Weatherford International PLC (WFRD) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter Weatherford International earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Please proceed, sir.

Thank you. Good morning. Lisa, why don't you get started, and I'll follow up afterwards.

Good morning. This morning we reported diluted earnings per share from continuing operations of $0.53, excluding a nonrecurring charge of 2.8 million, or 1.8 million net of tax.

Before I discuss the quarter, I want to point out the change in our divisional structure. We previously reported our Pipeline Services group and our Drilling Rig Operations as other operations. These two groups have been folded into our larger divisions; Pipeline is now part of Completion and Production, and the drilling rig operation is part of Evaluation, Drilling & Intervention.

We have restated the presentation of the prior quarters to reflect our new organizational structure. In connection with the reorganization, we recorded the $2.8 million charge.

The $0.53 was a 7% sequential decline from the $0.57 reported in the first quarter, and a 66% improvement over the $0.32 per share reported for the same period last year. The sequential decline is due to the spring breakup in Canada and non-cash foreign currency book losses, which were offset in part by improvements in all of the other regions. Let me walk through a breakdown of the net $0.04 earnings per share decline.

Operational contributions by region were a $0.16 seasonal decline from Canadian operations, offset by 7.5 cents improvement from the United States, a $0.06 improvement in the Eastern Hemisphere, and a 1.5 cent improvement from Latin America. That is, operationally the $0.16 loss from Canada was offset by $0.15 of improvement in the rest of the world, for a net $0.01 decline in operating results.

Additionally, there were nonoperating losses of $0.03, including foreign currency book losses of $0.02, and higher interest expense resulted in a net decrease of $0.01 additional.

The $0.53 is at the top-end of the guidance of $0.51 to $0.53 we provided at the last conference call. The mix of earnings, however, was not anticipated. The impact of Canada was greater than expected and the foreign exchange book loss was, obviously, not expected. However, the Eastern Hemisphere of the U.S. and Latin America beat expectations.

Canada's revenue was lower than expected, particularly in June, due to the erratic weather patterns. Also, decrementals were greater than expected as a result of higher repairs and maintenance, which occur while the equipment is idle. These factors combined resulted in spring breakup having a greater impact than expected.

On a company-wide basis, revenues were flat with the prior quarter. Canada revenues declined 42% in the first quarter. Eastern Hemisphere revenues increased 15% sequentially. This was led by a 20% increase in the Middle East/North Africa region. The U.S. revenues improved 14%. Latin America revenues increased 10% sequentially.

Operating income declined 6.1 million in the second quarter. Consolidated company-wide incrementals truly aren't meaningful due to the seasonal impact of Canada. However, if you exclude Canada, incremental margins were 53%. The strong incrementals were driven by product mix and higher absorption.

Now let me turn to the divisions.

Evaluation, Drilling & Intervention Services. Divisional revenues decreased 41 million, or 4%, as compared to the prior quarter. The seasonal revenue decline in Canada of 118 million was offset in part by improvements in all other regions.

Revenue improvements by region were Middle East 19%, Europe/West Africa 11, United States 10%, and Latin America 5%.

All product lines improved sequentially outside of Canada, with reentry, fishing and well construction topping the list. I would say that it was equally impressive, although less of an impact on the bottom line, since it starts from a lower base.

The wireline growth. The wireline revenue growth was 25% in the Eastern Hemisphere. This division's operating profit margin was 25% in the second quarter. This is a 200 basis point decline from the first quarter, due to the lower absorption of fixed costs in Canada. Excluding the seasonal impact of Canada, incremental operating income margins were 61%. Strong incrementals resulted from product mix and fixed cost absorption.

Now Completion and Production Systems. Its revenues in spite of Canada actually increased 43.3 million, or 8%, over the prior quarter. Excluding revenues -- excluding Canada, where revenues fell 42 million, or 28%, as a result of spring breakup, sequential revenue growth was 15% or higher in all regions.

The Middle East and Latin America both reported 31% topline growth. Europe/West Africa increased 25%, United States 21%, and Asia 15%. Sequential revenue was realized -- improvements were realized in all product lines outside of Canada. The highest growth in this division was for the Expandable Sand Screens, lift optimization and simulation. Electric submersible pump revenue also had high percentage growth, albeit from a lower base.

EBIT margins in this division surpassed 20%. This was an improvement of 280 basis points sequentially and 680 basis points over the second quarter of 2005. Incremental margins were 55%. This is reflective of the change in product mix. We continue to forecast incrementals to average in the 30 to 35% range for this division throughout 2006 and into 2007.

A few cash flow metrics. The quarter's capital expenditures net of (indiscernible) were 222 million for the quarter. Year-to-date capital expenditures are 420 million. We forecast capital expenditures for 2006 to be approximately 800 million for the year.

We completed eight acquisitions this quarter totaling 83 million. The acquisitions were primarily in the reentry and Pipeline Services product line. We also repurchased 3 million shares under our stock buyback program during the second quarter at an average price of $49.14 per share, for an aggregate investment of 147 million. Year-to-date we have purchased 5.2 million shares at an average price of $46.04.

Our net debt to capitalization is 22.1%. We believe a debt to capitalization of 25 to 30% provides us with a balance between managing our cost of capital and maintaining financial flexibility.

Now let me turn to the guidance. The third quarter 2006 should continue to show strong operating results in all regions, in addition to benefiting from the seasonal recovery in Canada. From the second-quarter earnings level, we expect the third quarter to be as follows.

First, we're seeing activity return quickly in Canada, and therefore expect to recovery $0.08 to $0.10, or approximately two-thirds, of the loss that we experienced from the first quarter to the second quarter. Growth, primarily in the Eastern Hemisphere, should contribute $0.04. The strike in Norway, if it continues, will negatively impact earnings $0.01 to 1.5 cents in the third quarter. Two nonoperational changes should net, and therefore, have none to little impact on the third quarter.

The assumption of exchange rates being neutral to earnings would contribute $0.02, which will be offset by higher interest expense and overhead costs. The most significant component of the increase in overhead costs are insurance premiums and training. That consolidates to a third quarter forecast in the range of $0.63 to $0.66 cents per diluted share.

We have not changed our outlook for 2007. As we said on the first-quarter call, we expect topline growth at similar rates to the 2006 growth; that is, approximately 30% year-on-year. Although this appears aggressive, it is important to consider that we are not static throughout the course of 2006. The 30% growth in 2007 on 2006 equates to a growth of approximately 21% on our anticipated fourth-quarter exit rate. So what we're saying is that 2007 should be -- that forecast of 30% year-on-year is really a forecast of 21% growth on our exit rate in the fourth quarter.

We expect the Eastern Hemisphere to grow at approximately 35% or greater, and North America to grow 10% off our fourth-quarter exit rate. To be clear, this is not a market judgment, this is a Weatherford statement.

At this time I will turn it over to Bernard.

Thank you. I'll read some of my commentary; I may not read it all. I'll read the primary sections. On the face of it, the Q2 results may appear uneventful, an expected $0.53 level. Q2 revenues were flat to marginally up quarter-on-quarter, with Canadian breakup decline made up in other regional markets. Operating income was also near flat with $6 million decline.

The quarter, though, had unusual and powerful dynamics. Two points are worth highlighting, the second being by far the most important.

First, foreign exchange book losses, which sit in other in the P&L, handicapped the quarter by about $0.02. Those entries reflect the P&L recording of foreign exchange fluctuations on intercompany debt. Intercompany debt, that is debt (indiscernible) subsidiaries of the Company, is structured to optimize cash tax efficiency. The accounting rules are arcane on this issue, and arguably do a [strange] job of recording economically irrelevant events. The Company is both a lender and a borrower. Foreign exchange should have no effect either way, but fictional gains and losses are recorded regardless. Those entries, or the losses or gains, are usually insignificant and not worth mentioning. This quarter was an exception.

Second, Q2 had powerful moving parts pushing in opposite directions. Canada was much worse than expected in both topline and decrementals. The Eastern Hemisphere was stronger than expected, particularly given that most contracts start up only in Q3 and Q4.

The U.S. did very well, as expected. Eastern Hemisphere and U.S. overperformance make up Canada's loss, even though the impacted scale of the seasonal decline was more than anticipated.

Quarterly regional review. Given the usual -- unusual dichotomy between Canada and the rest of the world, much of my comments will distinguish between ex-Canada and Canada, where relevant.

Canada's topline declined $160 million, or 42%, quarter-on-quarter; decrementals were very high, close to 60%. High decremental is typical of the breakup. Let me remind you what the breakup means. It means -- one, the loss of associated EBITDA, obviously; two, (indiscernible) economies of scale, or lower fixed cost absorption; and three, comprehensive overhaul of tools and equipment. During the breakup, intense maintenance is carried out on the region's equipment and machinery. Why do we do it then? Because we don't have any choice. That's when the equipment is available. Expenses rise accordingly. The decrementals are a combination of all three factors. This particular breakup was notably worse in topline percentages, declined to 42% versus 23 last year. Furthermore, the level of maintenance expenditures incurred was unusually high.

By contrast, Weatherford's topline growth ex-Canada was $163 million, exactly -- almost exactly the same number, or up 14% quarter-on-quarter. Incrementals ex-Canada at the EBIT line for both divisions were at 53%. EDI, or the Evaluation, Drilling & Intervention division ex-Canada had 61% incrementals, and the completion CPS division had 55% incrementals -- 61 and 55. The EDI incrementals were consistent with the high levels achieved in recent quarters. The completion of CPS incrementals were higher than historical performance.

Q2, the Eastern Hemisphere topline increased by 69%, or up 15.2% quarter-on-quarter. The Company's highest regional growth rate this quarter, with just under $2.1 billion of annualized revenues -- Eastern Hemisphere is at a historical dollar high in Q2. More than half of the Eastern Hemisphere growth occurred in the Middle East. The European, West and North Africa markets are responsible for the balance.

