Weatherford International PLC (WFRD) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2006 Weatherford International earnings conference call. My name is Lauren, and I will be your coordinator for today. (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, Bernard Duroc-Danner, Chief Executive Officer.

Thank you and good morning, and thank you for getting up a little bit earlier. I will turn it immediately to Lisa, and then I will pick it up from there.

Good morning. We reported diluted earnings per share from continuing operations of $0.66, a 25% sequential increase from the $0.53 reported for the second quarter and a 78% improvement over the $0.37 per share reported for the same period last year, excluding charges. The quarter's strong operational results reflects the seasonal recovery in Canada and a strong operational performance in both the United States and the Eastern Hemisphere. These improvements were offset in part by declines in Norway, the UK North Sea and Latin America.

Specifically the regional breakdown of the $0.13 sequential increase is as follows -- $0.07 increase from the Canadian operations, a $0.04 improvement from the US, a $0.03 improvement in the Eastern Hemisphere, and those improvements were offset by a $0.01 decline from Latin America. And as expected, lower foreign currency book losses offset higher corporate expense. The $0.66 is at the top of the guidance of $0.63 to $0.66 that we provided at the conference call. This was led by the strong results from the Middle East and the United States. The earnings were stronger than expectations, notwithstanding the fact that Canada was lower than anticipated.

On a Company-wide basis, revenue were 10% higher than in the prior quarter. Canada revenues increased 34%. Eastern Hemisphere revenues increased 9% sequentially. Strong growth of 17% in Asia and 10% in the Middle East was tempered by a 5% growth in Europe. The US revenues improved 6%. Latin America revenues decreased 3% sequentially. Operating income improved 62 million in the third quarter. Consolidated companywide incrementals were 39%. We expect incrementals to continue to average about 40%.

Now let me turn to the divisions. As noted in the press release, Evaluation Drilling and Intervention Services revenues increased $134.6 million or 14% as compared to prior quarter. The seasonal recovery in Canada was $55 million of the increase. Excluding Canada, this division's revenues improved 9.3%. The Eastern Hemisphere improved 13% and the US 10%. Latin America declined 2% in this division. All product lines with the exception of integrated drilling improved sequentially, and that holds true, excluding the positive impact of Canada. For example, re-entry fishing and directional services both had 16% sequential growth, excluding Canada.

Evaluation drilling and intervention's incremental operating income margins were 39%. Strong incrementals resulted from product mix and fixed cost absorption.

Completion and Production Systems revenues increased $23.6 million. In this division, Canada recovered $20 million. The United States increased 2%, and the Eastern Hemisphere was essentially flat. As I have noted in the past, this division's growth is not linear quarter to quarter; however, steady growth has been made in all regions. Total revenue is 33% higher than in the same quarter of the prior year. Regionally Middle East reported a 67% increase year-on-year, and North America reported a 39% increase. Latin America, Europe and Asia grew 18%, 14% and 11% respectively year-on-year.

On a product line basis, the highest sequential growth was in the engineered chemicals and progressing cavity pumps. EBIT margins in this division were 22%. This was an improvement of 180 basis points sequentially and 690 basis points over the third quarter of 2005. Incremental margins for this division were 64%. As is the case with revenue, the incremental margins in this division are not linear quarter to quarter. The strong incremental margins this quarter are reflective of the change in product mix, supply chain improvements and pricing. We continue to forecast incrementals to average in the 30 to 35% range for this division on into 2007.

Now let me give a few cash flow metrics for the quarter. Our capital expenditures net of lost and whole were approximately $245 million for the quarter. Year-to-date capital expenditures are $665 million. We forecast capital expenditures for the full year to be approximately $850 to $900 million. We completed four acquisitions totaling $53 million during the quarter. The primary acquisition was OMNI Laboratories. OMNI provides core management services, including the retrieval, testing, analysis and preservation of core samples.

We also accelerated our share repurchase program during the third quarter. We repurchased 6.3 million shares under our buyback program, which is more than the total repurchased in the first half of the year. The third-quarter average purchase price was $42.43 per share for an aggregate investment of $269 million. Year-to-date we have purchased 12.1 million shares at an average price of 43.83. We have $468 million remaining authorization under our share repurchase program.

Net debt to capitalization at the end of the quarter was 26%. As we have previously stated, 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 fourth-quarter guidance. The fourth quarter of 2006 should continue to show strong operating results in all of the regions. From the third-quarter earnings level, we expect the fourth quarter to be as follows. Growth in the Eastern hemispheric should contribute $0.03 to $0.04. Canada should contribute $0.01 to $0.03. The US and Latin America should be slightly higher for a combined increase of $0.03. Interest and R&D will lower earnings approximately $0.01. That consolidates to a fourth-quarter forecast in the range of $0.72 to $0.75 per diluted share.

At this time I will turn the call back over to Bernard.

Thank you. Q3 was a strong quarter by any measure. Topline was up $158 million or 10.3%. Operating income was up $62 million or 20.9%. EBIT incrementals averaged just under 40%. Operating income margins at 21.3% were the highest in the Company's history. Earnings per share were up $0.13 or 25% sequentially. The increase in margin was led by a combination of mix, lower supply chain cost and higher pricing. The Eastern Hemisphere did very well, up 9.3% sequentially. The US had another solid quarter, up 6.3% sequentially. Latin America was marginally down. Canada was up 34% on Q2's seasonal low, but that was less than anticipated. The Canadian market softened in the second half of August and September.

Companywide incrementals at the EBIT line were just under 40%. The evaluation and reintervention, which I will refer to as DDI or drilling division, had strong incrementals of 39%. The Completion and Production Systems, which I will refer to as CPS or production division, had very strong 64% incrementals, very much like in the prior quarter where incrementals were a comparable 65%.

First, I am going to go through our quarterly regional overview. Q3's Eastern Hemisphere topline increased by $49 million or up 9.3% quarter on quarter. This was the Company's highest growth rate this quarter aside from Canada's seasonal swing. With just under $2.3 billion of annualized revenues, Eastern Hemisphere is at a historical dollar high. More than half of the Eastern Hemisphere occurred in the Middle East. West Africa, Caspian and Asia were responsible for the balance. Growth occurred in spite of declines in Norway and UK markets. Norway was down due to the strike earlier in the quarter, while the UK went through its traditional seasonal low for maintenance purposes. Both Norway and UK should be fine in Q4.

