Weatherford International PLC (WFRD) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the first quarter 2007 Weatherford International earnings conference call. At this time, all participants are in a listen-only mode. We will be, however, connecting a question-and-answer session towards the end of today's conference. If you would like to queue up for a question for that Q&A session (OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's presentation, Mr. Andy Becnel, Chief Financial Officer. Please proceed, sir.

Thank you very much. Good morning. For our beginning quarter of 2007, we report fully diluted earnings of $0.82 per share before nonrecurring items. Setting aside the traditional Q1 pullbacks in lift and completion product sales, our international business continued on its steady path of growth. North America provided the net incremental growth despite challenging weather in the U.S. and only a moderate improvement in Canadian activity industrywide.

Before moving on to detailed commentary, we should take note of two items, both of which relate to our reorganization announced in January of this year. Number one, our $0.82 excludes an after-tax charge of $2.7 million associated with our Q4 restructuring activity. Guidance on our Q4 conference call indicated that we expected this number to be $5 million.

Number two, Q1 of 2007 marks the first quarter in which we report our revenue and EBIT based on geographic markets. Last Friday, we filed quarterly information for 2006. As a reminder, we now track our business based on four distinct geographic markets -- North America, Latin America, Middle East/North Africa/Asia-Pacific, and finally Europe/CIS West Africa.

EPS comparison, at $0.82, earnings per share are up 8% sequentially and stand 44% above Q1 of 2006. Sequential improvements amount to $0.06 net, which can be summarized as follows -- one, $0.05 of sequential improvement from the field, and two, $0.01 of improvement from nonoperational items.

I will cover the operational progress in connection with regional commentary. As for the $0.01 improvement in nonoperational items, increases in interest expense and R&D cost us $0.01 on a combined basis, while a lower tax rate added $0.02 to our results. At 24.1%, our rate was 195 basis points tighter than Q4.

Operating performance, consolidated overview -- on a consolidated basis, revenues grew $45 million sequentially or 2.5%. Revenue per employee crossed $222,000, the highest in the Company's history. North America, which accounted for 55% of total revenues was up $50 million. While the average U.S. rig count grew 1%, Canadian rig activity improved 18% over Q4.

Compared to underlying activity levels, several product lines outperformed, including drilling services, Wireline, completions, and well construction. Revenues outside of North America decreased $5 million; as was the case in the last five years, Q1 levels of international sales for artificial lift and completion products slipped from the levels of Q4, when customer budget cycles tend to lead to higher product spending. These two product lines declined $36 million on a combined basis in the Middle East/North Africa/Asia-Pacific and Latin America markets.

For comparison, last year's decline from Q4 to Q1 was $25 million in these regions. Consolidated EBIT before corporate equity in earnings and R&D was $484 million, up $23 million with operating margins at 26.1%. This is an increase of 60 basis points over Q4. Incremental margins were 51%. Compared to Q1 2006, operating income was up 33%. Operating margins were up 240 basis points over the same period.

Geographic performance -- sequentially, all regions except for Middle East/North Africa/Asia-Pacific grew EBIT in improved margins. Financial performance within our four geographic regions was as follows -- number one, North America, 55% of total revenues. Revenues were up $50 million or 5%. EBIT was $298 million, up $29 million. Margins grew to 29.6% on incrementals of 56.7%. This is a 150 basis points sequential improvement.

Our top performers were drilling services, well construction, Wireline, and completion. In addition, incrementals were exceptionally strong on the production side of the business due to improved mix. Margins also benefited modestly from cost structure improvements in this market.

Number two, Middle East/North Africa/Asia-Pacific -- 21% of total revenues. Revenues declined $15 million. Completion in lift product sales pulled back $23 million while other products fell $5 million. In addition, we deferred $4 million of revenue on a project in Asia-Pacific pending resolution of a contractual dispute with the customer. EBIT was $83 million, down $15 million. Margins fell to 21.1%.

In addition to recognizing costs associated with the deferred revenue mentioned above, personnel related costs, namely headcount and training increased $6 million. Countries that showed particular strength included Oman, India, Kuwait, Algeria, Egypt, Tunisia, Australia, and Brunei. Underbalanced Wireline, fishing and re-entry, and drilling tools posted healthy improvements.

Three -- Europe, CIS, West Africa, 13% of total revenues. Revenues grew $15 million or 7%. EBIT was $54 million, up $7 million. Margins grew to 22.0%, a 150 basis point improvement on incrementals of 45.1%. The UK, West Africa, and Sub-Sahara, Africa showed strong activity improvements. Drilling services, well construction, Wireline, and completion including downhole screens and ESS, outperformed expectations.

Four -- Latin America, 11% of total revenues. Revenues fell $6 million or 3%. Gains in Brazil and Mexico were more than offset by reduced activity in Venezuela, including $13 million of declines in lift and completion products. EBIT was $49 million, up $2 million. Margins grew to 23.6, an improvement of 170 basis points. Despite the revenue decline in the region, the startup of drilling services contracts in Mexico and Brazil as well as improved Wireline and fishing and re-entry activity resulted in margin improvement.

The strongest performers by product line were drilling services, Wireline, and drilling tools. As for year-on-year comparisons, we draw your attention to the following observations regarding geographic growth rates. One, global revenues are up 21%. Two, North America revenues are up 9% despite a 21% decline in Canadian rig count year-on-year. Three, international revenues are up 38%. [Meetup] revenues are up 44% and Latin America revenues are up 27%. These growth rates are consistent with our prognosis of our international growth as shared with all of you at the start of the year.

Cash returns and capital. Cash flow and returns, I'll start with. During Q1, we generated EBITDA of $552 million with DNA running at $136 million. EBITDA per employee increased 4% sequentially to slightly more than $66,000. Operating working capital, which is for us AR plus inventory less AP, consumed $215 million of cash, which is consistent with historical upticks in Q1. As a reminder, in Q1 2006, growth and operating working capital consumed $236 million.