The growth was broad-based in all product and service lines. Both the EDI and CPS divisions posted strong sequential growth in the East. The EDI division grew by 41.7 million, or 12.4%, in the East, while the CPS division grew by 27 million, or just under 24% in the East. Most of the 2006 contractual startups of significance have not hit the P&L yet, which makes the Q2 performance in the East very gratifying.

The U.S. region grew by 77 million, or 14.3%, quarter-on-quarter. The U.S. growth was $[30] million, or 9.6% in EDI, and 47 million, or 20.6 in CPS.

Latin America region grew by 17 million, or up 10.2% quarter-on-quarter. The growth there was disproportionately driven by the CPS division.

(indiscernible) a paragraph here that we normally don't disclose, but we thought it was a good marker for our shareholders. International contractual activity was very strong in Q2. This year (indiscernible) already very active Q1. A number of contractual commitments were signed up for incremental projects in the Eastern Hemisphere, and there's a few notable exceptions in Latin America. Those projects will start up on and around Q1 2007.

The total dollars of international contracts signed in Q2 round up to about 1.6 billion. Let me be clear. 1.6 billion is the dollar number of contracts signed in the course of Q2. There are, of course, different contracts that we signed in Q1, which are in the mobilization, and contracts are being negotiated and presumably will be signed in Q3 and, [no doubt], Q4. The Q2 contracts measured here are for international markets and are incremental to present level of operations. International is defined here as ex-North America. Incremental is defined here as additive to existing business volume. I realize I am being redundant here; I just want to be completely clear.

There were, of course, other contracts negotiated and signed during Q2 for extension and renewals of existing projects, and those other contracts are not -- I repeat, not included in the number quoted.

The largest contracts executed in Q2 are international contracts (indiscernible), Saudi, (indiscernible) Iraq, Oman, North Africa, Algeria, Libya, India, Norway, UK, Russia and Brazil.

The average length of the Q2 contracts is about 2.5 years, although it varies a great deal. Many -- I would say almost -- well, many, not all -- but a great many contracts have volume escalation provisions, which means that the client considers the scaling up under the same terms of the contract, but beyond the dollar amount of the contract. A number of the contracts also consider automatic extension in successive multi-year tranches beyond the initial timeline depending on performance. Some of the contracts actually -- well, not many of them, but some of the larger ones I can remember -- have an unusual timeline. I remember one which is 16 years. Yes, I did say 16, 1-6. It's extravagant. The product and service lines concerned are broad-based, covering both divisions.

Obviously, one of the keys to successful mobilization and execution will be the availability of qualified personnel. In that respect, we added a net 700 employees in Q2 and net 2000, 2100 year-to-date. The word net means essentially net of any loss of personnel we might have had in the quarters. The new hires are going through different levels of training and are assigned to specific ongoing or startup projects worldwide.

CapEx, as Lisa indicated, was $222 million in Q2, or up 24 on Q1. Cash payback on incremental investment is about 30 months, 3-0. We have at this time essentially planned out our 2007 CapEx based on core needs and contractual commitments signed and anticipated.

I follow a more detailed analysis by product service line, starting off with EDI. The division had total revenues of 966 million in Q2, down 41 on Q1, or 4%. (indiscernible) segments ranked by size, I added an ex-Canada measurement to provide a sense of direction, ex-seasonal effect. In fact, I will probably just focus on the ex-Canada number; it's probably more meaningful.

Drilling services [was] directional and underbalanced; ex-Canada was up 6% quarter on quarter. Well construction ex-Canada was up 10.9. Wireline was up 12.4, (indiscernible) tools was up 13.5, and reentry was up 19.4. This is all ex-Canada.

Clearly, reentry and fishing had the highest sequential growth, driven in large part by an exceptionally strong multilateral business worldwide. It's particularly strong in the North Sea. That's not a '06 phenomenon only. It will be even more so an '07 phenomenon.

Well construction was the runner-up, with strong growth split evenly between tubular running services, cementation, and liner hanger systems. Product lines most affected by Canadian breakup were wireline and directional, which is predictable; the least affected were reentry, fishing and well construction.

All product service lines grew ex-Canada in a range of 6 to 19% quarter on quarter. The fastest-growing product line ex-Canada was reentry, as I mentioned above, although wireline and drilling tools were strong runner-ups.

Although not the lead performer this quarter, drilling services, which is directional and underbalanced, together with wireline, will have their division's strongest growth rate over the next five years. In fact, much of the Eastern Hemisphere growth will be led by directional, underbalanced [and/or] wireline. Furthermore, we expect these service lines to accelerate their growth in '07 and in '08.

Drilling services and wireline will benefit from a combination of low to no market share ex-Canada, strong secular drivers; that's worthy of the whole conference call in and of itself. What's happening from the horizontal drainage standpoint and just the general phenomenon, the implications of aging reservoirs.

Three, unique technology. The example given here is compact (indiscernible) wireline, (indiscernible) a great many, and/or leading-edge technology -- for example, directional and underbalanced.

Now, take the directional service line, for example. The Weatherford LWD, EM and RSS -- that's rotary-steerable system -- technologies are setting industry records. They may have low, in some instances no market shares outside of Canada, but they are at the industry's cutting edge. They're not just (indiscernible).

For example, our LWD system again stretched pressure and temperature capabilities. In Q2, we successfully (indiscernible) a Gulf of Mexico well for Exxon, with [relativity] (indiscernible) pressure to over 30,000 psi and over 350 degrees Fahrenheit temperature. The LWD system performed impeccably. (indiscernible) upon completion in good operational condition. This performance was on the back of a similar well in ultra-deepwater for Kerr-McGee, where we successfully logged two in excess of 32,000 feet, with 100% logging capabilities on bottom. In both cases we replaced competitors who couldn't perform in the hole.

We successfully ran an EM LWD type combo in Saudi Arabia, an operational first in the Kingdom. The use of EM technology is tied to Saudi Arabia's emerging underbalanced activity.

A bit more substance on the rotary steerable system. Our RSS surpassed its prior record of building angle by successfully achieving a 16 degree angle, that's 1-6, for 100 feet for Lukoil (indiscernible) in Russia. This is on the back of achieving a 14 degree angle a few weeks earlier in the North Sea.

On the subject of Weatherford's RSS, this is essentially a new technology, but with complete range of sizes and very little share, which if you think about it is a very promising combination. We're proceeding with worldwide seeding which is slow, but it is a cumulative process. And the numbers, although modest, are beginning to move. In Q2, RSS footage drilled was 121,000 feet. Now, it was up 37% over Q1, but of course the numbers are so small that I'm not sure percentage means very much. Still, it adds up to close to 500,000 feet annualized. Now, we have a ways to go. To put it in perspective, compare 500,000 feet of annualized run rate to the overall RSS market, which should be at or greater than 22 million feet in 2006, and it is growing very rapidly. RSS is probably the oil field service industry's fastest-growing segment, at least to my knowledge.

Without [boring] you with all the details, we'll highlight a few other recent performance milestones on and around the drilling and evaluation division. By year end we should have about 14 new directional systems deployed on contract in the East -- Eastern Hemisphere alone. We had basically essentially none to a handful on January 1st.

Market penetration of wireline mirrors directional. Our multilateral technology is growing at one of the Company's fastest growth rates, with complex level three and four geometries. Our backlog exceeds by a factor of four the prior historical high. A new mechanized tubular running services system has gotten spectacular traction. We have to date been selected for 19 out of 38 deepwater projects in the Gulf, which sort of amounts to 50% market share. We have concurrently broken into mechanized applications to the land markets in the Eastern Hemisphere, particularly Middle East and Asia. Mechanized systems was typically used only offshore until very recently. There is no reason why we wouldn't use it on land. And of course, the land market is fundamentally, in terms of numbers, greater, particularly in the East. So this is in turn a much larger potential market then deepwater alone, which was the historic market of those mechanized systems.

Our top-drive [KC] running system introduced at the OTC last May has -- has recently 40 systems on order for late year Q1 2007 delivery. 24 systems are in the Eastern Hemisphere. We had no orders in Q2. This is entirely new product. Finally, drilling with casing and extended reach drilling systems are growing at strong double digits rates quarter-on-quarter, in line with horizontal and on multilateral reservoir drainage applications. So much for the EDI division.

The completion division or production division, CPS. They had an outstanding quarter. In spite of Canadian declines, which they also experienced, the division grew by 43 million, or 8%, Q2 on Q1. That's not ex-Canada, that's just what it is, which is a remarkable achievement. The growth was broad-based.

Five product service lines, though, stand out. In declining order of importance -- expandables, which to this speaker is particularly gratifying. Expandables was the single biggest mover for the quarter. This is in both scale and margin. Revenues reached a new historical high. The EBIT margins were the highest in the division and one of the highest company-wide. Expandables remain a very young market, beyond (indiscernible) control. The applications are broadening to include (indiscernible) isolation and completion, competency and solids.

Solids, which is expandables applications in well construction, were behind completion in commercialization. Solids, however, had its first breakthrough in Q2, (indiscernible) Weatherford. Applications were contracted for three new projects in Oman, Saudi, and a series of experimental runs in the U.S. All three are a market penetration first. They will start in Q4 and are significant in seeding potential. The other product lines that overperformed were completion, which is broad in its volume gain; ESP, electric submersible pumps, which is our new product line, which is getting traction from essentially no market share; production optimization, which is the software-led optimization services for wells and artificial lift. This is an international play and one where we are leaders. And stimulation, which is for Weatherford to date a U.S. play.