The Eastern Hemisphere growth was entirely EDI-based. EDI's growth rate in the Eastern Hemisphere was 12.7% quarter on quarter, obviously higher than Weatherford as a whole. CPS division had a flat Eastern Hemisphere topline. That division is subject to delivery swings from quarter to quarter. The US region grew by 39 million or 6.3% quarter on quarter. The US growth was $34 million or 10.1% in EDI and 5 million or 2% in CPS. The EDI gains were broad-based with Drilling Services on the balance showing the most gains in the US.

Canada's topline increased overall by $75 million or up 34.1% from Q2's seasonal low. The topline came in, though, about $20 million of our expectations three months ago. The weather in late August/September and a slowdown in shallow gas coalbed methane gas were jointly responsible for the shortfall. The weather was essentially rains, torrential frames, later part of the quarter.

The Latin America region was marginally down quarter on quarter essentially in Mexico. Mexico was weak throughout the quarter, partly for contextual reasons partly due to budgeting delays.

Operating comments. Q3 saw a number of startups primarily in the Eastern Hemisphere. Many of them had challenging logistics. To date, the quality and efficiency of the startups has been very good. For the most part, they were flawless in their execution. This is very important to us. Our range of startups is likely to accelerate further in Q4 and the first half of '07. Solid operating performance in organic growth is central to our growth strategy. We have been and we remain very focused on quality and efficiency of execution and incremental project implementation. We seek predictability, reliability and quality.

Consistent with our operating focus on quality and efficiency of startups, we have made further progress on both the employee and tool equipment supply chain front. One of the keys to successful mobilization and execution will be the availability of qualified personnel. In this respect, we have added a net 1919 -- that is 1919 -- employees in Q3 or a 6.4% quarterly increase, which is our highest quarterly net higher ever. Year-to-date we hired 4512 employees for a total workforce at the end of the third quarter of 32,057 employees. That adds up to a 16.4% year-to-date increase in Weatherford's total workforce.

The new hires are going through training and are assigned to specific ongoing or startup projects worldwide. CapEx, as Lisa indicated, was $244 million in Q3 or up $21 million on Q2. Cash payback on investment is about 13 months. We have at this time essentially planned out our 2007 CapEx based on core needs and contractual commitments signed and anticipated. Some of the planning is going into 2008.

Follows is a more detailed analysis for the quarter by product and service line. First, the EDI division. Our division had total revenues of $1.1 billion, up $135 million on Q2 or 13.9%. Follows is segments ranked by size. The deltas expressed changes from Q2 levels. So, in descending size -- descending order of size. The largest first.

Well construction $257.5 million, up $25.1 million or 10.3%. Drilling Services $241 million, up $28.2 million or 13.3%. Drilling tools up $200.4 million, up $23.3 million or 13.1%. Wireline $169.8 million, up $39.7 million or [13.5%]. Re-entry fishing $138.9 million, up $22.2 million or 19% even. Integrated drilling $82.3 million, down $3.9 million or 4.5%.

The fastest-growing service line was wireline. Re-entry and Drilling Services were strong runner-ups and broad-based geographically. Our re-entry is growing exponentially with the progressive re-drill in mature fields using multilateral architecture. Drilling Services, which is directional underbalance, had strong growth attributes of its own, and of course, the Eastern Hemisphere should be particularly strong.

Directionally it epitomizes the organic growth potential of the Eastern Hemisphere for us. Measuring activities growth by average number of directional systems deployed provides an accurate perhaps the best calibration of organic expansion. The directional systems as defined here includes the combination of bottom hole assembly, NWD, (indiscernible) and [rotary steerable]systems.

The tools and equipment were, of course, originally designed by Precision. Precision's directional technology is at the industry's cutting-edge after an eight-year cycle of intensive R&D. And, of course, at closing time a year ago, a little over a year ago, Precision had essentially low, no marketshares outside of Canada. The Eastern Hemisphere in particular, they had essentially no market presence.

We have made progress. At the time of this writing, we have about $530 million of new directional contracts with directional services in the Eastern Hemisphere alone. We show then this year we are close to 50 directional systems actively deployed in the Eastern Hemisphere. By the end of Q2 of next year, we will have about 75 directional systems actively deployed in the same Eastern Hemisphere. We had essentially none on January 1st. The operations will be in 13 distinct national markets split between Middle East, North Africa, Asia and Russia.

Market penetration of wireline mirrors directional. Wireline will have sustained growth in 2007 in both Eastern Hemisphere and Latin America.

Controlled pressure drilling, formerly underbalanced. It has continued to grow and broaden its applications. Only 4% of the world's wells use a measure of underbalance technology. Asia, Middle East and the US should have the steepest growth over the next four quarters. 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 4 the prior historical high.

Our new mechanized tubular running systems have gotten good traction and have to date been selected for 19 out of 38 deepwater projects in the Gulf of Mexico or a 50% market share. We have concurrently broken into maximized mechanized applications for the land markets in the Eastern Hemisphere, particularly Middle East and Asia. This in turn is a much larger potential market than deepwater alone.

Our top drive casing running systems introduced at the OTC last May has now 40 systems on order for Q1 '07 delivery. 24 systems of the systems are in the Eastern Hemisphere. We had no orders until Q3 as it is an entirely new product.

Finally, drilling with casing. Extended reach drilling systems are growing at strong double-digit rates quarter on quarter in line with horizontal and our multilateral reservoir drainage applications.

Moving over to the other division, CPS had an outstanding quarter on the margin side. They reported our best ever operating EBIT margin in incrementals. The factors that have led to margin improvement are a combination of supply chain gains, pricing and mix. Although we always have some quarter on quarter ebbs and flows, the incrementals performance at our CPS division is clearly improving.

The topline growth quarter on quarter was a more subdued 4.1%. Canada, which is essentially heavy oil for CPS, wasn't as strong as anticipated for weather-related reasons. The Eastern Hemisphere after very strong growth in Q2 was only marketably up.

