Weatherford International PLC (WFRD) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q4 2006 Weatherford International earnings conference call. My name is Rob and I will be your operator today. (Operator Instructions). At this time, I'd like to turn the conference over to your hosts for today's call, Mr. Andy Becnel, CFO; and Mr. Bernard Duroc-Danner, Chairman and CEO.

Thank you, good morning. I will turn the call immediately to Andy and I will have my comments immediately after.

Good morning. For our final quarter of 2006 we report fully diluted earnings of $0.76 per share. We outpaced our expectations in all geographic markets outside North America. United States activity was essentially flat while the unanticipated activity decline in Canada left us short of forecasted performance in this country.

Before delving into the operational details, let's cover one housekeeping matter.

(PLEASE STAND BY -- AUDIO DIFFICULTY)

Our $0.76 number excludes two items. One, a favorable tax settlement of $26 million; and two, an after-tax charge of $18 million. This charge is related to exit and restructuring items, namely employee severance. These items together net to a $0.02 benefit, which would get you to the $0.78 number reported in our income statement. $0.78 less $0.02 from the above items gives you $0.76.

EPS comparison. At $0.76, earnings per share are up 15% sequentially and 65% compared to Q4 of 2005. Sequential improvements amount to $0.10 net, which can be summarized as follows. Eastern Hemisphere, up $0.08 compared to guidance of $0.03 to $0.04; Latin America, up $0.02 compared to guidance of $0.02; United States, up $0.01 compared to guidance of $0.01; and Canada, down $0.03 compared to guidance of up $0.01 to $0.03. This adds up to $0.08 of sequential improvement from the field. On a net basis, nonoperational items added $0.02 to EPS.

Consistent with our guidance, interest expense, corporate and R&D cost us a penny on a combined basis. This was offset by a lower share count, which helped by a penny.

At 26.1%, our effective tax rate for the quarter was 190 basis points below that of Q3. This added $0.02 to our results.

To summarize, $0.08 from operations plus $0.02 from nonoperational items and taxes yields a $0.10 improvement over last quarter.

Company-wide comments. While we have traditionally only discussed sequential performance, I will throughout my comments point out certain year-on-year comparisons. Recall that we purchased Precision in September of 2005, making Q4 '05 and Q4 '06 the first opportunity to make meaningful year-on-year comparisons based on reported numbers. We believe these numbers are useful, not only in demonstrating our progress over the last 12 months but most importantly in providing perspective on the reasonableness of our goals for 2007.

Revenue progress. On a consolidated basis, revenues grew $111 million sequentially or 6.5%. North America, which accounted for 53% of total revenues, was up $2 million, with gains in the United States offset almost entirely by declines in Canada.

While the average US rig count held steady, consistent with our expectations, Canada shed approximately 50 rigs during the quarter. Instead of picking up $20 million to $25 million of incremental revenue as discussed during our Q3 call, we lost $28 million for a result that was some $50 million below budgeted top-line improvements.

Revenues outside of North America were this quarter's success story. With a 15% increase over Q3, our international operations posted their largest sequential increase of 2006. The increases were as follows by region -- Middle East/North Africa, up $44 million or 18%. All countries posted increases with significant improvements in Saudi Arabia, Libya, UAE and Egypt. Our top performers were well construction, drilling tools, directional, re-entry and fishing, ESS, and optimization. Latin America, up $38 million or 22%. The contributors by country were Brazil, Colombia, and Argentina. Contributions were spread across a broad range of product lines, with drilling services both directional and underbalanced; fishing and re-entry; drilling tools; completions; lift; and optimization all growing. Asia-Pacific, up $13 million or 11%. China, Indonesia and Malaysia showed exceptional improvement based off of high activity in drilling services, ESS and lift. Europe, CIS, West Africa, up $14 million or 7%. Europe, Russia, and the Caspian all posted increases. Our largest movers were tubular running, cementation, wireline, completions, ESP's, and optimization.

We would encourage you to take note of two things when comparing these results to Q4 of 2005. First, global revenues are up 24% with North America up 16% and international up 34%. The split in geographic growth looks different than that of many of our competitors. We appear to be achieving one of the highest rates of growth from international markets while holding our own in North American markets. Number two, Middle East/North Africa revenues are 57% over this same period.

EBIT performance. Consolidated EBIT before corporate and R&D was up $37 million, with operating margins at 25.5%. This is an increase of 50 basis points over Q3. Incremental margins were 33%. Outside of Canada, operating margins were 26.7% compared to 25.2% in Q3. Incremental margins were 42%. Compared to Q4 of 2005, operating income was up 61%. Operating margins before corporate and R&D were up 500 basis points over this same period.