The division segments ranked by size in Q2 are artificial lift, 287 million, essentially flat -- up 3 million from Q1. This is not -- ex-Canada up 17.7%, completion 174 million, up 30 million from Q1, or up 20%; ex-Canada up 31%; and chemicals and stimulation services, 90 million, up 8 million from Q1, or 10%; ex-Canada up 17.9%.

As evidenced (indiscernible) completion really overperformed, with 31% quarter-on-quarter ex-Canada. And actually, even including the declines in Canada, it's still up 20% quarter on quarter. The other three segments were almost identical at near 18% quarter-on-quarter growth ex-Canada.

Of note, this is the first time the artificial lift segment did not decline, in spite of losing much volume in the Canadian breakup -- but overall it did not decline -- the artificial lift is a big market for us in Canada -- which essentially means that undeniably, the artificial lift product line as a whole is looking very strong, which if you think about it is a derivative of the price of oil. It shouldn't surprise you.

At quarter end, expandables and artificial lift, production optimization and fiber-optics had the highest backlogs in their respective history. And lastly, although this isn't the quarter to comment extensively on fiber-optics, in Q2 we have field test breakthroughs in the use of fiber-optics with seismic applications and multiphase measurements. Q2 also a time which we signed a joint R&D agreement with Statoil, whereupon our client will support the application of our fiber-optic technology to specific seismic-related purposes. Fiber-optics overall have quantum commercial potential for CPS and Weatherford as a whole, not in '06, but beyond.

Geographic outlook. The comments that we made on the Eastern Hemisphere and Latin America market, given in Q1, they imply in full with no change expect the sense that if anything, the Eastern Hemisphere market will be stronger in '07 and '08 than anticipated. I'll will focus here essentially on the North American market.

The few points I'm going to make now, really -- they don't come across in the text -- they really refer to our view of the market for North America over the next nine to 12 months. It is a conservative view. It is also not the same view if we extended the timeline to 24 to 36 months. We're actually much more constructive on North America, looking out 24 to 36 months. I realize that may be of less relevance, but still I thought I should mention that.

So, the point on North America looking out over the next 12 months are as follows. There just isn't a material volume decline that appears likely. There just isn't. We define material as at or greater than 5%. Perhaps market conditions will change, but we try to scrub that hard, and it just isn't.

There are identifiable examples, particularly field work, that could be curtailed and/or postponed, typically CBM. But it appears equally likely that the canceled work would be made up with incremental work in either other gas fields or, more often, oil-based projects. You should not be surprised to know that the oil-based projects are very strong. There is not a lot of oil to go after in North America except heavy oil. But still, these light oil segments are exceedingly strong.

The North American market is looking for an equilibrium point near-term. And again, near-term, it strikes us that it isn't far from where we presently are. The North American market has, again, in our minds, near-term modest downside but equally modest upside. It's hard to know, and it's a narrow band in our minds.

Now, describe the market. Within the market, North American prognosis is going to vary oil field service company by oil field service company, depending on the product and service line that they're in. And the key differential will be capacity additions, or not, and where relevant, technology differentials, or not. Who you are and what you do will make a difference in how you do between now and, let's say, the middle of '07 or the third quarter of '07.

Given its product and service lines, Weatherford should do well on the relative basis in North America, which means that in our minds, over the next 12 months, if the market should be near flat in North America -- this is a conservative view, but it is what it is -- we still expect to have some volume growth, based on the traction we're getting in products and service lines. And the volume growth should be somewhere, looking into '07, 10%, 5, 10% for Weatherford, given the prognosis of the North American market. I realize there's a lot of distinctions, but trying to be as clear as I can be.

A large part of what we do in the U.S. is oil-based, as a reminder. Artificial lift, for example, is our historical core in CPS, and heavy oil is our largest single market in Canada.

In the gassy segments, North America remains for us a market where equipment and people are scarce, at least in our products and service lines. There remains to date a measure of rationing in many of our products and service lines. Simplistically, we could raise the level of our business volume by up to 10% near-term if we had additional tools and people. It's still true today. That's what the fields tell us, specifically.

There is no significant capacity increase underway in our classes of products and services. Most of the tools and equipment being built are being diverted to the Eastern Hemisphere and Latin America. The supply chain lines have a hard time keeping up with international growth, certainly speaking for ourselves. Stimulation would be the one exception, but Weatherford has itself been a significant factor in capacity expansion, at least until recently. It would be hard for us to complain about ourselves.

Other two points. I know this is a paradox. I alluded to it before, but we still have share growth potential in North America. The supplies to a number of products and service lines, specifically wireline, directional, drilling with casing, extended reach systems, expandables, ESP and simulation, to name a few. That's not true of all products and service lines, but it's true of enough.

In all those products and service lines, Weatherford has insignificant low shares in the U.S., and in a smaller number of instances, Canada. We are -- and we are gaining share. We're also gaining share in some of the more mature product service lines where we have recently introduced technology. For example, our new top-drive casing makeup system.

Lastly, the Rockies, Barnett Shale, new shale plays, heavy oil developments, and of course, Gulf of Mexico deepwater, half driven our gains in North America to date, the gains that we've had above the market. It is very important to note that the types of wells that we are drilling in greater and greater numbers in North America are far more suited to our toolbox than the well makeup for 2003 and 2004. Heavy oil, CBM, tight gas, ideally suited to our technological strengths. That is why unconventionals are a core at Weatherford. The direct topline exposure coming close to 15% of the Company.

In summary, we believe it is an overreaction to assume a wholesale pullback in the U.S./Canadian market. Curtailments, if any at all, will be modest, short-lived, and most likely made up by other deferred gas plays and more oil-based projects. In fact, we view the North American market at near its equilibrium, certainly for the next 12 months.

Second, it is simply not correct to assume Weatherford is vulnerable in North America on a relative basis. It's quite the contrary. We have some headroom in many of our respective product service lines before theoretical market retrenchment hits the P&L. Our product service lines are in short supply, have not been built up, and not expecting increases in capacity. Market conditions could worsen and our prognosis would change. But as we stand now, we believe that over the next four quarters our North American business should, at worst, be a flat segment, and most likely will be better than that. I think the sort of reference scenario -- not the worst scenario, the reference scenario, which is sort of middle of the road, and we tend to be -- we tend to be conservative -- is something along the lines of 10% growth in '07 for North America.

The prognosis for the international markets is identical to (indiscernible) described in Q1. I just -- very few points. The scale and scope of the expansion underway is very strong. The growth phase will last a long time before it stabilizes. You should interpret long time as meaning five years, seven years; I can't quite calibrate it. Each country market move is a multiyear expansion process, and these moves are cumulative, making for a very powerful multiyear regional growth.

Project management skills are an important growth factor. The importance of technology cannot be overstated. The importance of the [NOC] cannot be overstated.

On a forward-looking basis, and applicable to the whole company, we reiterate our assessment made in Q1 for '06 and '07. One, Weatherford should average 30 topline growth '05 on '06. This is, of course, adjusting for full-year ownership of Precision in 2005. And I don't think that's terribly controversial of an outlook. At this time, though, we see no reason why this would not extend to '07 at a similar rate. And as Lisa highlighted in her comments, you must remember that Weatherford is not a static company, it's a dynamic company in high growth mode, so that we make our assessment based on the most probable and reasonable run rate for the last quarter of the year. And we based our judgment on '07 from that particular starting point. And from that starting point, the 30% translates to about 20, 21%. Q4 -- likely Q4 '06 on '07 for the whole year.

Much of this will be driven by the underlying market growth in the East and in Latin America, and share gains for our technology. We assume flat activity in the U.S. and Canada [to] market in (indiscernible) '06 and 2007, except seasonal trends. That's the market.

We have raised our Eastern Hemisphere growth expectation. We expect the Eastern Hemisphere growth rate to increase throughout the year even more so in 2007.

We expect strong growth out of Latin America in '07, in particular out of Brazil and Argentina. Venezuela and Mexico are a wild-card in '07. And of course, the prognosis detailed above applies to both EDI and CPS divisions. Incrementals -- well, the EBIT incrementals ex-Canada were 53% Q2 on Q1. The high incrementals reflected primarily a combination of product mix and operating performance. Incrementals ex-Canada again were 61%. Incrementals at the CPS division were 55%.

Product mix yielded a high overall margin at both divisions. This was in part a function of normal quarter-on-quarter noise, but really for the most part it reflects the continued shift in technology [intensity] of products and services at Weatherford.

Operating performance shows strong productivity gains. This is a combination of better absorption with increased volumes and dividends from years of efforts improving our supply chain. Pricing trends in both divisions are strengthening in the Eastern Hemisphere. This is a contract-by-contract phenomenon.

On a forward basis, incrementals by division will vary from quarter to quarter. They'll also change as the year progresses, but they are likely to remain healthy. We'd prefer not to -- we would rather not reasonably anticipate keeping incrementals at the ex-Canada Q2 levels of near 53%. We worked with a company-wide target of incrementals in the range of 35 to 40%.

Summary, we have as good of a visibility on our business as we ever had; actually, even better than Q1. Weatherford's probable volume increase through '07 are on the high-end of our expectations. The market is helping, obviously. What sets Weatherford apart is the organic upside potential with so many young product lines with state-of-the-art technology and low to no market shares in otherwise fast-growing regions. In this respect, our younger product lines and emerging technology are showing early and good traction. Client projects on the whole exceed our capabilities and will have to be implemented in a staged manner. Of course, we're expanding our people, manufacturing and capacity aggressively.

Notwithstanding our expansion, the length of time needed to execute our clients' plan growth will be stretched in years, and often by our clients' own design. The corollary is that we expect strong growth in our markets and topline to be sustained through 2010, and probably longer, subject to healthy underlying economic activity and inelasticity of (indiscernible) demand for hydrocarbon pricing. This is an interrelated reflection of the scale of the projects and the concurrent acceleration of our [class reservoir] decline rates.