Division segments ranked by size were from the largest to the smallest, official lift $305.6 million, up [19] million or 6.5%. Completion systems $166 million, down $8 million or 5%. Chemicals and stimulation services $97.6 million, up $8 million or 8.9%. Pipeline and specialty services 27.5 million, up $5.3 million or 24%. The small decline in completion had to do with delivery times stepping into Q4. Completions would have an outsized Q4 based on backlog and installation plans. The highest growth is experienced in the nascent pipeline service line. Pipeline business, although small, should have good growth into '07 and '08 and as much in America as in the international market. There are strong secular forces under way in the pipeline sector worldwide.

The growth in stimulation and chemicals was essentially chemicals. We have introduced new technology in chemicals, which are getting early traction in the US markets. The artificial lift segment continues to do well. Artificial lift has had uninterrupted growth in every quarter for the past five quarters. Progressive cavity pumps had the highest growth rate, followed by electric submersible pump. The ESP line, electric submergible pumps, which is our younger segment, is now running at about a [880] million yearly clip. The outlook for artificial lift worldwide has never been stronger. As a reminder, artificial lift with over $1.2 billion annualized revenues is our largest product line companywide.

The press release on expandable issued a few days ago marks an important milestone in market readiness of the solid expandables otherwise known as monobore product line. The sizes that are field ready now cover a range from 5.5 to 13 7/8. At a time where the sand controlling completion applications of expandables are growing rapidly, this is a welcome development. BP's support on this technology has been very helpful.

Incrementals. EBIT incrementals companywide were just under 40% as mentioned before. The strong incrementals reflect a combination of product mix, operating performance and prices. Product mix yielded a higher overall margin in both divisions. This was in part a function of normal quarter on quarter mix flow and in part reflected the continued shift in technology intensity of products and services at Weatherford.

Operating performance showed strong productivity gains. Revenues per employee rose to $212,000, which is a 3.7% quarter-on-quarter rise and an all-time high. The statistic is impressive given the very -- the high rate of new hires. New employees have low efficiency and depressed productivity numbers. The operating improvements are in past dividends from years of efforts in improving our supply chain. Economies of scale with increased volume in our infrastructure are also proving to be a powerful margin expansion force. Productivity for both divisions is strengthening in the Eastern Hemisphere and selected markets in Latin America contract by contract.

On a forward basis, incrementals by division will vary from quarter to quarter. On average, though, we expect the companywide target incrementals to remain in the range of 35 to 40%.

Outlook by geographic market. First, I will focus on North America. The North America market has over the next 12 months some modest downside or modest upside. Should winter be mild, there will be a pullback in drilling activity in both US and Canadian markets to incur in late Q1, early Q2. Note there already has been a pullback in Canadian shallow gas CBN which occurred in Q3. It is minor but a pullback nonetheless.

Absent a warm winter, activity in North America markets will actually rise by about 10% year on year or marginally up from Q4 levels. The North American market is a looking for direction. Near-term the determining factors are our climatic. Weather considerations are completely exogenous to our sphere of control of privileged assessment. In essence, we don't know any more than you do. What we do know it is, regardless of market direction, North American prognosis will vary substantially depending on capacity additions and where relevant technology differentials.

Who you are and what you do in North America will make a difference in how you do it. Specifically, in our case, North America remains for us the market where equipment and people are scarce. There remains to date a measure of rationing in many of our products and service lines.

Second, there was no significant capacity increase 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. Supply chain lines have a hard time keeping up with (indiscernible) international growth.

Third, a large part of what we do in North America is oil-based. Artificial lift, for example, is our historical core at CPS. Heavy oil is our largest single market in Canada. Our exposure in North America is about 40% oil, 60% gas. That would be actually a conservative assessment.

Lastly, I know this is a paradox. But we still have share growth potential in the US in particular. It supplies to a number of product service lines. For example, wireline, directional, ESPs, chemicals, pipeline and sand control to name a few. In all those product service lines, Weatherford has insignificant low shares in the US. We are also gaining shares in some of the more mature product service lines with recently introduced technology.

To reiterate the points made above, irrespective of weather, North American markets are strong or soft. Who you are and what you do in the US Canadian marketplace will make a difference in how you do.

International. The prognosis for the international market is identical to be the views presented in Q2. If anything, they are stronger. The expansion underway is very strong and historically without precedent. The Eastern Hemisphere offers unprecedented organic growth potential for Weatherford. The growth phase will be sustained past 2010. Each country market move is a multiyear expansion process, and these moves are accumulative, making for a very powerful multiyear growth. The importance of technology cannot be overstated. The importance of NOCs, nationalized oil companies, cannot be overstated.

Weatherford's prognosis and my closing comments. On a forward-looking basis and applicable to the whole Company, one, we're on track to deliver a 30% topline growth 2006 on 2005, adjusting, of course, for a full-year position in 2005. At this time, we see no reason why this would not extend to 2007 at a similar 25 to 30% rate.

Two, we have not seen anything yet in operations or contracts that leads us to lower expectations in the US. There is a more cautious tone in the field, but no change in direction.

Three, a decline in Canadian CBN and shallow gas related activity has already occurred in Q3. It will likely remain over the winter season. We have factored that in.

Four, we expect the Eastern Hemisphere growth rate to be very strong throughout 2007.

Five, we expect strong growth out of Latin America materially in excess of 2006 performance.

Six and the last point, our focus remains on operating quality and delivering predictable organic growth rates with high incrementals. We are ready to execute the 2007 growth plan with an eye on operating efficiency. We are aggressively hiring and training our people and expanding our manufacturing and equipment capacity. Net quarterly hiring numbers and ongoing CapEx are evidence of such.

These conclude my prepared comments. I will now turn the call back to the operator for questions.

(OPERATOR INSTRUCTIONS). Jim Crandell, Lehman Brothers.

Bernard, how much is your Mexican business down versus either a year ago or the second quarter, and when do you expect it to begin to come back?

The second half of the question is the easiest to answer, which is Q4 will be a little bit better, and '07 should be better, although when we assess the '07 in South America as being stronger, we have not factored any particular turn in New Mexico. But it should be better. That is a qualitative statement as opposed to a quantitative statement.

With respect to the decline in revenues in Q3, it is about $10 million versus Q2. And it was probably as much of a specific for Q3 as anything else. It was contextual, meaning it did not have much to do with what we did.