Division comments, evaluation drilling and intervention. EDI revenues grew $62 million sequentially, with an accompanying $27 million increase in EBIT on incremental margins of 44%. North American revenues were essentially flat while Eastern Hemisphere revenues grew $41 million. Middle East/North Africa led the way in the East with a $30 million sequential increase. Latin America added $21 million of revenues over Q3.

All product lines grew except for wireline, which suffered, due to lower activity in Canada as well as equipment mobilizations from the Canadian markets to international markets. Drilling tools, well construction, and drilling services were the leaders. Fourth-quarter 2006 revenues were up 26% over the fourth quarter of 2005.

Completion and production systems. CPS revenues were up $49 million, or 8% sequentially, with EBIT up $10 million on 19% incremental margins. EBIT was hampered by approximately $5 million of inventory and asset adjustments in North America. Sequentially, Eastern Hemisphere revenues grew by $30 million and Latin America added $16 million. North American revenues grew $3 million over Q3. All product lines grew between 7% and 12%. Compared to Q4 2005, revenues were up 19%.

Cash returns and capital. Cash flow and returns -- during Q4, we generated EBITDA of $526 million with D&A running at $129 million. Operating working capital, which we define as accounts receivable plus inventory, less accounts payable, consumed $71 million of cash, a marked improvement over the $262 million consumed during Q3. After deducting interest expense and taxes, operating cash flow was $385 million for the quarter compared to $158 million during Q3. Cash returns, excluding goodwill, were 37% during Q4 and 34% during 2006. This compares to a figure of 24% during 2005. We calculate cash returns as EBITDA less cash taxes, divided by the average balances of shareholders' equity and total debt, less goodwill, over the applicable period.

Capital expenditures. Capital expenditures were $321 million for the quarter, net of lost in whole revenues. This was substantially above our forecast, as we were able to accelerate deliveries of equipment in connection with new contracts. For the year, capital expenditures net of lost in whole revenues totaled approximately $1 billion. Share repurchases -- during Q4 we repurchased approximately 1 million of our common shares at an average price of $40.69 per share. During the year we spent $548 million to repurchase 12.5 million shares under our $1 billion share repurchase plan.

Capital structure -- as of December 31, our ratio of net debt to net capitalization stood at 25.2% with total debt at approximately $2.2 billion.

2007 guidance -- we recognize the investment community's numerous and diverse forecasts for commodity prices and OSX activity levels during 2007. The market most debated is clearly North America. In this particular situation, our opining as to the likely outcome is of little or no value to any of you, especially in your efforts to form your own opinions as to how Weatherford will perform relative to its peers during 2007. While we will not at this time provide specific earnings guidance for 2007, we believe the following are helpful in assessing our prospects and encourage you to take this guidance into consideration as you formulate your opinions.

Number one, Eastern Hemisphere is expected to be our highest growth market in 2007. We expect a 40% year-on-year growth rate, similar to the growth achieved during 2006. Latin America is expected to grow at 25% year on year.

For nonoperational items we have budgeted the following. Corporate expense -- $120 million with increases due principally to incremental employee hiring, training, and retention costs. R&D expense, $165 million. Net interest expense, $125 million, based on the assumption that debt levels remain constant throughout the year. This is subject to free cash flow being used to pay down debt in the latter half of the year. Other, $28 million, consistent with current run rate and growth in businesses in which we own a minority interest. Depreciation and amortization, $600 million. CapEx, $1 billion. Our tax rate is expected to be 27% on average for the entire year so you should expect variations from quarter to quarter. Our share count we model as flat at 348.6 million, pending additional share repurchases. This number obviously moves based upon our share price performance.

In the first quarter, we also expect to have final exit and restructuring costs of approximately $5 million. I will now hand the call over to Bernard.

Thank you, Andy. Q4 was a very strong quarter. Top line was up $111 million or 6.5% sequentially. Operating income was up $36 million or 10% even. EBIT incrementals averaged 33%. Operating income margins at 22% were the highest in the Company's history.

Earnings per share were up $0.10 or 15.2% sequentially. All the above was in spite of an unfavorable swing in Canada's results.

The quarter's growth was entirely international. International segment's posted its strongest performance ever -- I think it's actually the strongest performance probably you'll find in our industry. North America was flat with a strong US top line, making up for a weak Canada. Specifically, the US was up $30 million even or up 4.6%. Canada was down $28 million or down 9.5%. The US and Canada offset one another for a flat North American market. Canada was obviously very weak for fourth quarter. Back in October, we had expected Canada to be up 7% to 9% Q4 on Q3. By contrast, international segment was very strong. The Eastern Hemisphere was up $71 million or 12.5%. Latin America was up $38 million or 21.6%. The international segment as a whole, and of course we exclude Canada from the international segment, was up 15%, 15%, sequentially.