North America activity will, in our minds, remain essentially flat near-term, with modest fluctuations (indiscernible). We should continue to do well in both the U.S. and Canada on a relative basis.

The future, though, is East, and the future is secular. We are [in] an international secular growth stage and one in which Weatherford should excel.

With this, I must apologize; my comments are a bit long. I will turn now -- turn back to the operator for questions.

(OPERATOR INSTRUCTIONS). Bill Herbert, Simmons.

Bernard, the $1.6 billion in contracts signed in Q2 -- to put that number into context, if you have it -- if you have it handy, what was the dollar (indiscernible) of international contracts signed last year? And what is the expectation -- rough numbers, because I know that there are a number of pending variables. Given what you see right now, what can we roughly expect for the second half of 2006?

The second question is easier for me to answer than the first. (multiple speakers) last year, but it's much less (multiple speakers). Sorry. It takes a fair amount of work to compile these things, because it doesn't come to us in a sort of financial summary form, we just asked for it this time, although I see the flow of contracts on a daily if not weekly basis. So, okay, that's -- I can get that for you off-line.

With respect to the second half of your question, Q3 is shaping up very similar to Q2. Q4 I don't know yet, because I don't know if things will be signed in Q4 or in Q1. I don't know that.

So, Q3 similar to Q2. You mentioned that many of these contracts contain volume escalators. What about pricing escalators?

For the most part, they have escalators that they are really -- either you have reopening of negotiations at certain points in time in the contract's life, which tends to be longer than the 2.5 years I gave, because you've got extensions. In other cases, you've got cost-related escalation. That will be the most frequent. (multiple speakers) raw materials, people, and that sort of thing, cost escalation.

In regard to the $1.6 billion, rough order of magnitude, do you have a breakdown in terms of which product service lines are represented in those contracts?

I do.

On a percentage basis?

I do, but I don't have it now. The key ones -- maybe, Lisa, you can go. Why don't you do some quick math? She's got the schedule in front of her; I don't.

Not (indiscernible) the percentages, but where you see the majority of them coming through is the drilling services and underbalanced (multiple speakers)

(indiscernible) probably are (indiscernible) half. (multiple speakers) 40%, half, no, yes? (multiple speakers)

That's just intuitive.

Two more. I didn't catch -- when we talked about the bridge for Q3 relative to Q2, I think you said $0.08 to $0.10 Canada, $0.04 Eastern Hemisphere, maybe a $0.01 to 1.5 cents reduction for the Norwegian strike. I didn't hear anything from U.S. Is U.S. expected to be flat?

The growth in $0.04 includes the U.S. I just expect the majority of that $0.04 to come out of the Eastern Hemisphere.

Last one. You touched on it very briefly, but the perceived area of vulnerability here for the industry is North American gas-related activity, especially those segments which have benefited from significant pricing increases, plus are witnessing a significant increase in, I guess, capacity. So, on the pressure pumping front -- one, if you have it handy, I think you mentioned here chemicals and stimulation services ex-Canada up 18% quarter on quarter. Is that a reasonable proxy for the increase in topline?

Actually, no. Chemicals grew faster than stimulation. I remember the growth in stimulation from Q1 to Q2 topline was actually rather modest, about $10 million.

Put that into context; that's what on a percentage basis? Is that basically flat?

No, it was up. It grew about $10 million Q1 on Q2, and the number -- hang on a second; I'll just tell you now. Take a quick look. Just bear with me a second if you would. The number -- stimulation -- it grew basically -- it basically ran a little above $70 million for the quarter, and it was up basically 10. So it didn't grow that much.

Great. Lastly, on the pressure pumping front, as you look out, sort of current leading-edge indicators with regard to pricing momentum, what are you witnessing? Are you still able to implement reasonably attractive pricing? Is it flattening out or is it more challenging right now?

We (technical difficulty) the price leaders in this market, so we are very humble followers at best, one. Two, pricing structures in the stimulation market, best I can tell, are very healthy, meaning that the returns one gets on equipment is very healthy. Certainly the price leaders have been (indiscernible) moving pricing higher -- God bless them -- and we'll gallantly follow. But we don't see pricing moving up. That's clear on stimulation. But then again, we haven't seen this in the past few weeks or few months even. But we are not the best people to ask the question to. We follow.

But you're not necessarily seeing your pricing under assault or -- no pun intended, pressured right now?

No.

Jim Crandell, Lehman Brothers.

First a comment to follow up on the previous question. The whole world ex-Canada up $0.04 quarter-to-quarter the third quarter seems almost unbelievably conservative, given that you have a number of contracts kicking in in the Eastern Hemisphere in the third quarter, and that the U.S. rig count is likely to be up Q3 versus Q2, and all the secular trends with technology that you have going for you.

I'll take a stab at it, and maybe Lisa can help me. I think it's true that we are being cautious. We don't mind saying it. It's also true that if the scale of what is going through the topline proves out, and certainly so far it has, also it comes with significant startups. Startups are disruptive, startups are expensive, and there's always something -- a bit of an unknown. So that's probably why we tend to be more cautious. Clearly, we'd like to see that number higher. Perhaps when we talk in October we'll be trumpeting that it was higher. Rather do it then than now.

A couple of questions about technology. I'm not an expert in this, but when you talked about the rotary steerable product line, the numbers that you threw out, you had a 16 degree angle for Lukoil and 14 degrees in the North Sea. (multiple speakers) seems to me to be pretty noteworthy. Is this something that truly is noteworthy and is going to lead to strong growth here going forward?

I think it's very noteworthy. You should talk to people who are in the well they're drilling. The rate at which -- there are two things that characterize the very successful RSS system. One is the life of the tool, meaning when does it fail. Obviously, the longer the life, the better the tool. And a lot of it has to do with how you design your bottom hole assembly. And the more runs you have, the better at it you become, which means that this is an area where I think people who have been running the tools for longer than us have an edge.

The second characteristic -- of course, (indiscernible) goes away with time. The second characteristic, which is terribly important in an RSS system, is how fast can you build an angle, meaning how steep can the curve be. I leave it to engineers to debate the point. But to the best of my knowledge, we seem to be building an angle at about twice the rate of our nearest competitor. That's a very impressive technology. It works very well. It's not experimental at all. It's totally commercialized, and it's the tail-end of a long process, which we were lucky enough to inherit as opposed to doing it ourselves, meaning it's nice people at Precision who did it. And what it means essentially is that it is, to the best of my knowledge, the RSS system that has the strongest attribute, when it comes to building angle, in the industry, and therefore, it will be that much easier to build a presence in the marketplace.

Now, to put it in perspective, RSS as a business is going so fast -- the indications that I've seen is a growth rate of 35, 40% per annum. This is the industry. It's growing so fast, we have so little of it, that (indiscernible) the degree the technological performance of our RSS system is a luxury we don't need, meaning that we can't make enough tools. We just -- we are -- we're so supply chain-constrained because of the demand for this that it will be years before I can tell you at this point we are doing extraordinarily well on a relative basis because we have this particular technological advantage. In other words, it's almost not necessary.

For your LWD tool, Bernard, you and John have now talked about maybe -- I can think of six or so different wells where you've actually displaced the competition, where they have been taken off and you've been put on. Is this kind of performance on the high-pressure, high-temperature wells causing companies to use you in the North Sea and other areas internationally on more of their traditional wells?

I think it helps a great deal, because what -- although competitive forces are what they are. And clearly, when we penetrate a market -- say, a market in the Eastern Hemisphere where we are present, but not with LWD systems, it's perfectly fair for competition to dismiss us as either a junior or (indiscernible) or (indiscernible) or technically sort of not proven. And when you have a dossier that you can resent to the client that shows not only six, but a dozen wells, where -- never mind who you displaced, but that the downhole conditions in pressure and temperature were exceptionally extreme, and you perform brilliantly -- and that technology has performed brilliantly -- it's a compelling argument. So it helps the marketing immensely. It accelerates the seeding, period. And it's not so much that we (indiscernible) in front of the client (indiscernible) to say we're so much better than our competition. Again, we don't need to say that. The only thing we need to say is that this is a technology which is in its own right exceptional, and therefore we deserve a slice of the pie. It helps.

One thing that surprised me -- a new product -- as you mentioned, you now have 40 orders for your top-drive casing running system. Can you talk to that? What is the dollar value per order for those?

Close to 1 million (multiple speakers) 40 million. Very high margin, and it's just the very beginning. I think probably the only thing I can say on this is it's a very mature product line, the TRS. It's in well construction. Just like cementation, liner hangers -- these are mature product lines that essentially move with activity. But you can rejuvenate product lines with technology, which is what we've done. We haven't done it last week; we did it three or four years ago, and it just has a long tail. And market reception has been excellent. Presumably you will get similar attraction in terms of growth rate in that product line throughout '07 and '08.

Last question, Bernard, is I hear a lot of positive comments from people in the field on this whole Reeves product line, particularly in the Rocky Mountains, and that it really is better or even unique versus anything that Schlumberger has. Can you comment on that and how quickly that is growing?

I'd be careful to say anything about Schlumberger, but what I will say is this. What Jim is asking for is -- the Reeves technology is for open hole wireline. The open hole wireline technology is so very simple. It is essentially a logging technology, which is, if you will, small size. The tools are about one-third the length and one half the width. Does it mean it takes better logs? No. The logs are as good as anyone else's. But it has a huge conveyance advantage, meaning that it can be used in wells of just about any geometry and configuration.

If you think about it, the way the geometry of the well is moving, we are drilling more and more multilaterals, drilling more and more horizontal. What you may not appreciate is that those horizontal multilateral wells have a lot of areas of constriction. Once you drill, it's kind of hard to go down to the reservoir. It's not a straight line like you see on an engineering drawing. Conveyance with a tool which is one-third the length or one-half the width is an enormous operational advantage. And therein lies its uniqueness. And that's what's driving the market share gains there.