Bernard, you said if there is a mild winter there would be a pullback you think in US Canadian billing late first quarter, early second quarter. Does that mean you expect January/February to be strong regardless, and it's going to -- operators will wait until essentially the winter is over to begin to release rigs?

I suspect so, but that is my best judgment. I don't think -- yes, that is my best judgment.

Okay. Over to the sort of operational side, what specific markets are you meeting with the most success in expanding your Eastern Hemisphere footprint in LWD, RSS and wireline in? And how would you sort of break down your success by NOCs, IOCs and independents?

I would say that it would half -- well, it is -- the Middle East probably would be the best in terms of the number -- the market penetration. Although Asia and North Africa are strong runner-ups. Yes, and what was the other question you asked?

Breaking down your success, are you having more success in -- (multiple speakers)

It is really more NOC than anything else. It is not exclusively NOC, but it is more NOC than anything else, yes.

Okay. And last question. Could you elaborate on your capacity expansion plans and simulation in the US and internationally?

Internationally, no. US is tapering off. It has tapered off actually. It is obvious from the numbers. There is a segment which is joined with chemicals, and as I think I mentioned in the comments, the driver for the modest growth was entirely chemicals quarter on quarter.

And Bernard, if you saw the scenario of warm winter things taper off by, let's say, March or April in North America, when would you start to pare back overall on US/Canadian CapEx?

It is I think very quickly. Very quickly depending on the market. Very quickly -- not that difficult.

It is not. It is product line based.

And would you expect CapEx at this time in '07 to be up versus '06 or flat?

Right now it is flat. I mean it is the same number, about $900 million.

Bill Herbert, Simmons & Co.

You mentioned that basically if I understood you correctly that in the third quarter, there was not any significant capacity increases in any of your classes of products and services in North America?

I actually was referring to the fact that in our competitive landscape, there has not been much, any discernible increases in capacity. In other words, it is not that us and our competitors have moved up our ability to handle volume, and now we will be found with excess supply.

Okay. Let me switch gears then. With regard to Canada, I think you mentioned that your North American exposure as it stands today conservatively, as you put it, 60% gas, 40% oil?

It was always that. It was always that way. Starting off --

So if you could break down Canada for us with regard to -- if you can -- oil, heavy oil and natural gas?

I cannot break out oil and heavy oil, but I can package oil together. Let's start with the one that is the most oil dependent, which is CPS for the production division. That division is approximately 80 to 85%, oil or heavy oil dependent. It always has been. When you move to drilling, that division is now approximately 50% oil, 50% gas. Oil would be predominately heavy oil.

All right. And then switching hemispheres or --

That was for Canada, Bill. I have to be clear.

Right. And then so in the second quarter, I think you mentioned that you had $1.6 billion worth of international contracts signed. I was wondering if you had that number handy for the third quarter?

I did not compute it. The only one I identified were the directional contracts for Eastern Hemisphere.

Okay, which segues into my last question. You mentioned that you hope to have to have 500, sorry, 50 directional systems actually deployed in the Eastern Hemisphere by year-end. You have $530 million worth of new directional (technical difficulty)--. How many directional systems does the $530 million represent?

Good question. I think you have to look at it conservatively. You have to assume about $5 million per annum per system, right? And the $530 million, which were the contracts signed at the time I did my comments, would cover actually approximately 75 systems, not 50, for roughly -- well, you do the math. It is a year and a half to two years. But there are contracts being signed all the time for the Eastern Hemisphere, so it is a dynamic -- it is a dynamic number.

Daniel Henriques, Goldman Sachs.

My question is, you mentioned your rate of startups in the Eastern Hemisphere will accelerate in 4Q and first half of '07. Can you elaborate a little bit more on that, maybe giving us some color on countries and products and pricing for those new contracts?

Probably not on the call. It is too long. But I think that if you look at the percentage growth rate that we are trying to deliver, which is the same one in '07 as in '06 roughly, you better expect to have good topline growth Q4 and Q3, Q1 and Q4 and so on in the Eastern Hemisphere and Latin America. Because the growth is not going to come out of North America. There will be some growth out of the US, probably not much at all out of Canada, so you do the math. It all comes down to those two large markets, Latin America and Eastern Hemisphere. You cannot have it all in one quarter, right? It is impossible, logistically impossible. So I would direct you back to just allocating the growth on a reasonable quarter by quarter basis.

The other statistic I would point you towards is the number of people we are hiring. I think if I remember correctly, we hired almost 2000 people, net 2000 people increase in Q3, which is probably the most we have ever hired as long as I can remember. Now we would not do this unless we had allocation of particular positions on contracts for them to work on. Again, that is the backdrop -- that is the supply chain backdrop of the growth which is ongoing.

With respect to pricing, I don't have a sort of weighted average sort of number. But every contract I have signed you either have better contractual terms, which have to do with things, for example, like raw materials protection or just have higher pricing or both. And the higher pricing varies a great deal depending on the service and product line from sort of humble low single digit numbers to materially higher. It depends again on the volume of the contract. It depends on all the other circumstances. But pricing is definitely stronger East and it is stronger South.

, Okay. And then one follow-up on wireline, it had very strong sequential growth since you gained market share there. Can you talk a little bit about your outlook for that division?

To be fair to wireline in Q3, a lot of -- in that case, a lot of the growth was in Canada, which is more seasonal than anything else. However, it is also true that there are amongst all the contracts being started up in Q4, Q1 and so forth, there is significant growth for wireline as good as directional if not better outside of North America. They are in North Africa. They are in Asia. They are in the Middle East. They are in the Far East. And there's a few in South America. So it blankets very very well the same markets as the other service lines, high-growth service lines. Wireline should do very well in North America.

Jim Wicklund, Banc of America Securities.

I guess I'm still limited to two questions. Russia, can you talk to us about Russia?

What would you like to know?

How is business? Are you going to make an acquisition over there? There does not seem to be a focus. (multiple speakers).