Year-on-year performance was equally strong. Q4 '06 on Q4 '05, Eastern Hemisphere was up 33.6% or 34%. Latin America was up about the same, 34.6%. And the international segment as a whole was up 33.8%. All these numbers are pretty much the same at 34%.

In the quarter, the Company's geographic breakdown was as follows. Canada 15%, 15%; US, 38%; Latin America, 12%; and Eastern Hemisphere, 35%. All regional subsegments are up in the Eastern Hemisphere. The Middle East, North Africa accounted for half the growth. Asia, Russia, Caspian, Eastern Europe and the North Sea all had good growth Q4 on Q3. In Latin America, the highest growth rates were experienced by Brazil, Colombia, and Argentina.

The US in the quarter had solid growth in underbalanced green tools, fishing re-entry, ESP and production optimization. By contrast, the Canadian product lines were essentially flat on the CPS side but down across the board in EDI with directional and wireline showing the greatest decline. The rig count of 441 rigs in Q4, the Canadian market dropped 10% over Q3 at the time when seasonality would've suggested a move in the opposite direction of the same magnitude. Poor weather patterns made the decline as captured by the rig count even worse.

We would limit our views on North American market in 2007 to two comments. As per the prior paragraph we saw in Q4 a sharp decline in the Canadian market. 441 rig count is close to the Q4 2004 level and 23% down on Q4 2005. Aside from seasonal swings, further declines in the 2007 Canadian markets are likely but not a certainty. We won't know until the winter drilling season is over. Although we have at last count 15%, 15% of our business mix in Canada, I would remind our shareholders that 60% of our Canadian exposure is oil-based, heavy oil, that is.

Second, the US plateaued during Q4 and has remained flat since then. Strikes south in the US that the basis of competition will be now efficiency and technology. We also expect as Weatherford a number of product lines to continue growing in the United States.

As per the opening paragraph in my comments, Q4 on Q4 growth in the international segments was 33.8% or just about 34%, Q4 on Q4. The full-year growth rate for the international segment was 50.4%. However, you've got to adjust for Precision. Adjusting for the pro forma effect of eight months of Precision stand alone in 2005, the international growth rate was closer to 30% -- 30%. 2006 international performance was good and the international growth rate is accelerating, which is what we expected.

Looking forward, most of the growth in 2007 and 2008 will come out of the international markets. We reiterate our 2007 objective for 40%, 40% growth in Eastern Hemisphere and 25% growth in Latin America. Both numbers add up to weighted average 36% growth for Weatherford's International segment. This is not a dissimilar growth rate than what we experienced in 2006, which is an important point for us to underline.

In Eastern Hemisphere, we expect the Middle East, North Africa, West Africa -- I should also on these notes, East Africa -- China, Russia, and central Europe to show the greatest growth year on year. In Latin America, we expect Brazil, Mexico and Argentina will show the greatest growth year on year.

A few statistics. In the course of 2007, the Eastern Hemisphere will take over the US as our biggest market. Middle East/North Africa will become our second-largest market behind the US. In fact, Middle East/North Africa will eclipse Canada even if Canada were to grow in 2007 more than double-digit over 2006, which unfortunately is an unlikely occurrence.

Finally, we expect in 2007, non North American revenues and operating income will likely pull equal to if not eclipse North American revenues and operating income.

Setting the geographic aside, I will take you through the product line quarterly performance. Product lines are ranked in size from largest to smallest. Number one largest product line, artificial lift, $327 million, up $21.6 million or 7.1%. Second, well construction, $286 million even, up $18.4 million or 6.9%. Third, drilling services, which is underbalanced and directional, $259 million, up $18.1 million or 7.5%. Next, drilling tools for proprietary and also nonproprietary -- $234 million, up $34.2 million or 17.1%. Next, completion systems, $177 or $178 million, up $11.7 million or 7% even. Next, wireline both cased hole and open hole, $149.9 or $150 million, down $19.9 million or 11.7%. It's the only product line which is down. Reentry fishing, $147.4 million, up $8.5 million or 6.1%. Followed by chemicals and stimulation services, just under $110 million, up $12.1 million or 12.4%. Followed by integrated drilling, $85.2 million, up $2.9 million or 3.5%. Lastly, pipeline and specialty services, $30.8 million, up $3.4 million or 12.2%.

Artificial lift is the Company's largest product line, with $1.3 billion annualized followed by well construction at $1.1 billion and drilling services at $1 billion. I'm just annualizing the numbers here for clarity.

Artificial lift, with groups all five forms of lift, together with lift production optimization, which has done very well this quarter. Well construction includes tubular running services, cementation, liner hangers and inflatables. And drilling services of course includes directional and underbalanced, which about split half and half.

