Weatherford International PLC (WFRD) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Weatherford second-quarter 2007 earnings conference call. My name is Lauren, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Bernard Duroc-Danner, Chairman and CEO.

Thank you. Good morning. As usual, Andy will read his prepared comments, and I will do the same and we will go to Q&A. Andy?

Good morning. For our second quarter of 2007, we report fully diluted earnings of $0.68 per share before non-recurring items. Our Eastern Hemisphere business continued on its steep growth trajectory, well on our way to meeting our 40% year-on-year revenue growth expectations. North America, on the other hand, pulled back hard due to decreased activity in Canada.

Before moving on to detailed commentary, we should take note of three items. One, our $0.68 excludes an after-tax charge of $9 million related principally to severance charges. Two, our reported number excludes an after-tax loss of $11 million related to the discontinuance of E&P operations. And three, we incurred a onetime withholding tax of $50 million on intercompany capital movements aimed at lowering our after-tax cost of capital. We will achieve an 18-month payback on this plan.

EPS comparison. At $0.68 earnings per share are down 18% sequentially from $0.83 and stand 28% above Q2 of 2006. The consequential drop of $0.15 was comprised of the following -- $0.18 of sequential decline from the field and $0.03 of improvement due to a lower tax rate. The effective rate for the quarter was 20% or 400 basis points below prior guidance due to geographic mix and more effective tax planning. You should expect our rate for the remainder of 2007 and for 2008 to stay between 20 and 21%.

Finally, nonoperational items other than taxes were flat with the prior quarter with increases in interest expense and other expense offset by lower corporate expense.

Operating performance. Consolidated overview. On a consolidated basis, revenue declined $36 million sequentially or 2%. North America, which accounted for 49% of total revenue, was down $123 million. While the average US rig count grew 1%, Canadian rig activity fell 72% from Q1 levels. At an average of 144 rigs, Canadian activity reached a level not seen since Q2 2002.

In the US drilling services, wireline, lift, completion and chemicals and stimulation all posted strong revenue gains. Revenue in Latin America increased $1 million despite reduced activity in Orinoco's heavy oil projects. As expected our Eastern Hemisphere operations excelled this quarter. Revenue grew 13.5% sequentially or $86 million on a 3% increase in rig activity. All product lines grew. Their performance was exceptional.

Consolidated EBIT before corporate, equity and earnings and R&D was $404 million, down $83 million with operating margins at 22.2%. This 410 basis point decline from Q1 is attributable to severe decrementals in Canada. Lower cost absorption on reduced activity in Orinoco did not help, given our high marketshares in this basin.

Operating margins in the Eastern Hemisphere increased 120 basis points to 22.8% on 32% incrementals. These are the highest margins reported out of the Eastern Hemisphere in the last six quarters.

Geographic performance. Financial performance within our four geographic regions was as follows. North America, 49% of total revenue. Revenue fell $123 million or 12% on a 16% decline in rig count. For prospective last year revenue fell 9% sequentially on a 12% rig count decline. EBIT was $192 million, down $108 million. Margins were 21.8%. The violent and sustained pullback in Canada produced fierce decrementals.

Revenue fell across virtually all product lines with chemicals and stimulation being a notable exception. As a reminder, we do not participate in the stimulation market in Canada.

Middle East, North Africa, Asia Pacific, 24% of total revenue. Revenue rose $41 million or 10%. EBIT was $97 million, up $14 million. Margins rose 120 basis points to 22.3% on incrementals of 33.3%. Countries that showed particular strength included Oman, India, Saudi Arabia, Algeria, UAE, Yemen, China, Indonesia and Malaysia. Drilling services, lift, completion and drilling tools all posted substantial improvements.

Europe/CIS/West Africa, 16% of total revenue. Revenue grew $46 million or 19%. EBIT was $69 million, up $14 million. Margins grew to 23.7%, a 130 basis point improvement on incrementals of 30.7%.

The Caspian, Russia, West Africa, the UK and Eastern Europe all showed strong activity improvements. Every product line grew revenue with drilling services, wireline, completion and drilling tools as the largest gainers. Latin America 11% of total revenue. Revenue was essentially flat. EBIT was $46 million, down $3 million with margins at 22.1%. Product mix and absorption inefficiencies resulted in 150 basis points of margin decline.

