, the EMMWD, the rotary steerable system, RSS, and the compact open hole wireline systems are industry-leading technologies in their own rights and are untapped shareholder wealth generators for us.

Our evidence of the LWD systems' capabilities is provided by a recent press release on a Chevron well drilled in the Gulf of Mexico a few months ago -- it's actually why we put out the press release. We normally don't do that. There are myriads of similar cases to report in both hemispheres -- a similar sort of performance as the LWD system. It is our view that we have the highest-rated temperature and pressure, fastest logging and most robust, therefore longest MTBF -- that's essentially the life of the tool before failure -- LWD technology in the industry.

The RSS -- rotary steerable system product line -- has completed field testing on the entire range of sizes, last being the 8.25 inch system, in Q4. We can now address all sizes, from 4.75 to 17.50 in diameter. It's about as broad as you can be.

The point-the-bit technology has many unique attributes that differentiates it from the competition. For example, the rate of inclination is the highest in the industry. It appears a full third above the rate of our nearest competitor. If I remember correctly, it is 8.5 degrees -- the rate to buildup, which is remarkable.

The EMMWD system is the best in the industry and obviously is an excellent fit with underbalanced. Meanwhile, Weatherford's legacy drilling with casing technology seemed to achieve accelerated acceptance late last year. We completed just over 300 wells with this technology. All wells have been vertical to date, with the first directional application using their liner, i.e., a drilling liner, or be tackled in Q1 with a customer in Asia. There are very interesting opportunities with this technology. Customer inquiries have ramped up significantly on casing well drilling in recent months.

The directional, underbalanced and wireline segments have very strong growth prospects over the next five years. The performance of directional, underbalanced and wireline will in turn accelerate the growth in the more mature well construction, drilling tools and fishing segments. We believe the former provides clear pull-through opportunities to the latter.

Moving over to the other division, the production division, the production division grew sequentially by just under 21%, 20.7, which is an outstanding growth rate. Completion systems and expandable sand screens were the strongest segments in the quarter, with over 30% sequential growth in an already-strong Q3. Expandable sand screens had it strongest quarter ever. The two other outsized growth segments in the quarter were ESPs -- electrical submersible pumps -- and stimulation, both growing sequentially by 30%, albeit from smaller bases.

Looking out into '06, we expect the following product lines to show the strongest top-line growth. It doesn't mean the rest doesn't growth; these just grow faster. ESS, intelligent completion systems, unconventional hydrocarbon lift systems, ESPs and stimulation.

ESS -- expandable sand screens -- intelligent completion and unconventional lift systems are all technology-driven. Period. ESPs are only in part technology-driven. The technology attributes of expandables and fiber optics has a long history in wells that has been covered in prior quarters, extensively on conference calls. So maybe that will be subject of question or discussion of the call.

Unconventional hydrocarbon lift systems are not alone to their technology. This is a reasonably field-tested and patented new hybrid form of lift system. The temperatures rating, lift capabilities and very low wear attributes makes it highly attractive for a number of applications, and most particularly, the more obvious ones, but not the only ones, are in unconventional hydrocarbons and all of the applications of such.

ESPs are the result of five-year, 15-engineer strong engineering effort. Obviously, it was expensive. At this time, we feel Weatherford has an ESP product line which is both complete, state of the art, and we expect to know a few technology attributes specific to ESP line within 12 months. Obviously, it's something we've been working on.

We have secured an internal and high-quality source of ESP electrical cable. We are in the final stages of building out the global supply chain, which meets the high-quality standards that we want with a competitive cost advantage.

The expected growth in Weatherford's ESP will be a multi-year process, carried out in both hemispheres, using our existing [Stratus] infrastructure in all the relevant markets. This newest product line is capitalizing on the Weatherford artificial lift brand, which is well-established. The largest growth is expected initially in Middle East, North Sea and the United States. But this is a multi-year process, anyway.

Last, Weatherford has been working for years at developing in-house know-how and core competencies in stimulation services. We have focused on the U.S. market. State-of-the-art equipment has been designed, specified and put on order with specialized fabricators.

We have methodically introduced equipment in the market when extensive trading accrues with secure, high-quality service. The rate of introduction has been disciplined and self-constraint, and with the objective of quality and reliable service delivery. Still, stimulation has grown steadily and is likely to continue in 2006.