The highest dollar growth was experienced by drilling tools this quarter followed by artificial lift and well construction. The drilling tools growth was centered around the Company's proprietary lines of extended reach tools and drilling jaws. Artificial lift was driven primarily by the ESP line, which crossed the $100 million revenue level in the quarter on an annualized basis. The well construction growth was split evenly between its various segments.

Well construction of note had a very strong quarter in the offshore and deepwater markets. I didn't note on artificial lift, our largest product line, artificial lift has had uninterrupted growth in every quarter for the past seven quarters. The outlook for artificial lift worldwide has never been stronger from a secular, that would be decline rates, technology which is the investments we made, and efficiency of delivery standpoint of supply chain initiatives.

Revenue per employee was up 3.5% sequentially to $219,000 even in the face of adding another 900 employees in Q4. We added about 5000 employees since the end of 2005 or just about a 20% increase year on year.

In addition to the Eastern Hemisphere and Latin American focus, Weatherford should also benefit from the growth in the offshore markets. Weatherford has in its core drilling product lines clear leadership in (technical difficulty) markets. In the Gulf of Mexico and North Sea, for example, we have dominant market shares in well construction, drilling tools and fishing reentry. We hold the world's record for LWD performance in both the Gulf of Mexico and the North Sea.

We have similar strengths in offshore West Africa. In offshore West Africa, we also add to the core drilling product line, leadership and completion and sand control. This market strength will be valuable as the fleet of floaters and jackup increases in the years to come.

Taking a bird's eye view of 2006, we invested about $1 billion in CapEx. $500 million in buybacks, and $200 million in acquisitions -- mostly in technology. Given the scale and quality of the organic growth opportunities in 2007 and 2008, investments in organic growth are the priority. We estimate an after-tax return on organic growth of between 25% to 30% per annum -- that is after-tax.

We have another $500 million also left in our stock buyback program and depending on need, we would expect a renewed commitment once that capital is deployed.

Acquisitions are hard to calibrate. We have very specific and disciplined criteria, both financial and industrial on acquisitions. The relevance of acquisitions depends entirely on circumstances that may or may not occur. Aside from Precision, they have not been a significant factor in recent years.

In 2006 we have delivered or exceeded our organic growth expectations. At this point we're executing the 2007 growth plan while laying the seeds for 2008. In addition to growth, Weatherford's focus is on efficiency, productivity, operating quality, and maximizing profitability. We are confident in our geographic outlook and growth prognosis in the international markets, while we stand ready to manage any decline in the North American markets. That concludes our prepared comments. I will now turn the call back to the operator for questions, please.

(OPERATOR INSTRUCTIONS). Bill Herbert, Simmons.

With regard to your international revenue outlook, up 36% at least expected 2007 versus up 30% pro forma for PES, a couple questions along those lines. One, where do you stand in terms of your buildup in terms of people and tools in order to meet that growth? And secondly, how much of that expected revenue stream is essentially contracted as we move into '07?

I think we are in very good shape on the people and tools side. I think that the revenue contracted -- I would give an estimate of about 90% is already under contract.

The only other question I have is this whole issue -- and I realize its early days but we're getting a lot of questions on it, and that is this whole issue as it relates to inversion. What is your particular view of that and what are your expectations along those lines?

I will let Andy give you a longer answer. My particular viewpoint is that our position is that which is by and large irrelevant. We will be happy to remain inverted. If we are brought back as a US domicile company we will be happy to. It shouldn't make any difference as to the tax rate that you see reported in '07 and '08. But I will let Andy give you a longer answer.

Bill, we really -- as Bernard said, we're not incredibly preoccupied with this issue. I think you'll note that our tax rate, effective tax rate, since inversion, has been somewhat above that of other inverted companies. It reflects a longer term planning objectives on our part. Tax planning is an ongoing matter but I think that we have at this point, inversion has given us the opportunity to properly structure our assets, particularly the international ownership of assets. And it has given us more flexibility with respect to optimizing our tax rates in foreign jurisdictions. It's because of that planning I don't think that you should expect to see any meaningful differentiation with respect to the rates you've been seeing from us lately.

So basically, irrespective of the outcome on the legislative front we really don't expect to see any substantial change with respect to your effective tax rate?

In the case of Weatherford, that is correct.

Jim Crandell, Lehman Brothers.

Bernard, right now I guess in the fourth quarter you are running at about a $1.3 billion CapEx rate. My question is, with such dynamic growth forecasts for '07 in both the Eastern Hemisphere and Latin America, why is your CapEx budgeted I guess at only $1 billion, especially when a couple of your major competitors, after starting slowly or seemingly ramping up substantially in '07?