North America represents approximately 50% of our receivables companywide. As such, it has been our first priority for working capital improvement. Since the end of 2006, we have reduced our DSO's in North America by two days. It's a small but important sign of traction. Days of working capital stood at 132, compared to 139 a year ago. After deducting interest expense and cash taxes, operating cash flow was $220 million for the quarter. Return on capital employed excluding goodwill was 23.1% during Q1. This is the first quarter we have ever crossed this threshold as a company.

We calculate return on capital employed as annualized EBIT less actual taxes divided by the average balances of shareholders equity and total debt less goodwill over the applicable period.

Capital expenditures -- capital expenditures were $342 million for the quarter, net of lost and whole revenues. We project total capital expenditures for 2007 at approximately $1.2 billion, a 20% increase over last year's level, net of lost and whole. This reflects our effort to stay ahead of the curve on the supply chain front in connection with anticipated activity increases in the first half of 2008.

Capital structure -- as of March 31, 2007, our ratio of net debt to net capitalization stood at 27.8% with total debt at $2.6 billion. Cash balances totaled $109 million at quarter end.

Guidance -- Bernard will cover our operational outlook in his comments. I have the following two updates for you for 2007 nonoperational items. Number one, tax rate, 24% on average for the entire year, though you should expect variations from quarter to quarter. Geographics earnings mix and continued planning activities have reduced this from the 27% rate expected at the beginning of the year.

Two, share count, we exited the quarter at 337.9 million basic shares outstanding and 346.2 million fully diluted shares outstanding. I'll now hand the call over to Bernard.

Thank you, Andy. Good morning. Q1 was another strong quarter. Top line was up $44.7 million or 2.5% sequentially. Operating income was up $20 million even or 5%. Operating income incrementals companywide after R&D, et cetera, averaged 44.7% or just about 45%. Operating income margins at 22.5% were the highest in the Company's history. Earnings per share, as Andy mentioned, were up $0.06 or 7.9% sequentially.

Sequentially, the quarter's growth was North America; both U.S. and Canada. The international segment was essentially flat. The Eastern Hemisphere was negligibly up while Latin America had a marginal 2.6% decline of $5.6 million.

As I look at the quarter, the U.S. did remarkably well in light of the sharp decline in workover activity and unfavorable weather patterns. The U.S. had solid growth in directional underbalanced ESP and well construction service lines. The latter, well construction, is a mature legacy business in the U.S., but one that is seeing excellent demands in the deepwater markets, and on and around new technology offerings in cementation, liner hangers, and tubular running services.

Canada was up seasonally, but to a much lesser extent than anticipated and of a shorter duration with the onset of early break-up. Year-on-year recount was down 21% in Q1, similar to the Q4 decline. Not surprisingly, our Canadian business for the past two quarters has performed at materially lower levels than equivalent 2006 levels. The shortfall was in part made up by a stronger than expected U.S. performance.

Q1's international performance, although essentially flat, is the best we've seen in our history for first quarter. For each of the last five years -- actually, if you go back further, it's the same thing. Our Q1 drops off seasonally from Q4. The predictable cause is a one-quarter deferral in product shipments, particularly production related -- for completion in lift. International services are unaffected. In Q1 2006 last year, the Eastern Hemisphere revenues declined sequentially by $27 million, or about 6%, only to grow year-on-year for the balance of the year by over 40%.

This Q1, we did much better. The Eastern Hemisphere service growth made up entirely the traditional seasonal decline in product shipments. All regional subsegments were up in Europe, West Africa, CIS. Western Europe and North Sea were the most up in dollar terms followed very closely by Sub-Sahara Africa, which was very strong and up the most in percentage terms. Middle East, North Africa, and Asia-Pacific declined $15 million, one-five, from Q4 levels. Product shipments in both areas were seasonally lower by just under [$13] million sequentially.

Net of service revenues increases -- Middle East, North Africa was essentially flat. Asia-PAC accounted for the brunt of the decline. Latin America was strong, particularly in Brazil and Mexico. Venezuela, Orinoco was very weak for obvious political reasons. Remember, we have a dominant share of completion lift and lift optimization in the Orinoco's heavy oil field. Start-up of directional and underbalanced contracts in Mexico and Brazil made up for much of the Venezuelan decline.

If you do a year-on-year comparison, it paints an almost exclusively international picture. Q1 on Q1, 12 months growth was overwhelmingly international. Q1 2007 on Q1 2006, Eastern Hemisphere was up 42%. Latin America was up 27, and of course, if you blend them both, the international on a weighted basis was up 38%, just under 40.

The Company's region, Middle East/Asia-PAC was up 44% versus 10% underlined regrowth in that same period of time, and had the highest year-on-year growth rate companywide. By comparison, North America in that same one year period was up only 9%, with the growth in the U.S. making up the substantial Canadian declines. And of course, in the same period, [NAM] recount year-on-year was up 3%. As a reminder, year-on-year comparisons are a clean measurement of organic growth insofar as there were no revenue enhancing acquisitions in the period considered. As for Precision, they joined Weatherford in September 2005. It's been a while.

In the quarter, the Company's geographic breakdown was as follows -- [North and] North America 54.4, Latin America 11.1, and Eastern Hemisphere, 34.5%.

Forward views -- we limit our forward views on [NAM] to two comments. One, we saw in Q4 and Q1 a sharp decline in the Canadian market for prior year levels. Q4 was down 23% on prior year and Q1 is down a similar 21% on prior year. Q2 is likely to be down a higher percentage level over the prior year, albeit from a lower base. Notwithstanding this, we are constructive for Canada on the latter part of the year. It's hard to put a sense of precise timing on it, but we would expect Q4 to be the first quarter showing in Canada higher year-on-year statistics plus or minus a couple of months.