Finally, the other category, which is rigs and pipeline -- as a reminder, the rig operation sits in the other category, commingled, for SEC reporting purposes, with Pipeline Services. They are clearly not the same business.

Other represents in total a very small percentage of what we do -- 7% of the Company from a top-line standpoint, and less than 2% of operating income. Pipeline is about 3%, leaving the rigs with about 4% of the top line.

As Lisa mentioned, the rig business was notable this quarter in that it had to absorb a one-time, $7.1 million charge to earnings based on historical discrepancies with U.S. GAAP reporting requirements.

Three comments. One, it was tempting for us to categorize this expense for what it is -- a one-time event driving, therefore, the quarter's performance to a higher level -- I mean, $0.47, $0.48 at a 30% sequential earnings growth from an already-strong $0.46.

Two -- on a forward basis, the rig operation is in the process of shifting its assets to the Eastern Hemisphere, which is I think what we told you we would do when we acquired those assets. We have, in fact, six rigs moving from Latin America to Kuwait, Saudi Arabia, and Australia as we speak. Four more will be following shortly. By year end 2006, roughly 80% of the fleet will be in the Eastern Hemisphere -- that would be really east of [Berlin], not the North Sea -- with the balance remaining in Latin America.

Three -- the objective remains for the rig operations to support the drilling division primarily in the Eastern Hemisphere's NOC market. This is a long-term thing. It is not a short-term thing.

Four -- within 2006, we expect to initiate projects which will include a combination of cross-divisional competencies, including the rigs. These projects typically combine directional, underbalanced, well constructions and completion, and will be for NOCs. But we expect more like that over the longer term.

Moving from forward to a comment on incrementals, incrementals for the legacy Weatherford product service line in the drilling division were 54%, Q3 on Q4. Very high performance. Incrementals for the production division were 24%, which was pretty much their targeted level.

Incrementals in the Precision tool and technology businesses were up -- if you look at them on a sort of Western Hemisphere standpoint, they look as if they were 36%, which is sort of consistent with its historical performance. Equally consistent with the historical performance, Precision's margins in the Eastern Hemisphere were very low.

The historical cost of their small-sized beachheads makes early economics difficult. Clearly, this is an area of obvious future improvements within Weatherford's infrastructure.

Looking out, we expect incrementals for the Company to average about 30 to 35%, depending on mix. The level by division will vary from quarter to quarter and will also change as the year progresses. But it is likely to average 30 to 35% over the course of the year, which if I'm not mistaken is about the numbers I gave for revenue growth. So, that's a coincidence -- I just realized that; it is not meaningful.

Pricing and costs -- prognosis is strong. The pricing for Weatherford products and services is likely to move up further and in a wide range. This will be true for both divisions.

We expect price increases of 3 to 20% to phase in throughout '06 in different classes of products and service lines and at different times during the year, depending on the region. Price increases do not apply to all contracts, nor will they in 2006 -- existing contracts. But on a rolling-forward basis, it will gradually spread to the whole Company.

It is not clear yet what the average pricing number will be for '06. It should be a positive number, net of cost increases, which I am about to talk about -- I'm about to discuss.

Pricing trends are occurring concurrently with raw materials and [other] cost inflation. Now, on the raw materials side, sort of two things -- we've tried hard in the past to recover materials inflation contractually. And we've had a lot of it -- referring to the cost of steel and nonperishable material. We have not always been successful, depending on the original contractual terms.

Fortunately, when it comes to ferrous and nonferrous materials, trends in materials prices are flattening, and even in some instances, softening. This is a particularly good prognosis for companies like Weatherford, which have significant manufacturing and a large component of products business. About 40% of our top line is product versus services.

The cost of people, on the other hand, is 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. But it is rising significantly.

Market turn into '06 -- I think to a degree, this is redundant, because it should be obvious from the prior comments, but I will go through it. Volume increases are likely in '06 and '07 and are on the high end of our expectations. Both NOC and IOC, the majors, are playing catch-up aggressively.

Products on the whole exceed the industry's capabilities and will have to be implemented in a staged manner. Now obviously, we are expanding our people, manufacturing and equipment capacity. We are doing this aggressively but methodically. We are acting as quickly as we can responsibly act.

The length of time, though -- this is an important point -- 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. This says through 2008, but it's probably longer, subject to sustained economic activity. In fact, if there is no issue of global economic activity, it will be longer than 2008.