No, there never was a focus. That is fair. As much as we did our infrastructure in all other parts of the Eastern Hemisphere, Russia was always the weak end of the link for us. So point taken. Our business is good. Our (indiscernible) for us is limited in Russia. Probably the most remarkable thing I can point out to you is, one, in spite of the fact we try to be as conservative as we can be in Russia, we do have for one particular client a startup on Drilling Services, directional systems, (indiscernible) Lukoil. That is one.

Two, we do have widespread opportunities in re-entry, which we will follow-up or follow-up on.

So I think there is an organic growth rate which is growing in Russia. The base it is starting from is small. So even though the percentage of growth rates, if I were to advertise them, would be high, they are not that meaningful.

Acquisition-wise I'm really not sure. I'm really not sure. It is a terribly important market, Russia, from the reservoir standpoint.

It would just seem as solid as you are in the US on a lot of these technologies and with the outlook in Russia to eventually be kind of the infrastructure play of the US, I am just curious to know --

You're absolutely right. From a reservoir standpoint, the re-entry play is huge. Brownfield play is huge, and there's a big exploration play to come later. And the only reason I am hemming and hawing is because it is really a good reflection of how we think, which is cautious on Russia.

Okay. My follow-up question is moving Southwest. Talk to us about the Caspian?

Very good, Caspian. A big big expansion underway for us in Azerbaijan, a big expansion underway for us in Kazakhstan. You will find the Caspian numbers will make you happy over the next three or four quarters. You noticed a change itself.

Yes.

It has everything to do I suppose with a measure of discomfort with how predictable our contractual relationships can be in one market versus the other.

Brad Handler, Wachovia Securities.

If I could just ask you to clarify, so in your outlook for '07, you are pointing us towards 25 to 30% topline growth. Can you clarify whether or not in the North American market that is 10 to 15%, and then that is all set in the international markets or some sort of calibration like that would be very helpful?

I think that will be -- there are some ranges, and probably that whole discussion needs to be off-line. And I think when it comes to North America, if you were to twist my arm on the conference call right now, I would say that it has got to be single digit, and it will be more US than Canadian.

Dan Pickering, Pickering Energy Partners.

Lisa, I wanted to explore a little bit your incremental expectations from Canada. I think you said $0.01 to $0.03 in the fourth quarter. Just kind of trying to back in, what revenue assumptions would be driving that assumption on the incremental revenue Q3, Q4?

Well, like we said, we're really 20 to 25 million lower than we were expecting in the third quarter, and we would expect to pick that up. Just fourth quarter is typically stronger than the third quarter.

Sure. So roughly that is kind of flat to slight growth year-over-year then in Canada in the fourth quarter?

I don't think it's quite as -- we are not quite as red-blooded as that. I think the notion is that Q3 was a struggle in Canada. It was better obviously from a seasonal low. It always is. But it was short, and what Lisa is saying is that you should expect or we expect to recover what we did not get in Q3. I'm not sure we will get the cream in Q4. In other words, we will be missing out in Q4 what we would have liked to have seen three months ago. Do you understand?

I do. Thank you. And then Bernard, could you talk in general, a fairly substantial share repurchase this quarter. How do you think about share repurchase on an ongoing basis? I mean are you going to use all your cash ex-acquisitions for share repurchase? Just what is the plan?

I think organic growth has got to be the number one priority, albeit organic growth however strong it is will not use up all the free cash flow. You remember, the yardstick on organic growth in our case is about $0.70 of cash per dollar of organic growth. The $0.70 being broken down into 40 CapEx and 30 working capital. And the stat moves around that number depending on the quarter, but they always tends to trend back to that number ultimately. That is one, but that is not the whole story.

Beyond organic growth, our share repurchase will be the priority. We will spend the balance of what has been approved. I cannot tell you what period of time. We obviously -- it seems as if we are doing it rather fast, meaning the other .5 billion we have, and then we will take a look at the situation then. But we are likely to be quite aggressive on share buyback, not as a Pavlovian response because the stock is down, simply because it is cheap. It is a good buy presumably, at least in our view.

Mike Urban, Deutsche Bank.

You have shown some nice productivity growth, but you're noting that the pace of hiring is still impacting the extent of that growth. At what point, to the extent you are able to calibrate it, at what points do you breakeven and actually go to a positive in terms of the headcount that you are adding?

You mean at which point -- of course, depending on when you stop adding, you have got different dynamics going on. But --

Third quarter, it is a trough.

Maybe this will be helpful. The odd 2000 people we hired net -- net, it is a net number -- these 2000 people, or 1900 people, should be productive -- productive is a broad term -- should be productive in and around nine months from now. So Q2, Q4, Q1, Q2, at the beginning of Q3, late Q2, I think many of them will be out of training, will be out of sight, and the learning curve will be steeper, but it will already very productive.

I also think that the sort of rate of hiring, I mean the percentage rate of hiring, is essentially the whole. Although the absolute numbers may stay the same for awhile, that rate will go down essentially because it is divided by a bigger base of people.

Okay.

The impact on productivity also goes down as I think it through.

Right. That is actually what I'm trying to get at is, at what point does that drag on --?

(multiple speakers). It is difficult, Michael, to really be terribly articular about it. Because the product at first -- the productivity, as we measure it, is going up in spite of the hires of people, so it is not like it is going down. So that is -- first, I want to make sure that I don't convey the wrong message. It is actually going up. One of the big benefits that CPS in particular has enjoyed is on the supply chain side, and you measure it productivity-wise in myriads of different ways. So that is one thing.

It is true that hiring of a lot of people particularly over the world that are not trained yet, very capable but not trained yet, depresses productivity, and but that will go on, Michael, possibly for years. It all depends on, one, the growth rate, Eastern Hemisphere and Latin America, Eastern Hemisphere in particular. How long? How much? Two, how labor-intensive are they going to be? Three, can we lower the labor intensity, which is another issue? Sure. So I mean that whole -- this is a very interesting question, but one that is sort of hard to give you an index card on.

That is helpful though. And then the follow-up, sticking to the kind of 25, 30%, kind of growth rates and that makes sense, what I'm trying to get a sense for is there is a dramatic ramp-up going on right now. What would the '07 growth rate look like as a function of the '06 exit rate?

Well, I'm not sure that that is easy enough to compute. You have to compute -- I mean it might even be computed without us. (indiscernible) arithmetic as a function of sleep deprivation, unless I'm can do it in my head right now.