We're also constructive on the U.S. markets. We do not at this time expect a significant drilling pullback. Although in the U.S., the basis of competition will be efficiency of technology, which is typical of a plateauing market, there's still solid organic growth to be had. Directional, underbalanced, Wireline, electrical submersible pumps, sand control and chemical technology -- all of the above in our case have proprietary technology and small marketshares.

The forward outlook for our international business, I think you know it already. It is very strong. As for the opening paragraphs of my comments, the trailing 12 months Q1 and Q1 year-on-year growth in international segment was 38%, split 42 in the East and 27 in Latin America. Looking forward, it's pretty much the same and notwithstanding the continued growth expected out of the U.S., most of the growth in 2007 and 2008 will come out of the international markets. 2007, we expect a growth of 40% Eastern Hemisphere and 25% in Latin America versus 2006. Both numbers add up to an average of 36% for [one of the] international segment in 2007 and this is a similar growth rate the 38% experienced in the trailing year.

In Eastern Hemisphere, we expect the Middle East, North Africa, Sub-Sahara, Africa, China, Russia, and Central Europe to show the greatest growth year-on-year. Latin America, we expect Brazil, Mexico primarily, and Argentina will show the greatest growth year-on-year. Venezuela is an unknown at this point in time. And in the course of 2007, international revenues will likely eclipse [NAM] revenues.

Setting the geographical aside, I'll take you through the quality performance of our ten service product lines, ranked from the largest to the smallest. Artificial lift, down 6% or $19.6 million; well construction, up 4.3%; drilling services, up 5.3%; drilling tools, essentially flat; Wireline up 23.2%; completion, up 3.6 -- up 2%; re-entry fishing, up 3.3%; stimulation in chemicals, essentially flat; integrated drilling, essentially flat; and small pipeline, down 13.3% or about $4 million, a very small service line.

Two of the ten product lines were down sequentially, lifts and pipeline, and of course, the only meaningful dollar event is artificial lift with a near $20 million decline out of the international markets. I think we've covered that before. The highest dollar growth was experienced by Wireline, drilling services and well constructions. Well construction segment has done consistently well for the past nine quarters and growth has been driven by new technology, such as the OverDrive, topdrive, casing [line] system and a strong exposure to deepwater markets.

A few added new specific to Q1. We had early commercialization success on a number of new technologies. The compact microimagery tool -- Weatherford has successfully introduced its compact stratographical logging device. This compact tool design can be deployed for real-time microimage logging, either during drilling operations or logged well when drill pipe is being retrieved. It is unique in the industry. There is no equivalents in its conveyance capabilities. The key here is conveyance.

Expandable reservoir completion system -- this system allows the client to install a single trip completion that provides for expandable sand screens across the producing intervals and at the same time watershed off isolation for nonproducing intervals. This is the only compliant -- meaning adjusting to exact shape of the reservoir -- this is the only compliant expandable technology in completion in sand control in the industry.

And thirdly, downhole scale and paraffin remediation is part of the chemicals group. This technology propagates specific high frequency pulses throughout the well bore that prevent the formation of scale and paraffin. Two ubiquitous production problems. Here again, the technology is unique in the industry. The point here is simply that they're brand new offerings being commercialized in the industry looking for marketshare.

We also had a first success in the realm of project management. Weatherford has been awarded two project management contracts with two more expected to be added shortly. The location in all four cases is in the Middle East, North Africa, Asia-PAC region. The startups will range from, in the course of this quarter, Q2 2007 through Q1 2008. This is a cautious first step for our plans in this area.

Taking a bird eye's view of 2007, we are likely to invest about $1.2 billion in CapEx, an increase of $200 million over Q4 levels. 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.

In the course of the quarter, we bought 3.1 million shares of Weatherford at average price of $39.79 or roughly $39.80. We have another $328 million left on our stock buyback program. We would expect a renewed commitment once this program is completed.

Acquisitions are difficult to calibrate. We have very specific criteria, both financial and industrial. The [realm of this] acquisition depends entirely on circumstances that may even not occur. Aside from Precision almost two years ago, they have not been a significant factor in recent years. In Q1, we spent $34 million, three-four, on five small acquisitions. This is less than the [modest] $200 million run rate of 2006.

In summary, as you would expect, we are executing the 2007 growth plan while laying the seeds for 2008. We are confident of our geographic outlook and growth prognosis in these national markets. We are constructive on the prognosis of the U.S. market and we expect a reversal of trends in the Canadian market by year end.

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

(OPERATOR INSTRUCTIONS). Arun Jayaram, Credit Suisse.

Oil field margins in North America, just a hair under 30%. International EBIT margins in the low to mid-20s. Bernard, based on what you're seeing internationally, when do you think international oil field margins -- what do you think they look like in 2008 and when do you think they approach this 30% clip as we saw in North America?

I don't know what they will be in 2008. They will be higher than where they are today, simply because of the forces in motion. I'd hate to give you a number I'd pinpointed and an exact period of time, because I'll make a mistake. I know they will be higher than where they are today. As to where they rest ultimately, logic would suggest that they should go higher than North American margins. Simply because of the nature of the business, the margins that are being -- on a pro forma basis, at least -- are being booked in our sales. The volume of the business, the economies of scale, absorption, all these things put together. I was be surprised if they did not settle at a -- ultimately at a higher number. As to where exactly when, I don't know. Our direction is clear.

And do you guys still feel pretty good about your previous 2007 incremental margin guidance of 30% or so? 30, 35, I believe?

I think we'd like to stay with it, yes.

And last question, Bernard, in terms of North America, what product lines that you compete in are you worried about capacity eating into some of your pricing power? And on the flip side, what product lines do you see underinvestment in and I guess the most pricing power?

Actually they all show sort of the same on both counts. I can't think of any -- I'm turning to Andy -- I can't think of any service or product lines in North America where we have much of a pricing exposure. Our pricing did not rise very much to begin with, from trough to where we are today. We didn't get much, therefore we don't lose much.