This is an interrelated reflection of the scale of the projects underway or planned. The structural shortages of people and equipment and the concurrent -- and for or us, this is the most important point -- and the concurrent acceleration of reservoir decline rates. The comment here, which says we are in the secular growth stage -- I think we have been in a secular growth stage. It has been our thinking for years. And looking forward, we are in a secular growth stage.

Weatherford implications in this environment -- we are hiring people. We've got 25,100 employees at the end of December Company-wide, and we need to increase this number roughly by 10% before the year is over. Manufacturing-wise, we were operating at a rate of just about 8.5 million hours Company-wide. The capacity is moving to 11 million hours as we speak. And CapEx, Lisa covered, is moving to a lever of about $650 million. That number will -- I mean, I think you have to watch the events in '06 to see where we go with that number.

And as closing comments, the industry needs to bring additional hydrocarbon production capacity onstream sufficient to secure a few years of demand growth and short-term swings requirements in the event of industry force majeure. This will take three to five years to be substantively evident.

During this period of time, the market for oilfield services will grow year on year, essentially tracking two things -- the implicit rate of demand growth, yes, but also the acceleration of reservoir decline rates -- not the decline rates, their acceleration. Only a sustained decline in world GDP will arrest or rather postpone the oilfield industry's secular growth.

And in this environment, Weatherford should experience above market growth. I think if all we do is experience market growth, there is not much to talk about. But we hope to experience above market growth.

The addition of the young but technologically advanced product line of Precision, together with Weatherford's legacy technologies and years of investments in R&D should increase Weatherford's growth rates for years to come. In that sense, we remain at our core a growth culture, which goes back to our roots. Coupled with capital discipline, this growth will produce increased returns and rising financial results, rising earnings, on the back of the technology and the footprint investments already made.

I will turn back the call to the operator so we can start the question-and-answer period. Operator?

James Wicklund, Banc of America Securities.

Specifically in the Middle East, where you are seeing a great deal of growth, and you talk about pricing from 3% to 20%, can you give us an idea of contract term -- how long pricing is locked in on the contracts and how those contracts changed with your ability to bring Precision tools into what I assume were already existing somewhat umbrella contracts?

We'll start by the second half of your question. The umbrella contracts did not impact the Precision tools and technology. It is only because they were for different classes of services. So that did not have any bearing. The relationship did and the real estate did, not the existing contracts.

With respect to the terms of the contracts, although the volume and the range of volume is set for periods of three years on average, pricing is kept open beyond the one-year period. That is not true on all contracts; it is true on most contracts -- the ones that are being signed up now and/or have been signed up.

So you could bring the Precision tools in without having to sign new contracts, and you could price those forward a year?

No. For the Precision tools, we have to negotiate new contracts. We have to. I wasn't clear. Sorry. We have to. The new contracts tend to be for three years volume-wise; there's a range -- that things will be utilized in a manner of X for three -- in a period of three years, sort of a high/low, which is at the discretion of the client.

Pricing is typically set for one year and then you reopen the contract for pricing. And there are specific clauses as to different factors to move pricing beyond that first year -- three-year volume, one-year pricing -- new contracts.

Last follow-up question, Bernard. In terms of pricing improvement over the next 18 months, what would you expect to see in the Middle East -- `18 months being obviously longer than giving your one-year window.

It's on the high end. It is on the high end. And to a degree, it's on the legacy side -- is more remarkable than on the Precision side. It's only because -- the thing is there's no historical basis, so to a degree I can say anything I want on that, because if we didn't have a contract before, we can sort of self-congratulate, saying that they will go higher by X percent; well, you did not have one. But the cross-impact on legacy is very interesting. And that one is on the high end.

Jim Crandell.

I don't think anybody would have thought, Bernard, that you would have industry-leading technology in LWD and rotary steerables at this point and the whole rollout of the Precision technology. Can you address two questions in regards to that?

Number one, how long-lasting do you believe your technological lead will be in these four areas that you cited where you have industry-leading technologies? And then specifically in LWD and RSS, do you think your industry lead is more due to the ruggedness of the tool itself, which has made it perform well for Chevron, where other companies failed? Or do you think it's really the quality of the measurements itself?