Great. Good quarter considering Canada. Thank you.

James Wicklund, Banc of America Securities.

$0.01 to 1.5 cent potential cost in Norway, Lisa. That's millions of dollars. Can you talk a little bit about what's idled, what your continuing costs are, either one of you, put a little bit more about the impact of Norway?

What I looked at the impact of Norway, it was pretty easy. I could just look back to the previous strike, and you do end up having some fixed costs that you're saddled with. You can't do anything about those for a short downturn like you have in a strike. And it was pretty easy to estimate.

As you know, in Norway there is no variable cost. It's all fixed. And so what happens is in an up-market [design], because you've got all the people on board basically to serve the volume; the absorptions are fabulous. When they have a disruption, well, you're out of luck. Basically they're there, they being your employees. And that's what I think Lisa is alluding to.

Not a cheap place to operate anyway.

Don't think so.

Let me switch to the Gulf of Mexico. A year or so ago, the Gulf of Mexico got hit. You guys and Baker Hughes probably kept too many assets there too long -- your own admission. You've reduced your capacity there. Bernard, you talked about the success you're having on deepwater. Can you give me some idea of your mix now in the Gulf of Mexico between jackup drilling and deepwater drilling, or gas drilling and oil drilling?

That's a very good question. Deep versus the Gulf of Mexico. As much as I (indiscernible) these calls, I always find (indiscernible) stuff I don't really know. I'll have to be intuitive on this. My guess right now is it used to be 75, 25, 75 shelf, 25 deep. I suspect now it's 50-50, as I think the share we've gotten deep has grown. And we sort of -- it's not that we lost share in the shelf, it's just gotten smaller. So that would be my guess, subject to it being verified. We still have the same infrastructure where we consolidated some facilities. We're doing it as we speak, actually, in (multiple speakers)

Are you still taking assets out of the Gulf?

No. Actually, that's a very timely question. No. It strikes us that the Gulf may -- not in '06 -- it strikes us that the Gulf may actually do a little bit better maybe late '07. I don't know how long it will take to get some rigs back, or maybe more platform work, and/or Deepwater work. But I'm intrigued by the prospects of the Gulf looking out '08 and '09 as (indiscernible) start taking assets out.

Now that Weatherford is an international company and you're running a great deal out of Dubai and the Middle East, how much business do you guys do these days with Iran?

Insignificant. I couldn't tell you. Couldn't tell you. Whatever we do would come out of probably Brazil. It would be -- might be some tools, but insignificant. I can look into it if you want, but I -- for obvious reasons I tend to stay away from it. And again, I did notice some quarters ago there was some shipments from Brazil, direct sale; that's about it.

Last question. With the G8 Summit last week and all, the big streak in nationalism coming in Russia, reports on Interfax that [Sipnep] has dropped Schlumberger as primary provider, going more toward a nationalistic push -- I realize a lot of that is politics, that the local indigenous companies can't do what the Western companies do. But that political push still has to have some implications. What does all this mean for you guys in Russia?

First of all, we do pay attention to it. And (indiscernible) we noticed exactly what you noticed. So, clear. We have found, first, that the only way to be successful in Russia is to be Russian and for real, to state the obvious, not sort of hybrid Russian or sort of a gentleman from East Texas who manages to speak Russian; that won't do. You have to be Russian to be successful, and I mean really Russian. That's one.

Two, technology still works. You might have noticed that the 16 degree angle report on RSS was for Lukoil in Kaliningrad. Now, what are we doing working for Lukoil? Lukoil and TNKBP (indiscernible) after all our number one client worldwide -- but Lukoil, which is hardly in the same situation, is a very important client for us in Russia. And the only thing they're interested in is technology. What I mean by technology -- whether it's (technical difficulty) we have two examples we talked about before. Whether it's directional systems that suit their needs, be it EM, be it LWD, be it RSS, or open hole wireline, because they've got problems of conveyance. We talked about it before, so I can just use those examples. And then we find we get traction there, and there is -- the relationship is -- we are being pulled in, we're not being pushed in. So that works very well.

For the rest, for the sort of the -- just developing a real identity and presence in a market where we only have -- we're growing in Russia, but I mean we're still -- I think it compares certainly to the likes of our larger peers, we have a smaller percentage of our revenue in Russia than they do for sure. To create a real Russian identity -- a real Russian presence you need to have a Russian identity. And you can go at it one or two ways -- either by acquiring it, which is very difficult -- it's possible, but it's very difficult. I could speak to it for hours. Or you do it organically, which is what we're doing. And it takes a very long time and you don't hear about it, and one fine day we appear to be Russian. So technology still works. It really does. We're the living proof of it. But really, a Russian identity is -- and a real Russian identity is fundamental.

Mike Urban, Deutsche Bank.

The international business, especially Eastern Hemisphere, sounded like a pleasant surprise for you. As you alluded to a number of times, you have a number of contracts starting up in the third quarter. Was that -- was the second-quarter business truly kind of incremental and surprising business, or was any of it early -- earlier than expected startups or in effect borrowed from the third quarter?

There are no early startups, at least I've never seen one in my life. I've seen startups that are pseudo on-time, which means they're only 60 days late. It's like having your house remodeled. When is it ever on time and on budget? I won't comment on that; I'll just let you think about that. So no, that's first off.

No -- what happened in Q2 was not a complete surprise. It was a happy event. Essentially what you got is you got movement in the existing product and service lines that you have working right now in the Eastern Hemisphere, we just got more volume out of it. It's simple as that. The client just asked for more, and just moving at a high level of activity, not just for the quarter, but on a sustained basis. So, it wasn't new contracts per se. (indiscernible) Q3, Q4, Q1 and so forth. What was the other question you asked me?

That was it. Following on to that one, in the past and, I think, last year, if I remember correctly, there was a little bit of a slowdown in the Eastern Hemisphere, I think in the Middle East in particular, which you said at the time was fairly typical. Is that something that mitigates (multiple speakers)

In the summer you mean, when (multiple speakers). Yes, that's absolutely true. That's absolutely true. It will be actually interesting to see if it turns out the same way this year. It's true that it's hotter than hell in -- the temperatures in [Daharan] or anywhere around it are 120 degrees Fahrenheit. I'm not kidding. So it's actually -- it's unbearable. So you're completely correct.

It would be interesting to see if indeed that translates into an event in this Q3. I'd venture to say that the answer is no, not as much, which will be actually an interesting sort of barometer of how anxious the client is to get started. So, point taken on the weather. We'll see in October. My sense is the answer will be no.

Is that something, Lisa, that enter into what we've, I think, agreed could be a conservative activity growth forecast, in terms of bridging Q2 to Q3?

It does, because I have the conversations with the operational personnel, and they submit numbers. So I'm sure they took that into account.

Kurt Hallead, RBC Capital.

A couple of quick follow-up questions for you. First on the incremental margin assumptions you guys are using for 2007. I think it's 35 to 40%. Is that incremental margin just the business segment, or is that the total corporate operating income?

It's the total operating income.

One other thing, if I understand correctly. So, if you're talking about 30% revenue growth year-on-year off a base of around 6.5 billion this year, that would be about 1.9 billion for next year. And didn't you -- you just booked 1.6 billion of new international contracts in the second quarter, and you probably have more coming. So that 1.9 billion, I guess, looks pretty achievable, if only from international business.

The answer is yes. I think [there are] two points. One that will tend to (indiscernible) and one that will tend to weaken what you said. First, the 1.6 billion -- don't take it as the yearly average. That's spread over a number of years. I tried to give the weighted average as 2.5 years, probably more precisely it should be 2.5 to 3. So be conservative, make it on 3 years. It really is only 5, $600 million worth of incremental yearly business. So that's point one.

On the other hand, I would suggest that you might want to think, if you try to assess how reasonable or aggressive we are being on our pronouncements on '07, take a look at the fourth quarter of '06. How do we know what fourth quarter '06 is going to be? Well, we had expectations. If you run simple numbers. And if you are -- if the average of the year is 6.5 billion -- and my numbers please should not be taken as biblical. I'm just giving you a rough sense. If Q4 runs somewhere close to 7 billion -- which is probably not unreasonable, look at your models -- that's annualized, obviously -- the international should be around 3.2 or something like that. And then North America should be like 3.8 or something like that. My numbers are not correct.

But the point is -- the point is that to go -- if that's your starting base internationally -- and that's what it should be -- to go to 8.5, really the amount of growth that you need to generate out of the international is something like 1.1, 1.2 billion in '07 from a base of 3.2. That is about a 35% or so growth rate, which is really strong, but is not unreasonable in light of what we're trying to do. It is operationally challenging. I'll say that. Did I confuse you or did I help?

Understood. The last follow-up on my side would be that -- look, you're not going to find anybody who's going to buy into any North American growth prospect. If anything, everybody is saying it's going to be down on a year-on-year basis, right? So can you just walk us through your assessment based on some of the maybe recent internal reviews that you've had of the business lines, the clients and projects, as to why you may think that the next 12 months may play out differently than the 2001/2002 period?

You've got the market and you've got Weatherford. The market is essentially activity overall. Activity overall falls into a lot of different subsegments -- first gas, and then oil. I think no one is going to debate the issue of whether the oil segments will be strong, very strong, and so the issue will be there -- well, how big are they, Bernard? And I think you have to look at the heavy oil segment and the light oil segment to pull as hard and as fast as they can. Do not dismiss it, because in your world, everything that matters is all at the margin. Right? So the oil segment will grow as far and as fast as it can, light oil and heavy oil. Okay.