And with respect to the second half of the question, I think for the few who have been around when I said things, we have stopped looking at pricing as a mechanism for wealth generation in North America six months ago. I think it's all a question of efficiency as in a cost issue. There's no question of the quality of the technology we provide to the client. Does it make a difference? And then thirdly, the quality of execution from the client perspective. In other words, the cost for the client, which is not the price they pay for your services, but how well you execute for the client.

This has been where we spent our time and attention. The market is plateauing. It is not the environment conducive to higher pricing. This had been obvious to us, again, six months ago. But then again, on the first part of your question, I don't -- I can't think of any particular service or product line that we are significant in, that has any issues of pricing pressures. I don't -- do you, Andy?

No, just on your earlier question, AJ, with respect to margins, if you look back to Q1 of 2006, you were running internationally at somewhere between 17% to 18%. And you're around a 400 basis point improvement over the last 12 months. I think that it's fair to think about the improvement in those terms with the 30% incrementals that we've given you.

On the pricing question, we don't. We do very much feel like things are in an equilibrium. In certain areas with certain product lines you can push price. But we don't generally like to talk too specifically about price.

Okay. That's fair enough. Thanks a lot, guys.

Ole Slorer, Morgan Stanley.

If you could circle back on the product lines that you acquired when you were positioned [in] energy services and at the time, if I remember correctly, at 25% of your revenues in Canada as a result of that. It strikes me that the two fastest-growing product lines, if I got your numbers correctly when you summed them up, were Wireline and drilling related services. Could you just touch a little bit on them and -- it's almost as if you're waving a little bit a red flag where there was a 25% growth or 20% growth in Wireline sequentially at a time when another company that reported earlier today had 0% sequential revenue growth in Wireline? Can you talk a little bit about how sustainable is any asset sales in that [product]?

No, there's no asset sales whatsoever in Wireline. I think it's two thoughts -- clearly the growth in Wireline in Q1 was partly simply a strong performance which would be seasonal in Canada. So one could not just say that, oh, well, this is something (inaudible) extrapolate over the next eight quarters. That's one thing.

On the other hand, it is also true that Wireline has gained traction in the U.S., in the Eastern Hemisphere, and probably more importantly, the prognosis for Wireline in a number of markets in Eastern Hemisphere is good; just about as good as the prognosis for directional. Even though it tends to grow at a slower rate normally, it takes much longer to grow Wireline than been directional. Of course, that's lumpy, if you will.

So the net is that I would not take 23.2%, $185 million of Wireline this quarter. I'm just saying, my goodness, they're going to grow by 23% compound quarter after quarter -- no, of course not. There is, out of that 23.2%, there is a significant percentage which is purely, I would say, seasonal, and therefore has to be discounted.

On the other hand, undeniably, the open hole Wireline in particular side of the business, is gaining traction in the U.S. and international markets bit by bit. What is driving it is essentially technology and within technology, what is driving it is a compact line. And the compact line is successful essentially because it is the only conveyance that works in a number of challenging well bores, particularly horizontal completions. And as you know, there are more and more horizontal completions so it's driving a secular trend. So you should expect that to continue.

Excellent. And if we return to your other strong product line, the drilling services, up 5.3% sequentially, again, could you give us some breakdown of how much of that was driven by, again, successfully integrating the Precision product lines internationally versus --?

That one actually, the drilling services did not benefit as much in the quarter from Canadian improvement as the Wireline business. That one is just another quarter I think of progress obtained both in the U.S. and Latin America and in the Eastern Hemisphere. You should expect drilling services, which is two things -- the directional and underbalance. Although it's never -- it's not linear quarter on quarter, there's always ups and downs that could be messy. But over a period of quarters, you should expect that product line to really grow probably to end up being -- to catch up with well construction, to catch up with artificial lifts as to being -- for service line really, not the product line, as to being our most important service line at Weatherford.

It's not a Canadian issue. It's a contract by contact penetration and I think the question for us is whether what we call underbalance, which now has a number of different names within the Company -- managed pressure drilling and petrol pressure drilling, et cetera. The question is really whether underbalanced will grow faster than directional or conversely. There is some measure of rivalry between the two. And you know they are tied a lot of projects together.

For example, the project management, you know, sort of the modest product management steps forward that we -- contractually, at least -- appear to have taken in all four cases include both directional and underbalanced with about the same dollar ticket. So it's kind of interesting that they are tied. At the same time, there is some measure of rivalry. And again, to summarize, drilling services, watch it quarter after quarter, I don't think this is a particularly strong quarter of drilling services actually. It was okay, but you'll find that over a number of quarters, it should grow the fastest of all. And in the end, it should end up being the service line, that is, from a size standpoint, will overtake artificial lift, which is (inaudible) well construction, which are the two higher-ups.

As well, Bernard, well executed and thanks a lot.

Bill Herbert, Simmons and Co.

What caught my attention, and it's a nice segueway from what you just talked about, was the winning of these project management awards. And you referenced that they are modest, but I suspect that they're something better than that, and if you could just sort of expound a little bit with respect to size, duration -- size in terms of [dollar volume], duration and breadth, and do they encompass your international rigs?

The size, the first two that were signed, I think the total ticket of the first two was just $100 million or thereabout.

Each? Or combined?

No, combined. This is very modest. Very modest. When you add the other two, probably 100 jumps up to something closer to 500 million. A bit more sizable. Of the four, let me see. Two of the four do not involve any of our rigs, but the client's rigs. However, we manage them. The other two involve our rigs, and of course we manage them with the rest of the downhole tools and equipment. All four of them are directional underbalanced projects. All four of them have an initial duration of two years, but one is led to believe that it is really a five to six year project in all four cases. But the initial hard contractual commitment is for two years. So it's once all four are signed, it is $250 million a clip for those four per annum run rate roughly.