No, I think -- in fact let's focus on the two I think easier to discuss on a conference call, the LWD and RSS. The LWD tool is strange. Its competitive advantage really has to do with the fact that it is extraordinarily robust and that it reads logs very fast.

Now let's focus on the first. It was designed for very hot, very high-pressure wells. That's the mission eight years ago when they started on this path. So the temperature performance are superior, and I'm talking about operating, not in a premium or in a survival mode. Okay? We had a problem with these discussions and they get fuzzy very quickly.

The performance of that tool is comfortable at 200 degree centigrade. The performance of that tool is comfortable over 30,000 psi. Okay. That means on the high-pressure, high-temperatures side of the business, it sort of is alone.

But the second point is that because it is remarkably robust by definition, given its mission, it tends to operate far more reliably than any other LWD systems across the board. And in a time where drilling costs are going up, the value of the time goes up. So the value of the robust aspect of the tool goes up also -- the fact that it is so reliable.

With respect to the logging speed, this is something that is not very well known, but it has addressed another one of the sort of original missions of the technology, which is sort of a little bit the mission of Weatherford as a whole. That tool can read logs, it appears, at about twice the rate than most of its peers in terms of speed -- sometimes actually three times the rate.

And you have to look at the value of time. One looks always at the time it takes to drill to TD, and then sort of the clock, from an analyst's standpoint, seems to stop. But it doesn't. The completion and logging days of the entire drilling process can be extremely long, days, and it costs the same amount of money.

So the ability to perform those steps with equal quality of measurements is enormously important from a differentiation and market position standpoint. The tool reads logs twice as fast in some instances; it is a great advantage. And the quality of the logs is excellent.

But its competitive advantage is not the quality of the logs -- the gamma rays, sonic, etc. etc. -- no. The quality of the tool is its ability to be so reliable and so fast. It's really conveyance and speed of execution as an equal quality. And this is all driving what I think will be the direction of Weatherford, which is one of being a company that does not necessarily provide the best measurement -- I think we all know who does that -- but the company that provides the fastest, most reliable method of execution and mobile measurement.

The RSS is an easier question, Jim. RSS is a minuscule, minuscule, minuscule product line in terms of size at Weatherford. I mean, it's less than $10 million in '05. However, if you had something like 10 or 20 runs in Q1, I think in December alone we had -- my goodness, I can't remember, but we had more than 50 runs in December alone.

The RSS business, which is already I understand 6 or $700 million worldwide, is an explosive business in terms of growth. And what you have simply there is the speed at which we can participate in that growth, and it is more an issue of the ease of participation in the growth and not displacing our three competitors in RSS. I think the displacement of our competitors can come many years later. This is a very fast-growing tool.

So Bernard, just to summarize, I think you are saying, among other things, that it is going to be difficult for the competition, that you have a clear lead, and it is difficult for the competition to catch up here in the LWD business.

And secondly, do you think you are penetrating the Eastern Hemisphere as rapidly as you are at this point more because customers are giving you a shot because you are Weatherford and you do have a sense of dealings with them? Or basically do the IOCs and the NOCs now understand the value of your technology?

There is no clear answer to that. I think in general, what you describe is true often, not always. There's still some IOCs, there's still some NOCs who don't have a particular view as to the quality of the LWD, etc., and the RSS. The RSS is actually very, very young in terms of being known by the IOCs and NOCs.

But it's also true there are many instances where the relationship that Weatherford had for 10, 20, 30 years is enormously helpful in accelerating the processing of getting to know the technologies, and it's still going on. It will go on throughout the year.

And finally, it is also true that none of this really matters very much because we are, for all intents and purposes, we can only do so much in '06. And I think the notion of convincing clients that this is a legitimate technology that performs very well, that's always important, but we have as much as we can handle in '06 in the directional, etc. business.

So the notion of converting more people for '06 -- '07, '08, different story. We couldn't do any more. I don't think we can take on more than we have -- maybe later in the year. We're in Q3; we'll be able to do more in Q4, then, I think, because we will have grown a lot between now and then. But we just can't take on more right now.

Two last quick questions here. Lisa, how much were earnings penalized by the mobilization of rigs to the Middle East in the quarter? And then secondly, just underbalanced drilling only, not underbalanced and directional, what level of growth did you see in '05 and what do you expect going forward?