Gains in Argentina and Columbia were more than offset by reduced activity in Orinoco and Brazil, contract timing and startups. Drilling services, lift and well construction performed well.

Cash and capital, cash flow. During Q2 we generated EBITDA of $485 million with D&A running at $145 million. Operating working capital, A/R plus inventory less A/P consumed $222 million of cash with inventories up $143 million in preparation for substantial growth in the second half of 2007. Foreign currency fluctuations alone increased inventories and receivables by $44 million. Even in the context of aggressive growth expectations, we are not satisfied with our working capital performance and continue our work to improve.

As a reminder, our goal is to be at 110 days of working capital by the end of Q4.

After deducting interest expense and cash taxes, operating cash flow was $147 million for the quarter. In the second half of 2007, we expect free cash flow after CapEx to be approximately $350 million.

Capital expenditures. Capital expenditures were $313 million for the quarter, net of lost and whole revenue. We project total capital expenditures for 2007 at approximately $1.2 billion.

Beyond CapEx, we invested $490 million in seven acquisitions during Q2. Bernard will address the largest transaction in his commentary. The remaining six targets are technology focused and are spread globally. The results of the largest transaction will run through the equity and earnings line. The others will contribute approximately $10 million per quarter to revenue in the second half of 2007 with de minimis accretion for the year.

In 2008 the combined impact of all seven transactions will be approximately $0.10 of incremental earnings per share.

Capital structure. As of June 30, 2007, a ratio of net debt to net capitalization stood at 32.8% with total debt at $3.3 billion. Cash balances totaled $116 million at quarter end.

Guidance. Bernard will cover our operational outlook in his comments. I have the following updates for you for 2007 nonoperational items.

Tax rate. Our tax rate will run between 20 and 21% on average for the entire year, but you should expect variations from quarter to quarter. Geographic earnings mix and continued planning activities have allowed us to steadily reduce our estimated rate.

Two, net interest expense. Net interest expense should run at $160 million for the year, leaving $45 million per quarter for the remainder of the year.

Three, incentive awards. We expect to grant meaningful incentive awards to field level personnel during Q3. We expect the expense associated with this grant to be approximately $50 million on an annualized basis.

Share count. We exited the quarter at 337.7 million basic shares outstanding and 347.4 million fully diluted shares outstanding.

I will now hand the call over to Bernard.

Thank you, Andy. Q2 was as we expected, a tale of two hemispheres. The Western Hemisphere revenues declined 123 million, driven by Canada's extraordinarily low level of activity. The operating income decrementals associated with the broad decline were a very high 87%. In sharp contrast, the Eastern Hemisphere added $86 million of revenues in the quarter, growing sequentially by 13.5% and year-on-year by 40% EBIT, which I suspect will be the industry's highest performance amongst our peers.

The growth was broad-based across all product lines, and the EBIT incrementals were a strong 32%. Still the Eastern Hemisphere could not overcome in Q2 the one-time broad decline in Canadian markets, not with the high exposure Weatherford has. The Canadian market was affected by an almost perfect storm combination of seasonal downturn, unforgiving weather, rain, client tactics and the recent change in tax laws. Rig count was down 72% sequentially and 51% year on year. The level of activity was identical to Q2 2002 and only about 43 rigs above 1999 levels which defies the imagination.

Weatherford has a higher Canadian exposure than any of its peers on and around heavy oil -- this is historic fact -- and in the aftermath of the Precision acquisition. It is fair to expect we would be the most affected amongst our peers by that's market contraction, and we were very affected.

To give you perspective, let me remind you of some historical data. In Q1 of 2006 -- this was only 15 months ago -- Canada represented about 25% of Weatherford's total business. By Q1 of '07, that number had dropped to high-teens. In this quarter the Canadian exposure was pushed down into single digits, a combination of Canadian market decline and Eastern Hemisphere growth.

Associated decrementals were predictably very high, which is traditionally the case by a combination of two factors. Obviously no fixed cost absorptions, but also seasonal repairs and maintenance.

On the latter, we did attempt in the short 90 days of the quarter to extensively zero time and whenever possible upgrade our tool and equipment fleet in that market as best we can.