Right. And in addition to the four that you've signed here, can you just sort of conceptualize what the breadth of product management opportunity for Weatherford is beyond these four projects that you --?

We're very careful. I think that we -- I suspect that we could, if we put our minds and our hearts to it, I suspect we could sign up and sort of gladly report another two or three projects next quarter to be started, you know, sort of -- to be started later. We're very careful not to take on more than we can handle. That's one. We want these things to be a success for the client, and therefore, we want to have the quality teams and good execution, good supply chain support and all these things are not obvious.

So we're very concerned about that, so the answer is that we could do, I'm confident, quite a bit more, if only because there's, I think, a good appetite in the marketplace -- and not everywhere in the world, but in particular areas of the world, there is a good appetite on the part of the client for someone to act, if you will, as a coordinator, as the person who is responsible for logistics and quality and execution; not someone who is responsible for downhole risk or reservoir risk or anything like that. There are no 10-key attributes to these projects.

But it is a function that is in short supply with our clients, and I really think this could be a materially bigger business. But then again, I think to a degree we're choking off until I think there's a level of comfort that we can handle these things demonstrably well. (inaudible) to a degree that we signed up is about as big as I would like to sign up right now, and they are in three different countries, which is I think also good. It prevents too great of a concentration to one country.

Understood. And I have two more quick ones and then I will let somebody else come on. Mexico, clearly Pennex is trying to be more inventive with respect to how it prosecutes its drilling needs. You made mention of Mexico. You did it in a project management sense. I was wondering if you could talk about the project management opportunities there.

And then secondly, with respect to the rather significant decline in Orinoco-related revenues, I assumed that's transient, and once that transition takes place from the IOC's back to [Petavesa], that revenue stream resumes again?

On Mexico, we are not taking on any project management of our own by choice. We are -- we have been selected to be the oil field service company of choice, pretty much everything we do in the first project management underway, financed by local interest in the south of the country. That is due to commence soon. In fact, the rigs that we sold back in -- and we had a few rigs in Mexico that were stacked, small rigs, that we had bought with Precision that never really worked much, and much smaller and in the wrong place. We have no desire to have a presence of rigs in the Western Hemisphere. Rigs for us is just an appendix to project management.

So we sold the rigs that were stacked back in Q4, and I believe the people who bought the rigs are going to employ them in project management mode and, of course, we are the oil field service company of choice to do the balance of the work, non-rig work. But we are not going to manage the project. That's one.

It is also true that the other project managements are not going to be done in Mexico. As I understand it, one of our larger competitors will be, I suspect, kind enough to use us in a couple of competencies; one of which being underbalanced, if I remember correctly, and a few other things. So although we are -- we end up being competitors with one another on so many different fronts, we can be friends also on this other project management, which I suspect will happen later on in the year, we are likely to work for one of our larger competitors. But that's just because you asked about Mexico. There are other things in Mexico that I think are also encouraging beyond those two project management.

So that I think as much as we expect in Mexico, particularly the second half of the year, will be really the shining star with Brazil in Latin America. And I think Latin America will be a strong performer once the whole year is looked upon, just like it was in 2006.

With respect to Orinoco, well, what I can tell you is an opinion. It's not a fact. I believe that the problem is transient. And I understand that it is a difficult negotiation between the various IOCs and [Telavesa]. We're just basically a passenger on the train waiting until things settle down. It is also true that in the realm of production, if you do not do the maintenance work, there is a big catch up. And I suspect that sometime in maybe Q3, it maybe Q4, I don't know. The longer the wait, the more the catch-up. There will be a big bulge of business to be done to re-plumb, as it were, the artificial lift side of the business in particular, of which we have a disproportionate percentage.

And so, yes, it is transient. Yes, I expected to come back with a -- with the reward of the catch-up. I don't know if it is Q3 or Q4. The sooner the better. And I will also say that [Petavesa] in general on the drilling side, [Maracaybo], et cetera, is an excellent client. It just so happens that they're going through now a political process which is paralyzing for operations, but that shouldn't last.

Sounds good, Bernard. Thank you very much.

Dan Pickering, Pickering energy partners.

Bernard, following up on the project management business just quickly. Margin impact kind of relative to your other businesses, are some of the flowthroughs going to pull down margins there or is this at least as good as what you're booking on a product line basis?

I think this is a good question, Dan. I think the proof will be in the numbers. But I think the answer is it shouldn't make any difference. But I will turn to Andy.

I think Dan, where you could get -- I agree with Bernard. Where it helps with some of these businesses and product service lines that are involved are very asset intensive. We're young and small in many of these markets for those businesses where we can build some density and improve utilization; that will tend to help our margins tremendously. And by tremendously I don't mean to overstate at all, but I think it should be positive net-net of the end of the day.

Two of the three countries concerned could use, at least in the next two years, some more volume to build that economy of scale. That's probably right.

Okay, good. And then your pumping business or stimulation -- I forget exactly what you call it, chemicals and stimulation, had a flat revenue quarter. I'm just curious, how are margins in that business at this point? For the (multiple speakers)

They are embarrassingly good. They've always been very good. We're obviously not growing that business in the U.S. any more. We've stabilized pretty much where we want to be. I was asked early on about a question on pricing and the answer I gave covered also our small stimulation business. And there's not a lot to report, Dan.

The chemical side in that particular segment will grow. That's not your question, I understand, but they are combined together. The stimulation side, at least for the U.S. component, I don't think will grow very much any more. The international may, and that will be with a lag because equipment takes awhile to be moved around and things like that. There is equipment on the stimulation side which is being deployed in two particular markets, as we speak. But as we speak, Dan, it takes at least a couple of quarters. It's slow, but it is being deployed as we speak.

And Bernard, your international strategy there, more focused on organic CapEx or would you think about buying assets if they became available?