On the first one, the $7 million was mobilization costs related to the rigs. Of course, you're also missing out on the revenues and the earnings that you would have with that. But the 7 million was the actual cost going through. Normally, you would capitalize those costs and amortize them over the life of the contract. But then you're not having all the documentation that is required under U.S. GAAP, which they will have on a go-forward basis. During this transition, we had to expense them.

And then on underbalanced, the growth was -- it was over 25% --

Yes, we don't have the full year. I gave you the number for quarter on quarter, which was about 15 or 16%. I can remember.

It's been consistently over 25% each quarter, so on an annualized basis, I guess it would be even above that. And we expect that to continue into '06, clearly.

We don't have the number for the whole year. So we get that --

[multiple speakers] every quarter. So it's --

Yes, get that for you offline. I just have the quarter number. I can make it up, but we'll get it to you offline.

Well, congratulations on a good quarter, and if he is listening, congratulations to Lee Colley on a great job on the completion of the production area.

I will let him know.

Robin Shoemaker, Bear, Stearns.

Bernard, I just wanted to clarify a little bit, if you could, on the strategy for the joint marketing of rigs and oilfield services, and whether what you contemplate here is kind of a full-scope fixed-price bundling of services for the NOCs, or whether you will package these products but price them independently?

It is the latter. I wouldn't make too much of it, Robin, by the way, in the sense that the rig operation is a very fine rig operation. It happens to be in the right locations around the world, as far as we are concerned. I also believe that there are some instances, not many, where you combine underbalanced, directional and rigs and the rest of it. Maybe I'm right. Maybe I'm wrong. I will find out.

But don't make too much of it, because it is not earth-shaking. In addition to which, bear in mind that the sort of the contribution of the rigs per se is -- what is it? It's 4% of the Company and it's one half the fishing line, for example, which is our most product line on the service line on the drilling side.

So take it for what it is. The rigs are very performing except evidently when it comes to mobilizing -- getting the documentation right. But that is going to be easy to fix. But beyond that, at the field level, it is very performing. We are very proud of them.

However, the notion that we could combine this -- Robin, I don't know how well it works. We will find out. But in terms of pricing, no, no, it's not one set price. No. This is an exercise in providing the client with logistic efficiencies. It is not a marketing excise. Logistic efficiencies that we will share with a client. That is it. It is not we're going to get more volume by being cheaper. That is absurd. Not now.

Understood. I just wanted clarify that. Thank you. My other question, then, had to do with if there is any sort of indication on your increased capital spending budget? I would guess from your priorities that maybe you need some additional manufacturing capacity in sand screens that's going into pressure pumping area -- maybe lift manufacturing capacity? Could you just -- is there anything that you can tell us in terms of the priorities of the capital spending?

Across the board, I think it's not only what you said; it's also the entire electronics side, on the drilling side, because, I mean, if we are going to grow so much, for example, directional and underbalanced, that's CapEx right there -- but Lisa, do you want to add something?

The one thing it's not is, there is very little infrastructure build. There's some manufacturing. And then it's the tools that we need for the growth. But there's almost no -- it's just very, very minimal on the infrastructure side. Other than that, it's the cost of different --

Probably the only infrastructure side would be manufacturing, which is not a big percentage of that number at all.

Michael Lamotte, JPMorgan.

Good quarter. Two quick questions. First, could you provide a breakdown of the CapEx number in terms of where it's going to go from a product and service line? And specifically, Bernard, would you mind detailing what the pressure pumping capacity objectives are?

And then the second question is related to the Hill Country R&D lab on the pumping side, whether or not that's really getting any traction with the customer in terms of technology differentiation and stimulation?

CapEx. Lisa, your first question.

Well, the majority of it is between the two largest divisions. And it's actually very evenly split between -- it's a little more on the drilling side, but fairly evenly split between completion and Evaluation, Drilling & Intervention, but fairly proportionate to the revenue.

My guess is it's really on the tools, as far as what classification where we're spending. We're not spending on infrastructure and a little bit on manufacturing, primarily where we have roofline that we are expanding, not new manufacturing facilities.

On a product line basis, you would see there is left a little bit of manufacturing on lift. You do have some spend on stimulation. And then on Evaluation, Drilling & Intervention, it's more skewed to the new product lines that we have acquired with Precision as we are ramping those up.

And of course, when she said lift, she means ESPs and not some of the other forms of lift.