I think we're using assets better than we ever did -- certainly historically, that's one. Two, I think the CapEx, the deliveries and the supply chain has paid dividends in that we are able to get some of the equipment and tools we needed a little bit earlier. So that you should look at the run-up in Q4 as borrowed, if you will, from '07. So that I think at this point $1 billion in '07 should get us comfortably to our targets.

How much of that $1 billion would you anticipate spending outside North America approximately?

75%.

Okay. Second question, Bernard, can you comment on your recent success in penetrating the market in the Eastern Hemisphere with your rotary steerable and LWD tools and what your expansion plans are here?

The rotary steerable system, which was essentially zero 18 months ago ran in '06 at about 400,000 feet, which is not much. Assuming all goes well, we should expect to double that in '07. That gives you an indication. It is still very small, Jim, and financially immaterial. As 400,000 feet would be roughly -- I don't know $30 million of business or so. So doubling would be $60 million. It's immaterial. But the growth rate is obviously very, very high. Rotary steerable systems technology in general has a lot of promise, both horizontally and vertically.

With respect to LWD's numbers they are much larger and the growth rate is running approximately 45% to 50% per annum. That's the number in '06. I suspect that number will be as high in '07. It's as much as we can do from -- responsibly from an operating standpoint. There again, the LWD technology is young and very low market share. So it's not so much a question of whether we will penetrate. It's a question of how well we will execute in operations, more than anything else.

Okay. Final question, can you comment on the reasons for right now going to a geographic-based organization from a product-line managed one? And would you expect in 2007 to be the winner of integrated project management contract awards on either the drilling or production side?

I suppose the answer on the first one is three different parts. One, it's really my personal preference. I tend to think that geographically-led businesses are more effective. So right or wrong, to give me the credit or the debit for that.

Second is the issue of redundancies. I think Weatherford was developing itself very nicely but not in two silos but in four silos, really, because the drilling division itself was developing itself under three different silos. Silos have their strengths. I've looked at it and we thought that we run the risk with the level of growth rate that we are experiencing to see a high-cost increase by having the redundancies between the four silos.

The third part of the answer has really to do with client management. To a great extent actually, beyond my personal preferences, a lot of this reorganization has been client derived, if you will. We are -- I think in the end our separation in different silos made communication with the client that much harder. And after being pressed by clients on perhaps running things a little bit differently to their greater satisfaction, I would say that other than my own personal preferences, clients determined our decisions in the end, if I was to do their introspection. So much for that particular question.

The other question, I would suspect, Jim, that in the course of 2007, we should sign up our first two significant integrated project management, would be my expectations.

One quick final question -- what was the revenue growth in underbalanced drilling in '06 versus '05 or managed pressure drilling?

You know, I don't actually remember, but Andy, do you know?

About 25%, Jim.

Okay that does it. Thank you.

Arun Jayaram, Credit Suisse.

Nice quarter, particularly relative to expectations. I was wondering if you could comment or estimate -- what percentage of your revenues in North America do you think are derived from secular growth type product lines? You know, meaning revenues would be up in a flattish rig count scenario, excluding Canadian seasonality?

That's a hard one, A.J. That's one that maybe we can do more justice with a few hours to think it through so this becomes an off-line answer. Maybe a different -- not such a different question but sort of close to the one you are asking is that, there are a number of product service lines where Weatherford has got interesting technologies that have been brought on market and where we have share gain growth.

ESP's is a classic example. Sand control system is a classic example. Chemicals is a classic example of that. Production optimization is a classic example of that. Open hole wireline is another example. Underbalanced continues to be an example and directional.

And so, clearly we have also other products and service lines where we have large market shares and we can't really even pretend to say the same thing. But on all the various ones I mentioned, there are others. We have, as a function of history, we have new offerings, interesting technologies, very low market shares, which is one of the reasons why I would expect that you will find, notwithstanding what happens to the market in North America, and the US in particular, you'll find that we will tend to do better than the underlying market.

That doesn't address your secular question, which A.J., that is something truly something that we need to think about. Otherwise, I'm not sure our answers will be worth very much.

Okay, Bernard, fair enough. What do you think are the two or three most powerful secular growth type product lines at Weatherford today?

I will give you a quick answer there but I would probably have to think it through. Underbalanced; sand control because I think sand control problems will be a function of accelerating decline rates; artificial lift for sure; and production optimization that goes so with it. I suppose those three address many different things but they address the growth of the brownfield market. The brownfield market in an Asian demography, which is akin to the well -- the reservoirs today, is a very high-growth market, just like deep water is, just like some of the few greenfields that we will experience in the Eastern Hemisphere. But brownfields is a mammoth market. Those three and others too since you only wanted three. Sand control, lift and particularly production optimization within lift. Production optimization is a term which is used commonly for many different things. In our case it really pertains to lift. Sand control, production optimization and underbalanced, at least the low formation damage aspect of underbalanced. We're the ones that are the most secular but of course by saying that, I've probably made a lot of people upset at Weatherford because there are many others that have the same claim.