No, no, I mean I can get it versus the kind of quarterly (multiple speakers). My sense is that you guys are -- there is a hockey stick going on some of these international markets. I don't think it is linear I guess is the problem. But we can kind of follow-up on that if you like.

We can do that off-line.

Again, it is arithmetic. So it is not that complicated.

I can get there.

Jamie Stone, UBS.

I just want to delve into the -- in the EDI segment, if I look back over the last four quarters or so, it seems like you are two fastest-growing businesses are actually without I guess what we would characterize as old Weatherford. So that is the well construction business and the re-entry business.

That is true.

Do you think obviously you have got all this growth coming on the directional under-balanced side as you add the new systems. But should we expect that the well construction and re-entry, for example, will continue to move along at similar growth rates as we have seen in the last couple of quarters, or do those businesses slow down as the other businesses ramp up?

That is very perceptive of you, and I do point it out to my peers here from time to time. You're absolutely right. I do think in the case of re-entry, it is likely to be actually the highest growth period, and that is a pure legacy. You are completely right.

I will also point out to your and my, our both old friend, expandables, sort of rising from the dead as it were, to become again a good growth business. Certainly on the completion, it already is. But, on the solid side, which is akin to our construction, if you will, also, having a lot of promise over the next few years.

Now, well construction as a large entity, which includes tubular running services, cementation, liner hangers, it really should not grow as fast as Drilling Services and wireline. You would say that Drilling Services and wireline, particularly Drilling Services, it takes longer to penetrate markets when you haven't had a presence because there is long testing phase, and then there is a long also preparation phase of setting up calibration facilities and the like. And in the case of wireline, think of all the permits that you have got to get people to handle nuclear sources and things of that nature.

So there is a longer gestation time, if you will, which explains why one is not better than the other. The other point also in (indiscernible) construction is that they are more mature. So you would expect the rates to go down vis-a-vis Drilling Services and wireline and things like that. Not re-entry.

On the other hand, and this is really true especially actually of all three, but I will mention one as an example. In the subsegment of well structure, tubular running services has had a rejuvenation. In my comments that are always too long, there is a paragraph that talks about the top drive makeup system and some of the new automation systems that we have introduced in tubular Drilling Services.

Now, Jamie, that is the oldest core of Legacy Weatherford. That is pre-EDI days. And you think that is the most mature and it is. But we have rejuvenated the offering, and that is just R&D over the past five or six years. And the backlog and the orderbook is probably one of the strongest in the Company for this old service line.

So where does that come out? As a point of logic in the case of well construction, it should not grow as fast as Drilling Services and wireline for example. But with the amount of R&D that has gone into those services and product lines, it might just do almost as well. And re-entry, set it aside, because it will be a start. Albeit it is not a very large service line, but it will be a start.

And just to go back there, we should not be concerned about the fact that wireline and Drilling Services really have not grown much the last couple of quarters, except for recovering from the seasonality of Q2 because of the contracts that you have signed -- (multiple speakers)

No, you shouldn't. That is very fair, Jamie, and the point is well taken too. It is very fair. You should not -- first, the point is well taken; second, you should not be concerned, not at all.

Keep in mind that they did not recover all of Canada, so comparing it to Q1 is not (multiple speakers)

Actually of the $20 million that I hinted that we thought we were going to get in Canada when we were talking to you three months ago and we did not, I would have to say half of that is just wireline.

And we only expected Canada to improve -- to recover two-thirds of what we lost, and we recovered less than 50%. So you still have that upside on a seasonal basis. (multiple speakers)

Your point is well taken, and it is fair, but no, I would not lose any sleep on that.

And just my follow-up is, last quarter in your prepared remarks, you talked about you did not actually put a number on the '07 range. You said it would be similar to '06 top line of 30%. This quarter you are putting a number on there that is 25 to 30%. Just characterize for that, is that a change in thinking, or is that just (multiple speakers) -- that is basically the same thing, it is just a number there? (multiple speakers)

It is the same thing. It is the same thing. I just did not ponder on the numbers.

That is fine. There has obviously been a lot of concern over the last couple of weeks about whether or not your conviction was slipping.

Well, I did not know, but if there was, there should not have been.

Ole Slorer, Morgan Stanley.

Lisa, I just wondered whether you could help us a little bit in terms of just bringing the growth that you are now signing up of the old -- not old but a new position product line such as wireline you highlighted and they are still drilling, what could some of the run-rates for international business be if you look at a percentage of what the Precision business was when you acquired it? I'm just trying to get a better handle onto what extent you have been growing this business.

Well, if you look at when we acquired it on the Precision Energy Services, it was around 10% of everything that we acquired. So they were starting from an international base of close to zero. So very high -- I mean almost nonsensical growth rates in the international market.

Probably I mean if you are off-line, Lisa, you provide the international numbers as in non North America for both wireline and Drilling Services that would give (indiscernible) and whomever else the information they need really.

We are talking about signing up $500 million plus of contracts from wireline --

No, no, it is just directional. (multiple speakers) -- the number I gave is just directional. (multiple speakers)

(multiple speakers) directional I mean and wireline on top of that. I'm just trying to figure out what that incremental is as a percentage of the existing businesses when you acquired them?

Well, it has got to be nonmeaningful because this is right, it is many many times. They had -- I mean to be fair -- Precision had a presence in South America, both wireline and directional and Drilling Services. Very modest but it is a number. In the case of Eastern Hemisphere, it is almost immaterial. On both counts, if you provide the wireline and Drilling Services numbers in Q3 for South America and Eastern Hemisphere as a whole, then I think it will be easy to see the progress made. But the numbers percentagewise will be meaningless. It will be more than -- many times 100%.

Okay. Another question, Bernard. Can you highlight a little bit the drop in the integrated, the drilling operation of revenues -- (multiple speakers)?

Integrated drilling is sort of a name looking for a business. As a segment, it is really the few rigs we have, line rigs. They are there for an integrated drilling purpose as it was highlighted when we bought with the Precision technology and businesses a year ago. So what you're looking at is purely the rigs. There is not any integrated work being done as of yet.

As for the decline, it is very simple. You have three rigs that are being mobilized and are being moving. That is all.