If you were to classify that in terms of technology rollout versus just capacity expansion on the tools side, is it sort of a two-thirds split on the technology front?

Interesting question. I am not sure I can answer it intelligently. This question, Michael, that one I have to get to you offline. It is an interesting question.

[multiple speakers] The new size and the products as opposed to more products that are --

Just banging more things out. Interesting question. I feel tempted to say half and half, but I don't have any real analytical basis for saying that other than what is in my mind. We certainly can produce that. But it's a different way of looking at it -- it is interesting, because normally, we look at it on the maintenance versus growth and then we look at the returns that way.

But we don't discriminate on, you know, I'm going to make more instrumentational tools, for example, which is an existing legacy which is growing -- or I need to manufacture more fishing tools, for example, because that's to support the services, which is growing, or more new [completion] tools versus I need a new LWD system, new MWD systems or I have to put together some more packages for underbalanced. It's kind of interesting. So other than that, not that it's not interesting -- we can't help you intelligently.

And then a second question related to the Hill Country lab, whether or not that was really getting customer traction and differentiating your stimulation business?

Not really. Not really. I think I am probably in the same mode as I was before on the bundling question. I don't want you to make too much of the stimulation effort. It is a good success, certainly, organically. We'd like to keep it sort of more quiet, but that's simply because I don't want to get emotions unnecessarily stirred because it is -- it's just not -- it's modest; it's not a very big operation.

Successful -- the R&D facility we put together was necessary, put together a while ago. Actually, R&D facility was opened in '04, specific for stimulation, very quietly, and has been expanded since then. My sense is that there is not a great deal of difficulty in expanding slowly and methodically our client list and our end quality of our operations. And things are sort of nice and easy -- nothing terribly dramatic. It is growing, it is true. But then, the market is growing.

Well, I guess the point of the question, Bernard, was really more oriented towards as a newer entrant to that market, I don't see the other newer entrants committing to R&D.

That is true. But we are playing catch-up. So I think in order to be fair to the existing players, I think we just -- this is something we had to do in order to be legitimate.

Weatherford is not a small company. We cannot sort of develop a competency in a class of service, particularly an important one, without having full backup of engineering, R&D, etc., etc. We have to. If you and I did it, which we could, to a limited extent, the stimulation, because the barriers to entry are not that high, you and I could do it. Yes, we could get away with having de minimus engineering backup. Weatherford can't. And that is number one.

Number two, as you move along and you're trying to develop enough of a bench and skill set to where you really understand the competency and you feel comfortable in it, you also need that backup. And so it was designed, I think, more for that than to introduce technologies that would somehow make us more performing than the largest players. I don't think we are quite as ambitious when it comes to stimulation. This is not our number one core competency by far, albeit it was very successful and it is very successful. It is not our core competency.

Geoff Kieburtz, Citigroup.

I'm going to kind of come back to the same topic as the last two questions, so I apologize for that. But just to go back to your top-line guidance, Bernard, 30 to 35%, we are all aware sort of what some of the other top-line guidance has come from other people. Would you characterize the principal difference between your outlook for top line and what some other folks have said is being your outlook for pulling Precision into the Eastern Hemisphere market?

I think that is it. There's a little bit more spice on the legacy side. It is a coincidence. It just so happens that there are things like ESPs. You have things like expandable sand screens, things like fiber optics, which, Geoff, we have working on for years. And it just so happens that they are getting traction at about the same time.

But it is complete -- simply serendipity. But otherwise, you're absolutely correct. This is not only that. It is also we're hitting our stride in some of the legacy Weatherford investments of years past. Serendipity. But otherwise, you're absolutely correct.

I guess what I'm trying to understand a little bit better is your capital spending increase is larger than those other folks as your top-line growth is larger than the other folks. But we've heard from them that they had to sort of set that plan in motion some number of months ago, in fact, even before you announced the acquisition of Precision. So I'd like to understand how comfortable you are in your ability to source the necessary equipment, as well as the people, to keep that top line?

I'll point out one thing -- when I mentioned the full-year spend, that was for Weatherford. And when we are looking at -- it doesn't include the first eight months of Precision capital expenditure. So you have the growth in the CapEx.

So it's not quite as -- what you're trying to say is it's not quite as dramatic as 650 over 418 or whatever.