Okay. Lastly, very, very strong international growth. Were export sales significant in terms of this quarter?

No, no, no, no. And you'll find that becomes -- it will always be important at Weatherford but you'll find it is of diminishing relevance.

Jim Wicklund, Banc of America Securities.

Like you said, considering the expectation, good quarter! Everybody talks about the fourth quarter in North America -- what we have and haven't seen yet. Here we are at the end of January. Can you talk to us about North American pricing?

Not a lot to say, Jim. I understand what people are saying and hearing and trying to sort out. To be fair, most pricing will occur first at the rig level and perhaps the tubular level, and then it sort of percolates through the rest of the industry to varying degrees. Bearing in mind that right or wrong, what we do doesn't get a whole lot of price upside, doesn't get a whole lot of price downside. It gets some but not the same degree. So not only are we not front line, but number two we are not as concerned, up or down. It goes both ways.

If we exclude pressure pumping from the equation because you guys are so small in that, what product line in North America or service line in North America would you expect to see impacted first if it got impacted?

Cementation.

Okay.

Cementation, well construction, liner hangers. Well construction, I don't think (multiple speakers)

But like you said, those were areas that not a great deal of -- not the level of expectation of pricing, do you think? Andy, I guess that is a question for you since you talk to investors. Is the expectation of pricing this year that great by The Street?

No, God no, God no.

No, no, no, no. I don't think so, (multiple speakers). No.

I don't think there's any in North America.

In terms of international, one fear that has been voiced is that you guys are growing so amazing rapidly in the Eastern Hemisphere that there must be some give-up on price for you to come in and be able to compete with Halliburton and Schlumberger and grow that fast. Can you address that?

Well, I don't think it's true. If it was, I would tell you if it was true, plain and simple. But, maybe the reason why people say that is because they don't appreciate how little we have fundamentally of the Eastern Hemisphere market. And therefore, how reasonable it is for us to expect to grow revenue-wise for a few years -- a bit faster than anyone else. It won't go on forever.

The Eastern Hemisphere markets -- look at the budgets, I know you do -- are very large. I think the -- it shows that the normal ratio of top line for a company in this industry -- let us talk about the international market -- that's just North America. It's probably easier to roll in Latin America in it also. What should be the breakdown between international markets and North American markets? Should it be 50-50? Probably not. It probably should be 70% or 30% North America. Now look where we are. How shocking is it that for us -- that we have 47%/53% or some such number -- 47% international. Why is it so shocking that with very good technology and a good infrastructure we try to go from 47% to 70%. That is an enormous move. It's not going to happen in I think many, many years, if it ever happens. Obviously as we move towards a more natural level -- that's been the notion I would like to convey, a more natural level, of market split or business split, rather, clearly we're going to have fast growth. And that's all that's going on.

Okay, that's helpful. Last question if I could. Excluding Canada because we all know about Canada, what country has disappointed you most over the last three or four months?

Three or four months?

Yes, since the last time that you had to talk to us?

God, I don't know.

Jim, I think based on the results for this quarter there wasn't too much outside of Canada that would have looked disappointing to us.

That's a great answer then.

Yes, that's correct, yes.

Mike Urban, Deutsche Bank.

ESP has played a pretty prominent role in your commentary here this morning. It sounds like you've gotten at least some sort of decent critical mass still, relatively small overall. Are you -- I know you've rolled out a new product which looks like it's being competitive. Are you where you need to be at least competitively? And I'm sure you will and will continue to expect to continue to grow it. But in other words, can you continue to grow the business organically and get where you want to be in that business?

I think so. I think so. You are correct, the product line has gone from essentially nothing to my gosh 18 months, 24 months ago it was zero, to a modest $110 million, $120 million run rate-wise in Q4 and it has progressed every quarter. The product line is good. It's probably -- it's the most technologically advanced for no other reason than it's brand-new. It's got by last accounting about 91%, 92% of every single possible size and designs that are on the market is complete. It has technology, including new technology that will be introduced. And so it is a good product line with a lot of promise. It is a large market, the ESP market, and because the quantity of produced water is a phenomenon associated with accelerating decline rates, which is increasing every year, not in a dramatic way but in a secular way, the ESP probably business in general should do very well.

I think for someone who is number one in the various other forms of lift and we believe number one in optimization as in lift optimization or services, it's terrific that we have now an ESP line, which is not only complete but also competitively very good. Add to that our focus, which is historical in this company on supply chain management, I think we could also lower the cost, the delivery cost of ESP's. All in all, it's something that has a lot of promise for us.

And geographically, Russia was a market that you mentioned that you hadn't mentioned as much in the past. Was ESP growth a driver in that market?