The US concurrently did remarkably well, posting another quarter of good sequential growth in spite of its unfavorable weather patterns and a meager 1% sequential rig count increase. The US had particularly solid growth in lift, completion, directional and chemical stimulation service lines. Latin America was flat. The primarily mover was Venezuela Orinoco for us, which was very weak for obvious political reasons. We have a dominant share in Orinoco for a number of product lines. It is a really heavy oil.

The other factor in this quarter was usual noise associated with contract timing, which is about to reverse itself. The prognosis for Latin America is very strong.

The Eastern Hemisphere was very strong across the board. The sequential 13.5 growth rate was split between a quantum 19% even performance out of the European/West Africa/CIS/Africa region and a strong 10% performance out of the Middle East/Asia region.

Russia, West Africa, Caspian and the UK drove 19% sequential growth for the European/West Africa/CIS region. China, Oman, Algeria, India and Abu Dhabi drove the 10% sequential growth for the Middle East/Asian region. Our product lines showed strong growth, including services which it directional, and the balance was the fastest-growing product line. Completion, lift and wireline showed the next greatest improvements in the Hemisphere.

Year-on-year comparisons paint an almost exclusively international picture. Q2 on Q2 12 months growth was indeed overwhelmingly international. Q2 2007 on Q2 2006 Eastern Hemisphere was up exactly 40%, adding $206 million in revenues. Latin America was up 16, and international as a whole was up 33.5%, adding year-on-year $234 million in revenues or almost $1 billion annualized.

The Company's regions, Europe/West Africa/CIS, was up 42% versus a 3% underlying rig count decline and had the highest year-on-year growth rate companywide. A close runner-up, Middle East, North Africa, Asia was up 38% versus the 12% underlying rig count increase. By comparison, North America was up only 5% year on year, still a decent performance growth-wise in the US making up for the substantial Canadian declines.

In the same time period, North American rig count was down 1% year on year.

And, as Andy mentioned, in the quarter the Company's geographic rig count was as follows -- North America 48.6, international 51.4. For the first time posted Precision acquisition international revenues eclipsed the North American revenues.

Forward news. First, North America. Two comments. The trailing 12 months has been for our shareholders of understandable concern as to the direction and impact of the Canadian market on our Company. I would suggest the concern has no further reason for being.

We reached in Q2 what strikes us as an unsustainable and perhaps unreasonable trough in activity. Canada will turn. We are constructive on the latter part of the year and 2008. Oil, heavy oil and (inaudible) segment will drive the market recovery. In fact, we would expect to Q4 or Q1 '08 latest to show higher year-on-year statistics.

Two, we remain constructive on the US market. The productivity limitations of the US reservoir base support a middleground scenario of healthy single digit growth to the market, particularly in certain classes of product lines.

In addition, for Weatherford specifically there is organic growth to be had still in drilling services, wireline, ESP, sand control and chemicals. All have proprietary technology and all growing with small marketshares.

Forward outlook for our international business is very strong and essentially unchanged. As for the opening paragraphs of my comments, the trailing 12 months growth in the international segment was 40% in Eastern Hemisphere and 16 in Latin America, which translates into 33.5 international markets as a whole. That is the historical performance trailing 12 months.

Looking forward and setting aside both the recovery in Canada and decent prospects for the US, growth in 2007, 2008 and 2009 will primarily come out of the international market. Year-on-year in 2007 we expect a growth of 40% in the Eastern Hemisphere and 25 in Latin America versus 2006. That has not changed. It has not changed since the beginning of the year. Both numbers add up to a weighted average 36% growth for Weatherford International segments in 2007.

In the Eastern Hemisphere, we expect North Africa, Russia, Middle East, sub-Sahara Africa, China and Central Europe to show the greatest growth year on year. In Latin America we expect Mexico, Brazil and Argentina to show the greatest growth year on year. The growth rates in Latin America for the next 18 months should be strong.