That is correct. That is number one. But number two, we started discussing joining forces with Precision, first of all, many years ago, but realistically we started discussing this January/February of '05, Geoff. Agreements were made very early. Plans were made accordingly. We already had aggressive plans. We made them more aggressive. That's sort of -- on terms of, oh well, we did not plan together. How can we -- no, no, there's a long route to where we are today.

So you feel pretty comfortable that you've got access to the necessary equipment that suppliers can deliver and so on and so forth?

Yes, Geoff, we are. I also -- you will hear us from time to time say, we are not trying to do more unless we really are comfortable. And the constraint is more on the people side, above and beyond what we committed for.

Can you talk a little that about that -- I mean, sort of how -- it's a big growth target, and obviously people are constrained across the industry. What about the recruiting and training efforts?

We already have recruited a significant chunk of people and we're in the process of doing it. If you analyze our employment numbers over the past few months, really the sort of 10% number is also gearing us up already for some further growth in '07.

Having said that, it's multinational. It's multi-everything, really, in terms of efforts. Not only is it with universities, it's with other industries; it is sometimes with the military. You have a broad range of recruiting skills that we're looking for. And it's very intense. It is expensive. The whole recruiting effort is very expensive. It will not go away as an expense. I have talked about the cost side, and it was a relief to see that the materials side is less of a problem, at least for people like us and some of our peer who are still heavily into products as opposed to service.

But the people side -- I would say when Lisa says there's no infrastructure or very little infrastructure in CapEx, in the CapEx number, she is right. But on the operating side, operating cost side, when we describe all the massive trading going on as a form of infrastructure expenditure, if you will, on the operating cost side, it is very significant.

Can you give us an idea of what you think the overall OpEx inflation rate is going to be? And then specifically, within that, what the labor inflation rate --

We derived a number, which I do not have a lot of faith in. But we derived a number on the payroll side between 6 and 7%. But it is our best effort for 6%. I'm not sure I know. Not sure I know. But blended -- blended total payroll, I think payroll is about 30% of our revenues right now overall Company-wide or something like that.

James Stone, UBS Securities.

I just want to get a couple of clarifications. Lisa, do you have sort of what the revenues would have been for '05 on a pro forma basis if you included PES for the full year?

It would be about 5 billion.

Even.

Even -- actually, very even.

So 5 billion, and then that -- so your 30 to 35% growth rate is really off of that number.

That would be correct.

Okay. Secondly, when you talk about growth accelerating in the second half of the year, do you refer to that on a sequential basis or a year-over-year basis?

Sequential. Sequential for sure.

And that adjusting for the seasonality of your first half of the year?

Indeed. But really, it is not only seasonality -- yes, indeed, the reason for the comment really has to do with the sense of how things will start and putting in some leads and lags and that's really all it is. The various places where we are sending tools and people and we're gearing up and that sort of thing.

And then my last question just is going back to the buyback, which I guess is probably the first time in -- I can't remember if you have ever had a buyback before.

I never did.

Can you talk to us about how you plan to use it? When does your blackout period end, if there's going to be a strategic sort of looking for opportunities or more of an organized, regimental type buyback?

I will take the fifth on that.

Our blackout period does end mid-next week.

That we can say. With your permission, we will take the -- we will quietly not answer.

While I have got you for one more, the debt to capital is going up to 25 to 30% -- is that likely to be through shrinking the equity?

It seems to be the most likely.

Yes.

It's not -- especially with the acquisitions, we are now very organically focused, like we were before Precision. The only thing that we are interested that I can think of are things in particular markets -- a particular example is Russia. I am not saying Russia is the only example -- these sorts of things that might be interested there, and for the most part are very hard to get done, and they're small. So yes, the answer is absolutely yes. [multiple speakers] buyback.

Mike Urban, Deutsche Bank.

Wanted to go into the discussion on the incrementals a little bit. First on Precision, I realize there are a lot of moving parts here, so this may be difficult. But I was wondering if you could walk us through as best you can, quantify how much of the relatively weak incrementals are acquisition accounting versus the Eastern Hemisphere margins versus any other moving parts? And then over what period of time would you expect that to move more toward legacy Weatherford type incrementals?