Okay. And then in terms of growing this business, which does not actually (indiscernible) could have quite a bit of potential, what type of discussions are you having with customers at the moment? Do you have any degree of confidence that this is a concept that you will be successful -- (multiple speakers)?

I think I will be -- yes, I'm sure I welcome the question. I suspect that in '07 we will have two, maybe more if we can handle it integrated projects where we will be able to combine the engineering and operations of the land rigs, together with the entire downhole suite of tools and services. Yes, I'm not convinced that the idea we have had is a good one. It was my idea, so if I'm wrong, I'm wrong.

The notion is not so much to be able to get more business in one contract. That is hardly what is needed now, but the idea was to deliver the client a more efficient method in which to drill the wells. Efficiency again is a big part of what we seek here, the notion being again that you can plan and execute things better by combining the rigs with the Drilling Services.

Anyway there are two -- possibly more than two -- likely applications. They will be in and around Middle East and North Africa. They should start in '07 for the best -- with the information I have, to the best of my knowledge. There might be more than that, but two would already be a good start. These projects tend to be rather large.

Just one more final question, breaking the rules here sorry. But in North America you highlighted it depends who you are and what you do. What conversations are you having with customers at the moment? Are there any customer groups out there that you actually see all the signs that are scheduled to be spending or doing more in North America than what they are at the moment?

There is very little change in the US either way. Very little change. I did mention in my comments that I felt that there was a greater sense of caution. But to a degree, caution is predictable when the commodity bids are unfavorable and/or when Wall Street is unfavorable. To a degree, it has an effect on our clients' psychology.

But there's no sense -- no change in anything really. There just is not that I can discern. In Canada, there was a change. It was immediate, which is the shallow gas and CBM were adjourned, which means the number of rigs that don't appear in the rig count is not as meaningful as just the numbers suggest because those rigs carry a low, such as power. Until you are left with a deeper gas segment, which is vibrant in Canada and of course the oil and heavy oil whether cold or steam heavy oil which is very strong, it is just not. This is not a lot of -- there's nothing to report really.

In Canada to what extent is your oil-driven business isolated from the gas-driven business? In other words, if commodity prices for gas in particular would go down, to what extent might that affect being the -- (multiple speakers)?

Really the crown jewel of the business there is heavy, and heavy oil is just on a different track altogether, a different class, a different everything. In fact, I remind often some of our shareholders when I talk to them that it's almost a perfect hedge for natural gas in the sense that gas is a significant cost component of heavy oil, both for steaming as in thermal energy purposes but also more importantly as a (indiscernible) to move heavy oil in the pipeline. So gas down, profits up for heavy oil. So no, I think it is compartmentalized; it is different.

Robin Shoemaker, Bear Stearns.

Now that -- just a broad question in a way -- as underbalanced has become such a core business and is an established mature business in some ways, in geographic terms, where has underbalanced do you think achieved its full potential, and where does it have substantial penetration marketshare gains versus conventional drilling?

I so wish you were right, that it had achieved its full potential and so forth. I so wish you were right that it was mature. It is still -- it is unfortunately or fortunately still a child.

What is happening to underbalance is that it is becoming a family of different processes as of first maturation. As opposed to just being a sort of a form of drilling which would answer all sort of -- all that ails our clients, is now a series of solutions for different problems. We now call it Controlled Pressure Drilling, and underbalanced is becoming a subsegment of Controlled Pressure Drilling. Do not worry, we will continue to call it underbalanced for Wall Street.

Really the process falls into right now two categories. One is different tools and software for the purpose of -- original purpose of drilling a wellbore without any drilling problems. And so depleted zones or speed of drilling where relevant, but particularly depleted zones as in occurrences of losing a wellbore for differential sticking purposes, is a large part of the new market for underbalance. And that is the one that is growing the fastest. That is the one that is growing the fastest because clients cannot get down zones without using a form of underbalance, which is something that is coming to the consciousness of a number of our clients, particularly the IOCs.

The second application is the one that I think we were the most interested in in the first-place, which is ultimately optimizing the reservoir which is no formation damage. And that one is marketed and used on completely different wells than the former.

Now you will say, well, why don't you use them both on the same well? Well, from a marketing standpoint, it does not -- it is not evolving that way. Some clients decide to use underbalance purely as a drilling, as a sort of hazard mitigation technique. Others use it essentially because they are having problems with the reservoir productivity and not because they have any difficulties drilling the well. Those are two large families of applications on underbalance, which are merging.

With respect to sort of reaching its full potential, to the best of our knowledge, the percentage of wells that are using a form of underbalance, whether it is drilling hazard mitigation or whether it is reservoir optimization, the number of potential wells that are using either one of them is not quite 4% or just about 4% of the wells being drilled. Sort of the objective number I am going to give you is completely theoretical because you really don't know the extent that it is a studied attempt at identifying where the use of underbalance would be compelling, and the number is much higher. It is closer to 25% of the wells being drilled.

I'm not suggesting we will go from 4% to 25% certainly not overnight. Like everything in the industry, it is a very long-time thing. But it is fair to say that underbalanced processes are -- well, they are not -- it is not an infant anymore, but it certainly still is a baby or sort of a very -- a toddler perhaps in age. It is not anywhere closer to adolescence, which is what you were suggesting. I wish it was the case because it would be much larger.

Right. Interesting. My follow-up question simply is, you expect strong growth in Latin America, and is that in all countries or principally Mexico in '07?

No, no, actually Mexico is not -- I'm glad you asked the question -- Mexico is not at all accounted for. In other words, you don't really expect anything plus or minus in Mexico. Actually, in a qualitative sense, I'm very confident Mexico will surprise us to the positive. But I don't know that.

What we do know is that in Brazil, in Argentina, in Columbia and to a degree Venezuela, which is the riskiest but the other three are not, the contractual commitments we have suggest that '07 will be a very good year. Mexico really should come through for the whole industry, not only us in '07, but we don't know that for a fact. It is just a qualitative statement. It is not something we can account for. The others, we can. That is what sustains the statement being made.

Rob MacKenzie, FBR.

Bernard, I'm surprised no one has asked you this yet given your proficiency in acquisitions, but I wanted to get some more color on what you plan to do with OMNI, whether it is just to come out and be a small competitor to Core Lab or to use that more fundamentally to help improve your stimulation business?