No, organic, really, Dan. I'm not saying we won't buy anything internationally, but certainly when it comes in the realm of stimulation, which for us is an interesting adjunct to what we do on and around either the Brownfield business -- let's just stick to the Brownfield business. On and around the Brownfield business, the important adjunct, we're very happy to have that competency in-house. We don't have any ambitions of acquiring anything in stimulation and things like that. So it is definitely organic.

Okay. That's helpful. Thank you.

Alan Laws, Merrill Lynch.

Let's see what I got left here. A couple of follow-ups. On Wireline, you talked about compact being some of the reasons here for most of -- a big reason for a lot of the growth. How are you doing in the other open hole in the LWD markets as far as penetration goes?

On the LWD side, it's not fast enough, but then again, the directional people remind me that it is very lumpy. There's a long sort of gestation period, and the contracts come in and then the mobilization should take place and so forth and so on. There is a significant gestation period, and if you take that into consideration, the other LWD penetration is excellent. But it is not as linear, if you will, in terms of speed of topline as I would like it to be. Then again, when you look forward, in the second half of the year and into 2008, I suspect that you'll find the other [beauty] performance excellent in terms of topline. So in other words, the gestation is we are living the gestation right now, so.

So Wireline could be like a growth story for you for 2008, then?

Most definitely. And so will the other -- other duty is not in Wireline, to be clear. It's in drilling services, but LWD and Wireline, one in the Wireline product line and the other duty included in drilling services together with the rest of directional underbalanced business. Both of them, Alan, if we -- if things work out the way we hope they will, they should be strong growth stories well into 2008.

I have a Canadian question as you probably could guess. I know we differ in our views on Canada, but I was just wondering what base assumptions are you now using for your Canadian business in terms of recount or spending levels there? Ultimately, are you worried about this torpedoing your North American base case for 2007?

No, I mean, look. We've lived with basically 20, 25% decline in Q4. 20, 25% decline in Q1. Q2 is really bad. At some point, you've got to loosen up on Canada. I mean what is going to frighten us at this point? Where do you want us to be psychologically in terms of pessimism to get frightened? No. I think we live with a very unfriendly market environment at Weatherford. We really have. We lived with a very poor Q4. My God, I mean, equally declining Q1, load-out Q2 is no good, and we don't expect much out of Q3.

However, you can't expect a market that has reasonable reservoir attributes including a large heavy oil segment to be bad forever. That's not sensible. And notwithstanding the trust issues, notwithstanding all the other issues in Canada, after doing what I can best describe as a heuristic review, I don't want to make it more analytical than it really is. So (inaudible) heuristic review of what's going on in Canada.

I do not know, Alan. If it is going to be Q4, it's going to be up year-on-year, but I sure as hell think it's going to be close to it.

Okay. So if you go into 2008 and first quarter isn't materially up from where it was this year, then that doesn't worry you at all?

No. I mean it is not -- as I said, it's a heuristic view. I will be surprised if Q1 of 2008 is not higher up versus Q1 in 2007. On the other hand, we have managed to keep the business in reasonably good shape in terms of performance. With Canada, there was far less than people expected, including us. I suspect we'll do just fine.

So you --

I think under those circumstances, Alan, Canada would probably look like it's about 5 to 7% of our business.

Yes, it's going to drop. It's going to -- in effect, it's going to be diluted over a period of time, which is not necessarily what I want, but it's going to be diluted over a period of time. Very quickly.

And the last part of that then is, have you made adjustments in your cost structure in that market?

Of course. Of course. Awhile ago.

Alright. Great answers. Thank you very much.

Daniel Henriques, Goldman Sachs.

My question is about your acquisition strategy. You haven't been very active the last -- recently. When you look at your pipeline of potential acquisitions, does it look more compelling or more attractive than it did in the past or no major change recently?

Daniel, it's such a broad question. The things that we are interested in do not seem to change very much. They remain the same. They're just not either easy to get done or available. It is true there are a lot of other things we could be interested in, and I think we haven't been in great measure because we had higher priorities. And so I suppose it is an issue return on time. You can't do everything at the same time. So the pipeline has been remarkably stable in terms of what we are interested in and perhaps it will remain that so it will be platonic, meaning nothing will happen if we can't get anything done.

And I do not spend that much time any more on sort of thinking through what we should or should not add because I do think we know. We just can't act very much [on] things. As to the speculative which we do not think about, I suppose that if I make an effort, I can think of all sorts of things. Daniel, we don't spend any time on it. I suspect it will remain the same for quite some time. We have just too much to do organically.

And another question, you talked earlier about pricing in North America. Can you talk a little bit about international pricing, general terms. Do you expect pricing power this year, international markets is similar to last year? A little bit better? A little bit worse? Just in general terms. And which divisions you think you get the most pricing power this year internationally?

Pricing power seems to be always -- the latter part of the question is the easiest one. Pricing power always seems to be, I think, more robust on the drilling side rather than the production side. There's always more violence on the drilling side in general and in all respects I think it's a fair answer.

You have to be careful that pricing -- when you look at pricing internationally, that you do a proper analytical job. As different regions have different requirements, different jobs have different capital commitments and so forth and so on. It's a duration. Some of the commitments are short duration; others are long duration. Obviously prices is also different. So you have to look at all these things.

I would say in the bird's eye view of pricing internationally, I would say that the environment is favorable. Pricing on a -- as fair of an analysis as I can provide -- is strong. Meaning it is moving up, not in a linear manner, but in a stepwise function project by project. It is moving up undeniably. Differences by region, but it is moving up.

I don't see any reason for it -- and I am referring now to things that are probably going to have an impact on the P&L in 2008, not 2007. So I don't have any reason to tell you it's going to be any different over the next three months, but it's a question you may want to ask me again as the quarters go by, because at some point it will plateau. I don't know when. So far it's showing no signs of weakening and the rate of pricing today is higher than it was certainly six, nine months ago in international markets. And it was good already then.

Which is another reason why some of the initial questions on what was going to happen to margins in international markets, I don't know when, but the direction is clear that they're playing catch-up in North America.