I think that you'll see it move towards our incrementals very quickly because in North America, Precision Energy Services' incrementals were 36, 37%. And that does have in it some of the impact of the purchase accounting writing up the assets, and increasing the depreciation. So that's already in there. They had that impact during the fourth quarter when we finalized the valuation.

So on a go-forward basis, they will move up quickly. And by the second half of the year, I think you'll start to see more of the volume in the Eastern Hemisphere, which -- and it may be earlier, but let me say second half of the year, which will bring those margins up rapidly. So I see it moving towards our incrementals very quickly.

And in terms of the kind of incrementals you're talking about for Weatherford as a whole, 30 to 35%, if I remember correctly, that's actually a bit of a step-up versus what your view on the sustainable incrementals were on the revenue growth. And is that a function of the obvious things, which are price getting better? Or it that moving up the value chain or is it volume?

Volume, value chain -- not value chain, volume, value-added --

And the Precision impact.

Yes. I think it is all that. We try to be prudent on the incrementals. There are quarters where we have historically had wonderful revenue increases and not terribly good incrementals followed by a quarter where we had so-so revenue increases and wonderful incrementals. It's very hard to get them both aligned in the perfect three-month period.

It's really a function a lot of times, as it was this quarter, a function of mix.

Yes, very much so. But over a period of 12 months, you can actually have a much better sense. And we try to give numbers that are prudent. That's sort of -- but anyway, value, volume are the primary causes for us moving it up from what it was to where we say it will be, more than pricing. Pricing is something that will come through. When it comes through, we will all be happy. So I never speculate on prices.

So that is something that could be potentially additive to--?

That's correct.

Alan Laws, Merrill Lynch.

I'd like to follow up a little bit on your comments there about M&A and organic growth -- the division between the two. can you talk a little bit about your thoughts on sector M&A today? And from Weatherford's point of view, are there interesting opportunities that you are seeing? And you had mentioned geography, but are there product lines or things that you'd like to augment or bolster in your service lines?

I think M&A has become less and less important, Alan. For us, it has become less and less important. It already was the case -- I realize Precision was an M&A deal, but to a degree, Precision was sort of the last chapter for us. And again, Precision had been worked on for a very long time between the Precision organization and the Weatherford organization. So one could say it was something that maybe could've happened a year earlier.

So it is less and less important. Organic is more and more important, at least for us. And really what we are interested in tends to be East, not West. No offense to the West; it's just we have plenty in the West. It tends to be East. You can have a few odds and ends on the technology side, but not much.

The truth of the matter is we're sort of content, content with what we have, and we should be, because we have a lot to try to harvest out of what we have. So the organic should really be our focus completely. And it is and it will be. With respect to the industry trends in M&A, if I'm to believe the half of what I hear, it's very active, but I don't believe what I hear. Therefore, I choose to ignore it.

So as a general sector comment, do you think that strategic thinking on the M&A side industry-wide is garnering more cortex time than it was, say, a year ago, or--?

I like that expression. It appears so, yes. It appears so, if I am to believe what I hear. Again, I am not sure that I do. Consider the source. So all in all, yes, I would say that our own cortex in M&A is either sort of shut down or is shrinking. And the organic cortex is the only one which is on, really, for us. Not to say that -- we're not the industry. The industry could get very active around us. But I think Weatherford is content. It's busy. There's lots of internal things it needs to do. It's not easy. But I think Weatherford is content.

Kevin Simpson, Miller Tabak.

Good quarter. And I like your progression. My question, just one quick one, was in either business, but particularly in Completion & Production, were there any large export orders in the quarter?

Actually, the export --

Or export sales? Sorry.

Export sales were just up slightly over third quarter, not a significant change.

Actually, it is a very good question, Kevin, insofar as it is often a Q4 phenomenon. But not this year, it appears, at least not as material as in prior years.

So that big sequential, then, would be very sustainable from a --

I think it is really -- and the wonderful thing about CPS, the one thing about CPS or production is it is not something that has been in any way or form impacted by Precision, which makes it very much easier to look at. It can get -- be lumpy from one quarter to the other. But it is not a Q4 excels and then it drops off dramatically in Q1. No, no. You do have lumpiness from quarter to quarter. I don't -- I'm not sure that Q1 would be lumpy versus Q4.

Thank you very much for that clarification. That's it for me.

Operator, I think we will probably close down here, since we are sort of above our time. And I'd like to thank the audience very much.

Once again, ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.