So you put that aside. That is a number. And I'm sure you can start playing with it, and we see it in our markets. We see it in our markets across the board. Anything that is even remotely oily wants to live. Anything that is almost oily wants to grow. Okay, that's one. And I'll come back to that, because that is a longer-term theme. I hope I won't forget it. I'm writing it down. Longer-term theme here I want to come back to on North America.

When it comes to the gas segment, obviously, it's not quite as rosy. However, there again, it's sort of -- it's really segmented. I would put the CBM market on one side, and I would put the other gassy markets on the other. And what I'm saying is not all CBM, not by far -- repeat, not all CBM. That's a vast simplification. But there are some CBM markets which, in my judgment, probably will be -- ought to be, will be, might be postponed. Why? Well, CBMs have two things that are notable.

One, they have pretty large upfront costs. New ordering. And often, the architecture of the wellbores tend to be multilaterals, fishbone or herringbone structures, which is pretty expensive. So you postpone the upfront cost of putting the CBM in production. But the second point is equally important. Production profiles of CBMs -- not all CBMs, but many -- is one of large volume of gas initially. Once the bonding of the gas to the coal is liberated by the absence of water, in simple terms, you've got a big rush of gas and then [decline rate] it hard. Well, that's the least you have. And then you're faced with a fair amount of upfront cost, and then you've got a big rush of gas (indiscernible) on production, which you want to try to time the first (indiscernible) of gas to be -- by far biggest volume, to where you could optimize your price of gas. I think the answer is probably yes. So it's not unreasonable to expect a number of CBM projects to be postponed.

Do I think that it adds up to a decline? I really don't. That's at least my opinion [because] that's the field's opinion. I do think there are other. The shale is actually must more robust than the CBMs. Again, it depends on the CBM. You can disprove me any day of the week, any week of the month. I'm just giving you general thoughts, not the specifics that are very different. I've been myself involved in CBM projects that are far more (indiscernible) different production profile. I'm just giving you a sort of yardstick. But it's not unreasonable to expect that there are shale projects, which together with traditional gas projects, which together with heavy oil and light oil projects, will more than overcome whatever deferrals you have on CBM. I just really think (indiscernible) equilibrium market the next four quarters -- a little bit up a little bit down.

With respect to how Weatherford is going to do in those markets, do I need to explain, or is that reasonably clear? I'm referring to the modest share gains we may be experiencing. I was asking you a question. Do I need to explain the share gains in North America, or that's pretty clear?

No, that's fine. Thanks.

Dan Pickering, Pickering Energy Partners.

Can you clarify for me -- I'm a little confused. I heard you guys talk about basically no change to your 30% revenue guidance that you gave last quarter, but I think you're talking about stronger Eastern Hemisphere, so I'm just trying to reconcile that. If we're not changing North America, and we think Eastern Hemisphere is stronger, wouldn't that imply that there's slightly faster growth in '07 than you talked about in Q1?

I will actually defer to Lisa on this so that I can rest my voice.

On the last call, we didn't break it out between North America and the Eastern Hemisphere. On the last call we had a little bit more in North America, which has shifted to the Eastern Hemisphere. So you do have a change in mix.

So there is a little bit of tweak to the North America numbers?

That would be very fair.

That's helpful. I want to understand the startup cost issues on the Eastern Hemisphere project, because I guess I agree with some of the other folks who have indicated that the sequential growth would seem -- it seems like we see more of an earnings pick up, so I'm just trying to understand the startup costs. Can that eat up a quarter or a half of a project early on in --

We have startup costs that I can identify in two or three countries. For example (indiscernible) I'll leave it at that. I can identify startup costs between 6 to $10 million, easily, a quarter, and for real. And I could show you what it means. You have people on the ground. You are training them. You are setting them up (indiscernible) get a penny from the client. And the expenses. You don't capitalize this. So that I can -- North Africa, Middle East, Asia, I can give you examples specific. It's real, and it's normal.

Now (indiscernible) what happens -- you understand that over a period of time it gets diluted, because the bigger you get in those markets while the absorption becomes, first of all, better and better, and also -- if you don't increase the rate of startups, then ultimately the impact becomes a smaller one, gets diluted down.

A significant piece of that is the mobilization costs of both the personnel and the equipment.

[Other way of putting it].

And those are expensed?

Absolutely.

In Canada in the quarter, it looks like we had, I think you said, 160 million in revenues at 60% decremental. So we lost 100 million in operating income quarter to quarter. And I was just curious what piece of that were these higher maintenance costs. I realize maintenance is always higher. I'm curious about the higher than you expected.

Actually, in my comments, I'm at fault for putting close to 60%. I think the decrementals were 57, 58%, (indiscernible). So the number is a bit lower than that. But still it's a very big number, no doubt.

It's about 91 million.

But I mean (indiscernible) answer your question. I'll give you a sort of (indiscernible) answer. The topline decline of 42% was probably more than we expected; we were probably expecting more like 35%. On the other hand, I think the impact of overhauls was materially greater than we expected. It was the greatest of the two in terms of impact. Lisa just wants to add one specific number (indiscernible) probably more helpful than I've been.

It was between -- it was over $10 million more than what I expected.

(indiscernible) the overhaul.

They spent 10 million more than I was expecting them to spend, and it's a good thing.

You've got other things, and you've got to understand. Activity goes down seasonally; you've been working people really hard, right, the prior six months. You give people time off. They have so many -- all these people take some time off, and then you commission other people to do the overhauls and so forth and so on. Normally you put the same crews to do the overhaul, but you've got to give people some -- a little bit of family time and rest. So you actually pick up on the cost side, because you're using different people to do the overhaul then you would normally. We had some of that going on also, and it's completely healthy.

Also, because of the intermittent rain -- it sort of never really stopped -- it was clear you could not mobilize. So either -- the number of equipment we overhauled was far greater than we expected. Did a good job, actually, of overhauling pretty much the whole fleet. That in and of itself is a good thing, except it just gets concentrated in one quarter.

So that saves us money in the second half of the year and early next year, then?

Yes. The answer is yes, of course.

Directionally, okay. Can you talk about the share repurchase? You spent a fair bit of money buying back shares. Is that going to be a systematic process for you guys? Are you opportunistic? How are you approaching it?

We're systematic in -- on that. Obviously, our first use of capital is to fund growth; the second, if there are any acquisitions -- as I said, there were a few small ones this quarter; and then the third is the share repurchases.

Okay. And then, if we -- Bernard, I think I heard you say in your comments -- you said on the pumping side of the business you had been focused domestically to date. Does that imply that you're thinking about international pumping? And if so, can you expound on that a bit?

The answer is yes. This is not new. As to where, probably for competitive reasons it is best withheld. But there's nothing spectacular. But the answer is definitely yes, and it was yes from the beginning. (indiscernible) and know-how and expertise, both engineering and operationally, at a capital cost per (indiscernible) we thought was attractive, (indiscernible) acquiring someone in the stimulation business. We didn't do it just because to be in the U.S., not at all. The U.S. is a good place to learn things. But the objective is always particular places around the world. And it's not a one-year phenomenon; it's a multiyear phenomenon, meaning there are a number of different things we would like to do. But this was true from the beginning in our minds.

Last question. 2007 CapEx plan. I realize it's early. But how much is already committed for '07?

Quite a bit. Quite a ways. A lot. I think certainly the core and many of the projects is quite a lot. (indiscernible)

(multiple speakers) this year -- do we have at least 400 committed for next (multiple speakers)

God yes.

We have more than that committed for next year.

Jamie Stone, UBS.

I just have one clarification, Bernard. Did I hear you right before when you said that pressure pumping revenues in the quarter were 70 million, up 10 million?

I think that's right. I'll check again.

That's about 17% growth?

That is.

Because I thought (indiscernible) didn't grow very much.

I'll double-check again, because I -- but that's 70 up 10; that's right. (multiple speakers). I said the right thing and you remembered right. Yes.

That's it, and I'll follow up off line.

Ole Slorer, Morgan Stanley.

Looks like you have pretty good momentum in the business here. My question is on Canada, just some clarification again. The 42% decline in revenue was about twice of what you had last year. Was there anything particular with the breakup this year versus last year, or was it that you've changed your product mix (multiple speakers)

I think it's the latter, because the people at Precision will tell you that their breakup last year was also very hard on them, and more so than it was on us, when we were separate companies. So I think it's the latter. And I think by and large, you take the wireline business or directional business, for example, just don't go back on location until things are really very stable. And so we tend to be out longer.

The second question, on Canada. If we do see some delays in CBM activity, and the switch to heavy oil or light oil drilling, or probably more heavy oil in Canada, what product line implications does that have, and what margin implications?

Probably what you want to do is you take a look at the two divisions, and I'm going to give you sort of simple (indiscernible). The EDI division is about 40% in Canada heavy oil base, 60% gassy. On the other hand, the production division is about 90% heavy oil base or light oil base, that's really more heavy oil in Canada. So you've got 90 of the production and you've got 40 of the drilling which are heavy oil based. Clearly, if the business mix changes, from the drillings perspective they can change that percentage easily, insofar as if you think of what is required for heavy oil, what's the first thing you require for heavy oil -- typically it's the SAGD. The SAGD is directional (indiscernible). And double directional architecture in order to inject steam at the same time as collect the oil. So I think they will very quickly refocus on the heavy oil market, and you'll find that 40% will move up very quickly.

That's good. On the CPS side, that was the second thing that was different to our expectations in this quarter as far as the mix was concerned. You did significantly better on the margins, and you highlighted the expandables as being the big pullthrough. Can you talk a little bit about the margins now in expandables (indiscernible) coming from -- is this business now fully commercial on super optimum margins at this point, or what's going on there?