(multiple speakers) thank you.

Mike Urban, Deutsche Bank.

You addressed Canada a little bit and some of the steps you're taking there. It looks like you also made a few adjustments on the U.S. side. Are those headcount efficiencies? Have you moved capacity around either within the region or internationally or a little bit of all of those?

Michael, you're perceptive. Yes, we have made some adjustments, but it's really all of the above, so it's hard to make any dramatic statements. We have moved people and assets in different parts of the century. I would rather not say where and when for competitive reasons, but we have. We also moved a little bit of equipment selectively outside of the country, it's happening right now, but nothing dramatic. I actually -- I remain quite constructive on the U.S. and I hope I'm right. And so I don't think we need to make any further adjustments than we have.

And you did actually have a very good performance, all things considered given some of the weather issues and what have you. How much do you think that some of those issues, storms or well freeze-ups or whatever, how much do you think that cost you in the quarter?

I don't know, Michael. I'm very careful not to always blame the weather. I mean, in our business, we either have political upheaval or weather. And I mean there isn't a single quarter when I can't just go and say well, look at what's going on here, what's going on there. When I wrote my notes and I had to mention Orinoco, I did it with mixed emotions because there's always something, and the weather is always something. So I don't know, and to a degree, even if I did know I would not tell you, I think, because it would be probably -- it wouldn't do you justice because in second quarter we may have weather again, somewhere else. So it's difficult.

Well, then I'll throw a -- just to stir the pot a little bit, throw another sort of weather-related question at you. Warm winter in Europe, UK gas this week, any concerns about the North Sea environment?

It's interesting that we've had a very good quarter in the one-half (inaudible) I guess so many between the east and west, but the western part of the Eastern Hemisphere, which is if you can call it that, since we split the Eastern Hemisphere now into two entities, which is the European market, former Soviet Union, and Africa -- Sub-Sahara, Africa -- leaving Middle East, [South Africa], and Asia-PAC in the second half.

While in the western part of the Eastern Hemisphere, as you will observe, we've had an uncharacteristically strong quarter for the first quarter. But when you analyze, you find that where we are getting traction on the clients, from a client standpoint, is with the pullback of people like Exxon, for example, in the North Sea, partly because of gas. You find that we have done enormously well with a lot of the new players in that market. Call them independents, although many of them are large companies. And they were companies we never worked for before.

And I suspect that Q2 will show in that particular Eastern Hemisphere, Western Hemisphere, another very strong performance. In spite of our traditional clients, the large IOCs, who are staying on the side because of the warm winter and the gas situation in the UK. So, good question. I would normally say that, well, yes, it's holding us up, and I think we are -- we could have done even better with them, but we appear to have replaced the client base with a whole new list of smaller players. And from what I've seen through Q2, it looks very promising. So it's not a one-quarter phenomenon.

Great. Thank you.

Brad Handler, Wachovia Markets.

Could you -- I guess I'm going to open up a topic of capital spending. You mentioned increasing CapEx for this year to accommodate 2008, so just a couple of questions down that road. First, can you please just confirm that it has nothing to do with meeting 2007 growth prospects or is there some opportunity to accelerate?

It could not, Brad. The time it takes to get things done, even if I wanted to, it could not.

Fair enough. What areas are going to receive kind of the boost in capital spending? I probably know the answers here, but go ahead.

Probably the most important will be drilling services. Wireline also, but drilling services will be most important. It is actually spread rather evenly afterwards. Some of them have a lower capital intensity. For example, artificial lift does not carry a high capital intensity -- I mean, in terms of CapEx. Working capital, different story. Completion, ditto, do not have a high CapEx intensity. Working capital, again, is almost the opposite. There's a sort of balancing aspect. But still, I think those are the top two -- drilling services and Wireline.

Fair enough. To the extent that you are willing to comment, obviously you're consistent with the message about longer-term growth prospects, so it's not an unusual thing, but to what extent are you telling us about potential growth rates not in those two markets, but more generally perhaps for 2008?

I think I have a much better handle on this in Q2 because I have a very good handle then on the rate topline in the second half of the year in those markets. And at the same time, I have an idea, based on that, on where 2008 growth rates will be. Why? It really has everything to do with operating execution, which is how on-time will we be on startups of a number of different things, and therefore, how much more can we add in 2008? So I can't tell you now. What I will tell you is that 2008, in international markets, will be a good year. There's no doubt about that.

Fair enough. And then just one more sort of nitty-gritty on it. To what degree are you actually sort of adding to footprint in terms of manufacturing capacity versus just kind of ramping up the rate of processing new tools, et cetera?

Doing both. We are adding in a few areas some manufacturing capabilities. We are also pushing the utilization in the existing facilities on the service based side. It's a little bit the same. There are perhaps half a dozen new bases being built on and around the existing bases simply because of throughput. Nothing dramatic, but you're having some of that. So all of the above. I suspect that if you ask me the same question in two or three quarters, I'll give you the same answer. It's a continuous process.

Fair enough. Okay, thanks. Very helpful, guys.

Thank you. You want one last question, Andy?

I think one last question and then we've got to let everybody go.

Then we'll let everyone go.

Jim Crandell, Lehman Brothers.

Hi Bernard and Andy. I think the most impressive thing that I heard today and what I've been hearing here recently, Bernard, has been these multi-hundred million dollar contracts that combine your underbalanced drilling expertise with LWD and other services you provide. I guess, in that context, is the critical ingredient underbalanced drilling? And are these jobs that you're still sort of selling to the customer underbalanced or do they all fully understand the benefits of underbalanced and they're coming to you and wanting to drill them underbalanced. And thus, you're able to package your sort of LWD, MWD services and other downware hardware and tools you provide into that?

Fair amount of debate on that particular question internally and I'm not sure that everyone agrees with what I'm going to say, internally.