Setting the geographic aside, I will take you through the quarterly performance of our 10 service product lines. The product lines as usual are ranked in size from largest to smallest. Artificial lift, $309.1 million. Well construction, $293.1 million. Drilling services, $281.3 million. Drilling tools, $217.2 million. Completion systems, $195.3 million. Re-entry finishing, $144.1 million. Wireline, $128.7 million. Chemicals and stimulation, $124.4 million. Integrated drilling, $87.2 million. And then pipeline, $35.5 million.

As a comment on the ups and downs of the product line sequentially which you can compute for yourself is remarkable that drilling services, completion and lift grew companywide in spite of Canada where they all have large presence of market share. Ex-Canada, which is the most meaningful metric, all product lines grew at Weatherford. There is no exception. The highest dollar growth experienced by drilling services, directional and underbalance, which is up 14%, artificial lift up 12.6% and completion systems up 14.3%. Drilling services had an outstanding quarter as did completion, no doubt. The growth in PCP and ESP drove lifts over performance.

In the quarter to quarter, we started off our first two management projects in North Africa and China. We expect in 12 months to be running five projects concurrently.

Two other items. We discontinued an E&P operation and will divest of the assets. The C&P initiative started two years ago had a primary R&D purpose that was complementary to proving out recent technologies. It has run its course, and we have identified more efficient substitutes to progress new technology development. I might add that the capital invested is modest in our discontinued operation.

Second, we were uncharacteristically active on the acquisition front this quarter. For the past two years, we have been exceptionally dormant in the acquisition realm. This quarter seven transactions were completed for a total of $490 million. Seven of seven were modest in size and essentially technology driven, covering a wide spectrum of product lines from optimization software to pipeline. Four were in the West, and two were in the East. The seventh investment was more material.

Late in the quarter we closed on the acquisition of a 33% stake in the Russian company, Borets. Borets is the world's largest ESP manufacturer by volume and the third-largest in the world by value with an extensive industrial and service infrastructure. The Company operates eight large engineering, manufacturing and service bases throughout the Russian oilpatch. Borets was founded in 1897 -- I did say 18 -- 1897. It was the first company in Russia to design and manufacture submersible pumps in 1952. Although Borets will be held as an equity investment, there will be close cooperation between the two companies.

Now withstanding this quarter's investments, you should not expect Weatherford to be particularly acquisitive. The relevance of acquisitions depends entirely on circumstances that may or may not occur. Aside from Precision almost two years ago, acquisitions have not been a meaningful factor in our financial and operating performance.

Taking an overall view of 2007, we are likely to invest about $1.2 billion in CapEx or at about Q2's level. In addition, we are already well advanced in finding our 2008 CapEx. Given the scale and quality of the organic growth opportunities in 2007/ 2008, investments in organic growth are the priority. We estimate an after-tax return on organic growth of between 25 and 30% per annum.

We bought 1 million shares in Q2 at an average price of $55.45 per share. We have another $272 million left under our $1 billion share repurchase plan, and we do expect a renewed commitment once this program is completed.

In summary, we are executing the 2007 growth plan. We're laying at the same time the seeds for 2008 and 2009. We have consistently believed that what is unfolding in the oilfield service and equipment markets is a very long secular growth trend that mirrors three things. The acceleration of decline rates is one. Non-OECD demography and non-OECD GNP per capita wealth effects. We are confident in our growth prognosis for the international market. We are constructive on the prognosis of the US market, and we expect a reversal of trends in the Canadian markets effective now.

That concludes my prepared comments. Operator, could you please open the question and answer period.

(OPERATOR INSTRUCTIONS). Bill Herbert, Simmons & Co.

A quick question on Borets. Largest ESP player in Russia. What kind of exporting can build, if you will, do you plan for Borets vis-a-vis your ESP endeavors outside of Russia?

One of the strengths of Borets is its engineering and manufacturing. They have very large-scale. In fact, one of the pricing facts is that from a volume standpoint, the best of our assessments are Borets manufactures a bit more than twice the level of its largest Western competitor. So they have very, very large manufacturing infrastructure, and it is not unreasonable to expect us to work with them in order to accelerate, facilitate the manufacturing of ESPs for the international markets whether their design or our design.

Okay. Secondly, with respect to Latin America, you prophesied a relatively vigorous second half of the year, yet Orinoco was one of the main reasons why the sequential performance was subdued. Give us some color with regard to the second half of the year in Latin America? Does Orinoco come back from your standpoint, or is that growth attained notwithstanding a continued sluggish Orinoco?