No, not all. Not at all. Good question though, but not at all.

Well, I will take that question then. What were some of the drivers in Russia or what would you expect (multiple speakers)?

Directional, directional, re-entry, these sorts of things. Not -- there was also -- to be fair -- there was also completion, which is growing nicely also but high-end completion in the Russian markets. We have though, Michael, we have, as is well-known, Russia is not our strong suit and so we have a ways to go before we can claim that we are as good in Russia as we may be in other parts of the Eastern Hemisphere.

Dan Pickering, Pickering Energy Partners.

Bernard, it sounded like equipment was getting a little bit easier to get. You said you had some accelerated deliveries. Is there any area that was bottlenecked that is now freed up?

Not really, Dan, and I'm not quite sure what to credit that to specifically except that the supply chain focus is, I would say, zealous over here; has always been a big part of what we do but it's become zealous. So I suppose I would credit the supply chain people. But I can't point to a particular bottleneck, other than to say that the delivery of tools and equipment and shortening the days of delivery is enormously helpful to plan execution for the clients. So I would just say it's good execution on behalf of the supply chain people at Weatherford.

Okay, all right. Then it sounded like you are sort of going to hold your judgment on the North American market to see how it develops. I think that makes sense. We heard several of your competitors talk sort of about contingency planning in terms of what happens if. Walk us through what Weatherford's plans are if the North American market softens.

For us, there are certain categories of tools and equipment which have been earmarked and will be redeployed. It's not a big number, Dan. We already know what it is and where it is. It's not a big number, again. It can't be a big number. And on the people side, we also have contingency but I think we are likely to be cautious. People -- pretty good people, most people ask, what's a premium. And so we're very unlikely to -- have to look at the circumstances -- to do anything drastic on the people side.

So, it sounds like reallocate equipment but we'll be careful in terms of lowering headcount just because potentially tough to get them back?

That's exactly right, Dan.

Dan, we will watch -- on the variable cost side we will watch it closely. But it despite the fact that we mentioned it's such a broad range of opinions about commodity prices and activity, there seems to be a very strong consensus that any pullback would be short-lived. So you don't want to do a lot of harm to your organization or for your clients by making any violent moves with respect to people.

Bear in mind also, Dan, that we've seen already a major contraction in Q4 in Canada. I realize Q1 is seasonally up. But Canada has already been -- I mean the whole year '06 has been a slide from the first half to the second half. And also bear in mind that we have a large presence in Canada, which certainly has been -- we've certainly been told over and over again by the financial markets that we are too Canadian. So we have had a firsthand experience already in managing our way down in one of the two North American markets, in Canada. So we have already one good sort of set of empirical data on what we can and cannot do in those markets.

Last question. You talked about $1 billion in CapEx was roughly 75% of that international. So, that implies roughly $250 million spending North America. How would that $250 million in '07 compare with '06 North American CapEx?

It's down, obviously. Remember that after -- in rough numbers, Dan, out of $1 billion on the base of 100 it's the same thing. You have a certain amount of CapEx that is best described as maintenance. And that number is somewhere around 30% to 35%. I think Andy's people bracketed exactly at 32.5% with where there was quite a bit of precision. So, on $1 billion, it's $325 million. And when you start looking at the geographic allocation of that maintenance, our CapEx, you find, it shouldn't surprise you that a disproportionate amount is in North America because it's got the oldest equipment base; not on everything, mind you, but of our entire system. So put another way, out of the $250 million that will be North America, I don't know, Andy, what a bit under $200 million would be maintenance?

Yes about $185 million.

Okay, there you are. So, that is just one thing for you to understand. In '06, what was the North American as a whole, CapEx? Do you have an idea, Andy, offhand? As opposed to what it will be in '07? He's looking, Dan, if you want to give him a second?

Sure.

I have a number in mind. But why don't I let Andy just provide the actual number? The number is about $425 million or so. But that was in '06 -- $400 million, $425 million. So, Andy will give you -- if he can't find it now -- he doesn't have it all his papers, he can give you the exact number.

That's close enough and answers my question.

Geoff Kieburtz, Citigroup.

A couple filler questions here. The exit and restructuring charge, what does that pertain to? You had it last quarter, you have it this quarter, you expect it next quarter.

The next one is very, very small.

Geoff, it is primarily employee severance with respect to our reorganization into the COO structure. Obviously, departure of Lisa and John and others. But there is between 15 and 20 people included in that.

So it's just the reorganization then?

Very specific, Geoff.

Yes.

Okay, you've talked (multiple speakers)

I'm sorry, as far as things rolling forward into next quarter, there's just certain rules that don't let you expense that until you've actually paid the cash.

Right.

You can't accrue for it ahead of time.