Neither one of them.

Okay.

Neither one of them. No, no, stimulation is actually helping the other businesses. I don't need to help stimulation. No, no, no, no, and we have an interest in being a little bit more proficient in rock mechanics about it. And I will leave it at that.

So you do not want to talk about it yet?

Well, I think rock mechanics is something which is important for a lot of our different businesses, not only in how we market ourselves but how we execute. So maybe the idea on stimulation is correct, but it just does not apply to stimulation in particular or only.

Okay. Thanks. That is all I have.

Kurt Hallead, RBC Capital Markets.

I just want to get a general sense here as we go forward on (indiscernible) incremental margins a little bit more. To what extent do you think those incrementals are going to be driven by pricing, the operating efficiencies you have and/or the volume growth that you see in the Eastern Hemisphere? You don't have to get too specific with me. I just wanted to get general magnitude.

The majority of it really is coming off of the volume growth. There is an element built into the contracts that we have already signed for pricing. But if you're looking for which one is driving it more, it is clearly the volume. And there's also somewhat of a shift in the product mix as we have been seeing in the Completion and Production Systems division towards the higher margin products.

Okay. And then the follow-up I have for you is when you get to the fourth quarter of 2007 to the extent that you have that kind of visibility, what percent of your revenues do you think will be derived from national oil companies, and how would that compare to, say, year-end 2006?

It will be higher. My friend, I cannot tell you any better than that because I don't know. I don't have it right now. But it would be higher. I mean that is a certainty.

You don't have a percentage basis for me, though, right?

We can dish that out for you, but as I talked to you now, I would just make it up. I don't want to do that. It would just be higher and not be --

Significantly higher. But I can work on pulling that for you. (multiple speakers)

That is it for me. I will follow-up off-line.

Probably one last question to let the audience breath before the next conference call, if there is one.

Jeff Kobylarz, Citigroup.

Well, that is an interesting one.

I'm sorry. I think you got the same treatment I got.

Bernard, in your comments you mentioned several times both product mix and supply chain improvements. I wondered if you could just in the time available elaborate a little bit? In terms of product mix, are you talking about between segments that you will have called out in the numbers, or is it really more something happening within segments? And then on the supply chain side, could just maybe explain a little bit more what is going on there and where you are in terms of realizing the benefits of those initiatives?

On the mix, probably the best example that I can provide is one I think not visible from the outside. We have had a number of service or product lines, which are either -- well, typically they were young. They were technology intensive, and they were also I think financially punitive for a number of quarters and a number of years as we tried to one, make sure the technology they were espousing was what we hoped it would be. Two, that it would get some commercial traction.

Once you get, one, the technology to work well predictably; two, commercial traction, the swing in the margin obviously goes from punitive to being excellent, and the delta obviously is great.

An example, the expandable side or the intelligent wells. Expandable is a classic. For a long time, you have had a product line which had a negative operating income. I won't even tell you by how much. But it was something that was hard for us to sustain.

The same thing in electric submersible pumps, they can go on. As a function of volume, which is a function of basically a maturation of the technology in commercial traction, all of a sudden you replace something which is a negative number with the EBITs which are in the 40, 50, 60% range depending on the product and service lines. Those are some of our highest margin items. Obviously the swing has a disproportionately large effect on the overall division, simply because it is so powerful, even though the topline numbers are not that high.

So you had a lot of that going on, and some of it is pure serendipity, which is it is the tail-end of a number of years, a number of quarters of hard work. So that is one of the sort of factors that are going on and have been going on.

With respect to supply chain, now we have long been known for putting a lot of emphasis not only on things like procurement and logistics but also manufacturing. 50% of what we do is manufacturing, and the Company itself is running just under 10 million hours of manufacturing worldwide itself and outsources about 3. We not only do continuously grow in quantity manufacturing whether we do we outsource, but we also change how we do it and where we do it. A locational cost advantage is something that we really work on very hard. It is not just moving out from an OECD countries to non-OECD countries. It is also changing what the OECD country does in terms of type of manufacturing. That doesn't even necessarily mean shutting it down. It means changing the types of product lines the OECD focuses on.

It is a continuous effort. It is driven from the top, not by me but by the gentlemen who runs the supply chain whose name you can find in the back of the annual report, and it is given just a lot of importance and we get some results. They are not results that we get sort of once a year and then that is it. We get it continuously, and you have some of that also coming in, and of course, I think what Lisa says is absolutely true, which is the adsorption effect on infrastructure is very powerful. And on some of the new classes of services like directional, for example, is really typical, which is before we get the volumes to start off, we do have five, 10, 20 people on staff that are there to prepare for the startup to handle all of the ancillary infrastructure issues such as calibration, etc., and that obviously generates a loss. And all of a sudden when the tools start to run and run well, I think it is fully absorbed, and the effect, together with the entire rest of the infrastructure, still is being the same not having gone up by $0.01, it is powerful. So it is a little bit of all of these things.

When you say on the supply chain continuous improvement, should we take from that that whatever benefits you're gaining from these supply chain improvements you would expect them to continue adding at the pace that they have been adding, let's say, when we look at year-over-year numbers?

Jeff, I think the answer has got to be yes for the same reason that you would not expect productivity in an economy such as ours to grow at a lesser rate. It would be viewed as a bad thing, would it not?

Yes.

For the same reason that certainly the shorter supply chain people here are -- sort of none of you ever do and you can, they would tell you that whatever we have done, we expect to do as much or better. This is normal.

And kind of a similar follow-up on the product mix. To listen to your comments, it would sound as if most if not all of those businesses that had been dragged have become positive contributors through margin. Do you have today other businesses that are in that drag category that still have the potential to become -- (multiple speakers)?

We do and we also have certain products in certain regions where you don't have the volume as of yet. So we expect those to turn as the volume increases.

That is absolutely true, even for some of those same service and product lines that have gotten some real good traction, that is the overall number. What you don't see is they have established a real foothold in some markets, and they are making very good returns there. That is not to say that the new markets where you're pushing them in, they are in the same -- they have the same financial success yet. So you're absolutely right.

Thank you and that concludes our conference call. Thank you very much.

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