If you take the four different clients, four different projects, I can think of -- I'm thinking right now -- three out of the four incidences where the underbalanced -- and I say underbalanced in a global sense, there are many different applications depending on the purpose of the client -- I can think of three out of the four cases where I believe that the perceived expertise in managed pressure drilling, control pressure drilling underbalanced was quite critical.

Now, I think that two other opinions over here, which is to say that in all three countries, there is a strong infrastructure and strong client intimacy which is why, people will tell you played a greater role than I'm giving them credit. And then there is the perception that because in at least two of the applications, the downhole conditions on the directional tools will be tough, meaning pressures and so far in temperatures, where the quality of what we have from a technology standpoint directionally, is really, when it comes to anything that is a little bit demanding, is the best in the industry, where that's really what sold the project.

So there are different views. My view is that, again, three of four, it was probably the most important factor, but then again, other people have different views over here. One thing is for sure. I don't think it's our project management skills per se that sold these clients because we haven't demonstrated it yet. Probably the most important thing for us, our closer to that thought, is to establish that we are responsible, efficient project management people. And again, to make sure that everyone understands, there is no turnkey attributes to any of this. It just -- it's the issue of scheduling, coordinating and delivery; delivering efficient downhole performance.

But is it going to be important, even critical, that the underbalanced and LWD or rotary steerable services come from the same company?

Yes. Yes.

Because the integration of information, and doesn't that give you, to the extent that underbalanced penetrates the market or managed pressure drilling pressures penetrates the market to a much greater extent, given your overwhelming marketshare and underbalanced, doesn't that give you a --

How can I disagree with you, Jim? I believe this to be absolutely true. Yes. Absolutely. That's correct.

Second question. Your biggest competitor said on their conference call, I think that they expect kind of a plateauing in their international business or, at the very least, their Saudi Arabia business. Or maybe not even a plateau, but maybe even a slowing of growth until the new offshore rigs come on, particularly deepwater rigs. Do you sort of see a slowing of growth sometime, Bernard, as you maybe get into 2008 internationally and then a reacceleration as these rigs come on?

I think country by country you will have evolutions like this of rapid growth plateauing and then another startup, if that is necessary. That is generally not an unusual evolution for market. However, I -- in the Eastern Hemisphere markets in general, overall, and I'm saying, I'm speaking now through the end of 2008, it's too early to say anything else beyond other than sort of theoretically. I do not, I do not see a plateauing of anything. It is true in the case of Saudi Arabia. It is this A market that on the land rig side, until we'll be added some offshore rigs pursuing gas.

It is true that the rate of acceleration in Saudi will diminish. Paradoxically, in our case, it probably will not, as some of the applications that we are adding there are late in coming, but in general, that's true of the market overall, which is it will plateau sometime in 2008 and then start up again with the offshore segment. But then again, Jim, there are a dozen other markets in the Eastern Hemisphere that have a different -- are on a different timeline. And I don't think you should draw a conclusion. I really don't think you should draw a conclusion as to the Eastern Hemisphere outlook at all. It would be completely wrong. Very strong through 2008 and frankly, just like one of my larger and larger peers, and I don't know which it was, the one you were referring to now; maybe it's the same peer or a different peer, but it's just like one of our larger peers.

It is hard not to -- it's hard to be anything but optimistic, and I think even a bit more than that, on the prognosis for the international market, particularly the East, for a very long time, Jim. But not all from the same country. Now all from the same country.

Switching topics, Bernard, when is your last U.S. stimulation equipment delivered in the U.S.? And given that your strategy has been to sort of enter the market and come 20, 25% under the market with your equipment, as you are pricing one-year rollovers on contracts with these customers that you -- that signed you up when you got into the business, what do you think the most likely outlook for those contract rollovers in an overall weakening market is? Since you're so far under the market, will you be able to keep yourself flat?

Of course, Jim, I would argue, we're not so much under the market, but I'll leave that aside for a one-on-one conversation. What I can say about stimulation market is that our stimulation business is at, I think, two things. I think [this is] small. Second of all, it's in our focus, the international market. And then thirdly, best I can tell and this is to be expected, it's got a very low-cost structure. Exceedingly low. Partly because it's brand-new, partly because it's homogenized, the same equipment, and partly because of the benefits from the infrastructure Weatherford in North America, with very little sort of infrastructure of its own.

So I think it's extraordinarily efficient from a cost structure standpoint. The rest of the focus is on the international markets, and that's just sort of it. And I'm going to skip the rest of the questions with your permission.

Okay. Andy, why -- what surprised me was the lower tax rate of 24%, and the expectation it will continue. Can you talk to that a minute?

Yes, that was good work from our tax group in terms of planning. We had some benefits that rolled in that will appreciate over the -- that we will recognize over the rest of the year in terms of those planning implementations. And also it will depend on mix. So we think 24 is very good and solid for the rest of the year. It will be up and down by quarter depending on where we are making our money. But we feel very good about that.

And last question, I think your geographic group that included Asia and the Middle East, I think quarter to quarter revenues were down [$15] million and operating income was down [$15] million. I understand the shipment issue with the seasonality and that's always the case, but why was operating income down as much as revenue?

We had 4 million of deferred revenue that we all recognized full cost for. And also, we had about $6 million in terms of personnel related cost that I referred to in my comments. And those are just --

The biggest item, Jim. The other thing also that we mentioned in our comments, so many things were mentioned just to help, is that on a topline standpoint, quarter on quarter, [Milli, North] Africa was kind of flat, and then the brunt of the decline was Asia-Pacific. But just (inaudible), this is just work, just your knowing. It was mentioned in the comments also. That's not the operating income. That's the topline.

Thank you.

Jim, thanks so much. Alright, I think with that, we're going to end and we will be around today obviously for any follow-up questions.

Thank you very much.

Thank you very much, sir. And thank you ladies and gentlemen, for your participation in today's conference call. This concludes your presentation and you may now disconnect. Have a good day.