Okay. On the CapEx you've talked a little bit about the geographic mix. Can you talk about the international CapEx? It doesn't sound like you have much more than maintenance in North America. So international growth CapEx -- in terms of line of business concentration?

Andy, do you want to take a crack at that?

Sure. Geoff, you should expect to see obviously the highest amounts of capital committed to our drilling services and wireline groups. Not to say that there's not some additional capital required with respect to well construction. The CPS side of the business tends to be much less capital intensive so there's not an awful lot of capital allocated on that side of the equation. It tends to be more on the EDI side of the business.

Okay. Maybe I'm splitting hairs here but it seems to me that you have scaled slightly back on your Eastern Hemisphere and Latin American revenue growth projection for '07. Is that correct?

No, actually, it is not. I do -- I actually keep all my notes from all the prior conference calls. And no, it hasn't at all. Maybe what throws you is that I combine now both Eastern Hemisphere and Latin America for ease of presentation as opposed to talking about 40% one and 25% the other, I talk about 36% combined. It's a weighted average. But 40% east and 25% Latin America --?

Oh, they are quite healthy. I understand I (multiple speakers)

No, they haven't changed, Geoff. They haven't changed in -- maybe they should have changed. But they haven't changed in gosh, nine months.

I just for some reason had a 50% Eastern Hemisphere number in my head.

Geoff, you may be recalling Middle East/North Africa and that was up (multiple speakers)

Middle East North Africa is 50% is the right number. As it turns out. We do tend to talk about Middle East here and North Africa probably more than the others for no other reason than as sort of the yin and the yang are, we're very strong in Middle East/North Africa. We're not so strong in Russia. We often presented the two as opposites, not that we're happy about the Russian situation but just to show where we are. So you might have remembered that the Middle East/North Africa number, indeed.

Fair enough. And then lastly, I understand your reluctance to make any real concrete projections of North America in '07, but if you think about the makeup of the Weatherford business portfolio in North America today as compared to what it was in 2001, would you expect the profitability of your North American operation to be more impacted by a downturn or more insulated from a downturn in '07 than it was in '01, '02?

Jeff, I think it would be more insulated. Let me tell you why. If you look back to '01, '02, just the market what was driving things back then, the types of work and the types of wells that were getting worked on or not worked on, as the case may be. And if you were to look at our specific product and service line mix. On that last point specifically, we have a much higher concentration of service revenue as opposed to product revenue, which would imply for us higher variable cost, lower fixed cost in terms of percentage of total costs in our structure. And so we think we have a lot more flexibility in terms of managing the market in that way. But, you are right in that if we look at our business today, it is so substantially different for us and a much different level of reliance in terms of offshore work and land work that it will behave differently and we believe much better in the event of a pullback.

One of the problems with Weatherford actually is that it's hard to draw conclusions, positive or negative, going back to the prior recession or any other period, as the Company has changed materially and very materially, not only in scale but also in makeup. I can appreciate your -- I can appreciate why you asked the question Geoff.

Probably -- how are we doing time-wise? One more question maybe and then we will probably have to close to let other conference calls proceed.

Brad Handler, Wachovia Capital Markets.

I'm wondering could you guys share some thoughts on Q1 of '07 with respect to EPS?

No, Brad, I think that we -- obviously, it was a conscious decision not to give any guidance with respect to that. Obviously we can all see that the Canadian activity is thus far very good though I will remind people 600 plus 600 plus zero is still 400 rigs for a quarter up in Canada. So we have to see how March goes. I think that is definitely a variable. And we think that the US has continued to perform fairly well. It is at a plateau. I think last rig count was 1699 -- so down about 25 rigs from where we ended Q4. And I think that you should expect to count as good our expectations and forecasts with respect to the international markets. And that is where for us performance and execution will be at a premium. And I think our performance will very much hinge upon our ability to execute in those markets.

Fair enough. I guess if I could follow up with one thought process, -- in an earlier question, you kind of ruled out the impact of export sales in Q4, but maybe you can speak still to the notion of Q4 seasonal strength and whether or not -- how much of a factor that was in '06? And thereby maybe sort of, you get at sort of Q1 expectations that way.

I don't think -- seasonality was not a big swing for us one way or the other. I think on the margin in every Q4 you have a degree but it certainly wasn't anything meaningful that showed up for us this quarter -- of folks using up budgets and whatnot. But nothing out of the ordinary for us, Brad.

Okay. So, for example, in the completions area, which sometimes experiences a big step-down in Q1 relative to Q4, maybe we should not expect that this quarter, at least in the international arena. Is that a fair statement?

I think that's fair.

That concludes the conference call. Thank you very much for your time. Operator, we will discontinue now.

Thank you, sir. Thank you, again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines now at any time.