Business is completely commercial. Two things are happening. Business is commercial. For us the applications which are in sand control initially are just spreading in terms of the application in the marketplace. The completion extension is also commercialized, which is on isolation and is also spreading. Obviously, it's younger than sand control systems. And solid, which is well construction, which is extension of 1000 or 2000 or 5000 feet of steel changing the diameter is even younger and is also being commercialized. So put another way, the sand control side of expandables is what (indiscernible) 140, $150 million or thereabouts right now. And it's not mature, but it's sort of adolescent, if you will, in its life, or maybe a young adolescent. Zone isolation is very little, and solids is even less. And they're all being commercialized. So what you have is you've got -- you should have over the next two, three, four, five years a series of expansions in all three applications until it becomes hopefully a sizable business.

With respect to the margins, they are truly great. The margins we experienced on expandables are at the operating income level north of 50%. I think there is another service line which rivals with it within Weatherford; maybe another one, maybe two. One for sure. And no, it's not stimulation. And it's -- it really is a function of selling the service based on performance, not based on costs. In other words, this is a technology that truly (indiscernible) great value. So we value price it. And it's sort of unique. You don't have that many people to compete with, and you're likely to remain unique for quite some time.

As you roll out the (indiscernible) solid business (indiscernible) we spoke to (indiscernible) recently; they appear to have signed a bunch of contracts with you for Middle East applications that certainly they were quite excited about. Can you talk a little bit about the scale and whether the profitability can be the same as you half in screens overnight (multiple speakers) problem there or --

Of course you'll have teething problems, you always do. This is like the notion of could you have an early startup, of course not. You will have teething problems. And (indiscernible) we try not to factor any of this in at all on anything we say, because we know these things are very hard.

Presumably what the people at (indiscernible) mentioned to you were things on and around the application in both Saudi Arabia and in Oman. I describe it as seeding, insofar as -- yes, it's true, we're going to be -- you're going to be using sort of our solids technology in another application there. It's going to happen before year end. The sort of -- the applications we'll do are sizable, in terms of what we're doing in the wells and number of wells. I don't view that as -- I certainly don't factor that in as a moneymaker. What I do factor that in is very important seeding, so that if we do well -- and time will tell between now and year end. If we do well in these applications, then I think in '07 it becomes a market application of size, and it closes the end in '07 in the market applications of significant size, and it grows from there. It's very, very, very important technology. It's just terribly difficult to make these things -- one, work reliably, which I think we can, and we've proved it; two, just to go through the commercialization and seeding process. I will say that in the industrial climate we are in right now, particularly in the East, the clients have such complicated downhole architectural problems to deal with, one; and two, are in such a hurry to make a difference in their reservoirs, that the rate of adoption technology is faster, without a doubt. That's why in my commentary I think I made the point that the importance of the technology cannot be overstated, just like the importance of [NOC] cannot be overstated. I think both are terribly true.

(indiscernible) premium connections technology on expandables -- have they been resolved now?

Very much so. Very much so. Very much so. Yes. Without -- yes. Without any reservations.

Alan Laws, Merrill Lynch.

I also have a few CPS-type questions. Specifically, you mentioned that artificial lift was up, even with the large seasonal slide in Canada. Are there other regional market pickups you would like to highlight, or is there more -- is there just sort of really a more function of your new ESP product line?

It's both, really. It's not all ESP. That would not be true. It's really ESP is easy to point to, because when you have so little of something, then the (indiscernible) rates are very high. And I expected that. And it will not only go so far, if only because our ESP line -- I don't view it as being particularly -- there's nothing in our new ESP line which is revolutionary, that's just the very good competitors are out there. So you just get a little bit simply because you're there, because you're very big in artificial lift and you get a little bit. And that in and of itself is a good thing, because a little bit translates to a fair amount of money.

But what is really happening in lift, and (indiscernible) production optimization -- and you may see that in our commentary, production optimization did extremely well. Production optimization for us is primarily the optimization software, software (indiscernible) hardware also, but wells and artificial lift, regardless of the form of lift. And we're the largest in the world on that. It's a sizable business. You might have noticed in the quarter it did very well. And that, together with the lift product line, shouldn't surprise you. These are quintessentially oily product lines. Right? So you should expect them to do very well across the board -- not only in Canada, but also in the U.S. and South America for sure, and, of course, the Eastern Hemisphere.

So it's more than just selling individual lift products, it's more like the combination now that (multiple speakers)

I could wax eloquently about the virtues of the combination (indiscernible) system. It's all true. But the reality is that the markets are just using brute force, which is they're using lift systems on a greater -- they're replacing lift systems sooner, because when the lift system starts to malfunction, you lose production. So they're replacing them sooner. They want to optimize them to gain every single barrel they want to optimize to a greater degree. So the combination of both means that you should see the lift business do very well over the next six quarters everywhere.

As sort of an extension to that, how would --

I would add that if you want to look at a microcosm, where they might do spectacularly, (indiscernible) in America, which got the attributes of a heavily lift market, but not quite as mature as the light oil markets in North America. I said light oil, not heavy wells. The heavy oil markets in North America are very young actually.

As sort of an extension to that, on the ESP kind of line, could you characterize how that's doing out of the chute here?

On a percentage rate, very well. I think the topline growth is like 35%, something like that, quarter on quarter. But that's not meaningful because it's so small. So I think the ESP line will grow nicely to about, I would say, 100, $125 million in size. And I think at that point in time -- maybe $150 million in size. At that point in time, you really have to earn any growth as opposed to just getting it simply because you're there. But that gives you still room to grow quite easily, particularly in some of the older markets like North America.

Second one -- given your dark horse image in the pressure pumping market, could you update us on sort of where you are in your plans in this market? You mentioned having a good idea of what your 2007 CapEx budget or plans are. I wondered how pressure pumping factored into these plans.

First, I'm not sure that I either have or deserve the dark horse image. I would probably point out to you there are many other dark horses that are much darker than we are.

I was hoping you would respond that way.

The (indiscernible) thing we did is acquire skill, a skill set. I think we have a skill set. I'm not arguing whether we have it as well or as deep as some of our larger peers; we have enough of it. The other dark horses, I think, may be up to something different. With respect to our CapEx project, I think -- I am told that we should not tell you that, certainly not on a conference call. No. So, with my apologies.

I'll just finish with this then. If things were to get worse than you expect in North America, could you or would you see yourself as a potential consolidator in the pressure pumping market?

God no. Why would we? We've built our business essentially (indiscernible) of horsepower. Why would you want me to go out and buy (indiscernible) companies for a multiple of that? Why?

Fair enough. (multiple speakers) regional exposure, for, say, Canada or Russia.

No. Bless your heart, no. The answer is no. I don't think so. I think it's a very legitimate idea, and I certainly -- I could see why it would make sense. But we've chosen a path here, and unless there's something dramatic that changes in our lives, that's not what we're going to do. We wanted to be proficient at it. We are. We're happy. We're not being destructive in the North American markets. We're not the dark horses. Our interests lie elsewhere.

Pierre Conner, Capital One Southcoast.

Lisa, first, on Canadian sequentials again, to understand the recovery part of that, the $0.08 to $0.10. I'm assuming that the remainder of the $0.15 decremental or the 91 comes quickly in the fourth quarter, or what's the perception of that?

I would expect it to come in the fourth quarter, yes. But typically, get around two-thirds of it back in the third quarter. So that's what I was estimating.

So it's not a commentary on a loss there permanently by any means?

No. It's purely seasonal.

(multiple speakers) not meant to be at all.

Bernard, within that recovery, we've talked a lot about the mix of gas services, particularly in the artificial lift activity levels in heavy oil. Is there an assumption of a shift in Canada to get that recovery, or is this (multiple speakers)

That's a very good question. We're not -- I'm afraid to say we're not that clever. No, there isn't. I think the activity as is now [led] in Canada through the end of the quarter appears to be very much the same as it was since the beginning of the year, remains gassy. The oil segments are perking up. But if anything, they may provide a little bit of upside later in the year or early next year. So it seems to be incremental, the oily [not interfacing with] the gassy. I'm pointing to the fact that if gassy does weaken, the oily is here to pick up some slack. What I'm pointing at is a possible substitution, not the fact that it is being substituted. It's a speculative comment on my part.

That's helpful. Bernard, could you expand a little -- we haven't talked about it yet on the rig side, in terms of I'm assuming we're fully utilized there, and where are you relative to your perception of what you want to do on the pullthrough of other contracts and services? Could you expand upon that a little bit?

First of all, the rig side has been placed under the management of the drilling division. And the reason is that as you will recall, I haven't changed one iota. The only reason we added the rigs is because we thought they were useful in a project management mode. And I believe this even more than ever. Project management business is one, I think, that takes a longer leadtime to engineer, negotiate, and then you start sort of reporting it. I would be disappointed if I didn't report to you before year end some project management successes, and you'll find they will take with them a number of rigs in the project. That's one.

With respect to utilization, I don't think it's changed very much. I think the ones that have moved in the East are all working. The ones that are in the West, we have some down that are down waiting on Mexico and things like that. But it's not material either way.

And then the third comment on sort of the rigs in general is that what I really wanted, what I think we got is rig engineering skills. I do believe -- maybe I'm wrong. If I'm wrong, I won't do you much harm. I do believe that there is something to be said for harmonizing the engineering of the rig with the engineering of the downhole. When you look at the number of projects that are being -- that are going to be drilled in '07/'08 that are multilateral, complex geometry, the horizontal drainage systems we call them, and many of them are underbalanced, the ability to design rigs to facilitate the process in harmony, for example, with underbalanced -- or if you are going to be very steep angle type of multilateral drilling programs, where you have to have a very -- not a very steep angle, but so steep that it can be [held] by slanted rigs, I think it's interesting to be able to have some engineering to where you can modify the equipment you have in a manner that is a bit enlightened and coordinated with the tools. I still believe that. Maybe I'm wrong. And if I'm wrong, so be it. I won't do much damage. But again, I would be disappointed if we don't report some significant project management commitments before year end. It takes time.

So that would imply that of the 1.6 contracted that you did in this quarter, you really haven't (multiple speakers)

No, of course not. These numbers tend to be very large, and so the numbers would jack up immediately (multiple speakers). It takes time.

Moving on to the tubular running services, nice growth there. Do you attribute that growth to the implementation of the top-drive casing running?

Not at all; it's mechanization. Mechanization, which is essentially removing people from the rig, and making the casing handling part of the drilling essentially safe, fast, and people-less, which is something that normally has been the attribute of the deepwater market, and is becoming -- and still is, but it's becoming also the attribute of the land market in the East, which I find very interesting and very exciting.

The sale of these tools, will that provide a pullthrough of services?

Yes, it will. That's going to happen. You're referring probably to the top-drive casing (multiple speakers) -- absolutely, absolutely.

Rob MacKenzie, FBR.

My first question was going to be on people, something you haven't addressed a lot so far. You mentioned you hired 700 people during the quarter, down from 1400 last quarter. Are you being able to hire all the people you think you need to deliver the growth you're expecting?

First, the answer is of course not. And the second comment is that do not inhale these numbers too much, because they change -- depending on the way you close the books, you either have a bunch of people in or you don't. But the rate is about the same, actually. July is very high, so it's not meaningful. You actually -- that's why I sort of look at six month chunks. And if you think (indiscernible) huge amount of people being hired, I'll tell you also to bring those numbers down in your mind, because it's not smooth. But net net, we like to hire about 1000 people a quarter, give and take -- a little bit more, a little bit less. That's not enough, but it's the best we can do. And frankly, I'm not sure we could train people any faster anyway. It takes about a year to train people. Not a year in a classroom, but classroom is depending (indiscernible) technical, as in sort of basically people who have a little bit either technical experience or technical institute type background, (indiscernible) engineering people. It will take anywhere from 30 to 90 days of classroom, and the rest is field. It just takes time, so I'm not sure we could do anything more. The answer is not enough.

Obviously, we're going to make do. We can't push more people through the system and run the risk of having poor quality service; that's not [profitable]. That's why (indiscernible) some of the comments I make suggest that people expect this to be sort of the end of a cycle or whatever in 12 months or whatever -- they're out of their minds. The time it takes to get things done (indiscernible) is immensely long. There's a misunderstanding of the logistic constraints that are out there, not only on the supply chain, equipment and so forth -- which actually is the easiest part of the equation; not an easy one, but easiest -- but really on the people side. You can only do so much. But we are.

And the other point I'd like to make also is that paradoxically, although it's costing us a lot on the training side, much of what we're bringing in is non-OECD people, so your cost of people actually -- we're talking this time next year would start to basically go down, as once they are trained and operational, they actually cost much less than OECD people, which is, again, the evolution you would want us to have.

My final question, in the interest of time, is centered around your comments earlier vis-a-vis some potential slowdown in CBM activity. Are there any particular geographies where you think that risk is (multiple speakers)

No. The only examples I had had a couple of places in Canada of CBMs that might be postponed, but immediately are replaced by other gassy projects. So it's actually -- don't make too much of it. It would be a mistake. I don't see -- there is no -- there's nothing I can point to where I can say a-ha -- see, there's a curtailment of the gassy side. When projects go down, they're either picked up by oily ones or you've got other gassy ones, best I can tell.

Geographic-wise, it's Canada. What other regions do you think are the most (indiscernible) risk of having some slowdowns?

Really I don't have any. And again, be careful that the anecdotal evidence of a couple of small CBM projects in Canada -- they were immediately picked up by others in Canada, too. So be careful that I -- I don't want to mislead you. In six months, it may be different. But I really think on the Canadian and U.S. side, if I talk about a market which will be essentially flat -- market, not us -- I really think that's sort of what you'll see. And you'll (indiscernible) look at real declines, and then be surprised at (indiscernible) increases, but I think that's what you'll see (multiple speakers)

So there's no anecdotal comments from the U.S. yet?

There's really not. And God knows I tried. Maybe you'll hear about them before us, but God knows I tried.

Daniel Henriques, Goldman Sachs.

My question is about Eastern Hemisphere growth, especially Middle East. When you talk about the growth forecast and the growth opportunity there, are you focusing more on the smaller projects? I'm assuming -- but I'm curious to see how competitive you think you are in terms of the larger projects that will be awarded later this year and next year.

What do you mean by larger --?

Like the mega-projects like a Manifa project, like the (indiscernible) project that was awarded to Halliburton. Just wondering how competitive you think you are on those kinds of projects, how long it will take for you to get there.

I don't need to get there. We have more than we know what to do with. First of all, NOCs break down their business into non-project management business, which is typically the largest part of what they have, and then project management business. And we'll have our share of project management business as much as we can handle. Frankly, I don't see that being a material part of what we do until this time in '07. Just handling the beginnings of the non-project management volume is overwhelming for us. It's just too big.

Don't obsess on press releases on big project management contracts. You'll have others from other people, including us in the next two years, and maybe I'll be happy when you obsess then. But it's just not right. Countries like Algeria or Libya or Kuwait or Abu Dhabi, there are big chunks of growth being given out that are not in project management mode that you never see. They're not small projects, they're big chunks of business. And my goodness, it's more than we know what to do with.

That is not to minimize the importance of project management. Properly done, project management -- in my comments you might have noticed I referred to it -- is a terribly important thing. But it does not segregate into big projects and small projects, and we end up with the small projects. That is probably the sort of comment that our larger peers will say about us. And the answer is, watch the topline that we have in the Eastern Hemisphere, give it a few quarters and draw your conclusions as to whether we have enough business or not.

Definitely that's what I expect. I just wanted to hear your thoughts on that. Then in terms of U.S. activity, revenues actually up 14% sequentially -- is it possible to break that down in activity pricing and maybe market share, roughly?

Not a lot of pricing, I don't think. I think Lisa can do that off-line, because now we're going to be stretched. I've just been told that we've been keeping people now for almost two hours. Can you help off-line?

I can help you off-line.

As opposed to my just giving numbers that are going to be too rough to be worth your while.

I was going to say we probably have one last call, because we're approaching the two-hour slot, and it's really too long for the audience.

Jeff Kobylarz, Citigroup.

Just a clarification. I think you've been quite elaborate in your outlook for the North American market. You're forecasting the market to be flat at sort of second-quarter levels for the next four quarters, as I understand it.

Excluding seasonality in Canada, roughly. It's a very rough, rough, rough, rough read.

And against that, you would expect to see 10% growth at Weatherford?

That is correct.

If you're wrong, let's say that the market in North America declines by, let's say, 10%, would you then expect Weatherford to be flat?

We would think so.

And in that environment, would you expect pricing to remain flat as well?

It depends on the products and the service line. Products and service lines are generally, so I'm told, not ones that have seen much at all in the form of expansion of capacity and they're in tight supply. So it's not unreasonable to expect that the behavior might not be so bad.

You made a comment -- and I don't want to attach too much significance to it -- but it sounded like you might have been suggesting that you are suspending the growth of your pressure pumping capacity in the U.S. Is that correct?

I think probably what I really meant is that our intention is squarely on what it was in the beginning, which is applications in a few selected areas around the world. (indiscernible)

And shifting to the international, I think the math is that to get the 30% growth overall with 10% growth in North America, you need to grow international 50%.

You might want to take Jeff through the Q4, because it will help him.

I will. I think it's key to look at a lot of that growth has been achieved throughout 2006, or -- either has been achieved or we anticipate it will be achieved in the second half of 2006. So if you start at a Q4 run rate, I think you're looking at something more around 35% growth off of the fourth -- I'm sorry, not Q3 run rate -- the Q4 run rate. You're looking at about a 35% growth 2007 off of the Q4 run rate, which -- the fact that we have not been static during 2006 and have had very high growth makes the year-on-year comparison seem aggressive. But it's not when you look at the fourth quarter.

I'm glad you asked that question (indiscernible) peers in some form or fashion tried to ask the same sort of question during the call. I understand the confusion. It really has to do with the fact we look at things from an '07 -- from where we start, and we start in Q4. (multiple speakers) start an '06 average. And of course we didn't move an '06 average. The quarters are sort of identical in terms of international exposure. That's completely reasonable, but that's not the case.

My question is, what market growth assumption do you have embedded in that Weatherford growth assumption?

Market growth in -- the international activity growth '07 on '06?

'07 off of fourth-quarter rate. You've defined the terms. 35% growth off of the fourth-quarter run rate. What is your -- what market growth (multiple speakers)

15. (multiple speakers) a bit more than twice the market growth, which is actually less than what we've done historically.

And what is your expectation that pricing will do internationally, given those conditions?

We don't factor that in.

There's some pricing that's obviously moving up, but --

We don't factor that in (multiple speakers)

It's rolled in.

It's hard to factor, and it's contract by contract. It's hard to factor it in.

Got it, okay. Just finally, you pointed to the product mix as being a significant factor in the incrementals that have continued to be above your expectation. Is that structural product mix changes that you see being permanent, or are these product mix changes that could reverse depending on (multiple speakers)

I honestly don't think so. I think it is permanent. I think it's structural.

It is permanent. It's not linear quarter on quarter, but you definitely see the trend towards higher technology, which equates to higher margins.

It shouldn't be a surprise; it's the result of five to six years worth of work.

Thank you, Jeff, and thank you, all of you, for your patience. It's been a long conference call. Thank you. Bye bye.

Thank you for your attendance on today's conference. This concludes the presentation. At this time all participants may now disconnect.

So this is the kind of seasonality we should expect (multiple speakers)

That's correct. I do think it was worse. They will tell you also it was worse than the prior year. But that service line or product line typically gets deeper downturns. That is correct, although it was worse.