My comments are ex-Venezuela. So the growth will come from Mexico, Brazil, Argentina, Colombia and Ecuador. It is very, very widespread. I cannot say anything reliable on Venezuela.

Okay. And then thirdly I thought one of the singular revelations, if you will, from last quarter was the degree of success that you were having with respect to the project management business. I think last quarter we talked about something along the lines of $500 million worth of contracts to be realized over two years. Any incremental contract wins on that front, if you will?

There are -- there are two more contracts that have been essentially completed, making it four. There is another two which are pending whose timing is hard to pinpoint exactly. I know the map suggests there are six, but we expect perhaps in the year that one will drop off. Perhaps the number five we gave is just a little bit cautious.

Okay. And can you give us any sense with respect to dollar magnitude from an incremental standpoint and where these projects might be located?

Projects located altogether North Africa and Asia still remains the focal area. The dollar amount would be closer to 750 than what we said previously.

Okay. So it's 500 -- so it's $750 million in total including the last two that you talked about last quarter?

Close enough.

Kurt Hallead, RBC Capital Markets.

Bernard, it sounds like your international expectations are pretty consistent with what you have been talking about in the middle of last year, so I guess that is definitely a good thing. Nothing has really slowed down there.

Can you give us some additional color on what you think the differential growth region may be? For example, in your Middle East, North Africa region, I think there has been some talk about the ability to maybe triple that business in the next couple of years. Can you give us some color around that?

In general, what drives the growth not only in North Africa, Middle East but also on the other European and former Soviet Union and sub-Sahara African types is the same thing. It's a combination of infrastructure which preexisted what we acquired from Precision and the introduction of directional, wireline, pushing of underbalanced and in all the other young technologies at Weatherford. So we did not have the seeding from a product line standpoint two years that we're trying to get right now.

So you're getting good traction, and you will for a couple more years, probably disproportionately so. So all that is going on, and the execution appears to be good.

And yes, you are right. The expectations that we set out more than a year ago have been fulfilled, and the expectations we lay out for the next 18 months are the same. And so I think you should expect us to be also consistent in our performance. But it is nothing more than execution. There is nothing new as to what is the engine of the growth. (multiple speakers)

Sorry, Bernard, but some of the questions that I have had just maybe related to that, the prospect of growing the business in that region to that extent would far surpass all of the other bigger players that you compete with in that region. And so I was just wondering if there was some additional color you may be able to provide as to how you can -- you've provided some of it. Now the other element is, is it all existing relationships? Is it new relationships? Is it just a function of the relationships plus the expansion of the investment programs in these countries?

I think it is all of that. I think you start from, first of all, from a lower base of business, a low base of market share in a number of service lines. That is number one.

Number two, you do have existing relationships in some of the legacy services and product lines of Weatherford that have been doing very well in those countries for a long time. So it is a combination of both. And I don't think it goes on forever. Differential in growth rates between Weatherford and its larger competitors will not go on forever. It cannot.

But I do think you have got a period of time during which if we have good execution -- and I insist this is the key risk factor, it is not the marketplace, it is execution. If you have a good execution, you should be able to grow in those markets at a higher rate than your larger competitors. I mean for a while it stands to reason, and then beyond that, you should probably sort of look more comparable.

Right. Now one other thing, it probably does not impact you, but I wanted to check anyway is, some discussion on the Schlumberger call last week about some pricing issues in Western Siberia and pressure pumping as a lot of North American companies try to move some assets. Is there any effect on your business in some of your other product lines in the international markets that are going to impact your incremental margins or pricing ability?

No, actually it is quite -- I mean I cannot comment on stimulation on pressure pumping in Western Siberia because we are not in that business. (multiple speakers).

What I will say is that I think we're more constructive on the outlook for Russia than we have ever been. We have always been cautious about that market, and we remain cautious. But we are more constructive about it than we have ever been. That is one.

And I'm taking pricing into consideration. Two, pricing in general in the Eastern Hemisphere is wrong strong. This is a view which is across all service lines. Obviously there are differences by country, by market, by service lines, but it is strong. It is not decelerating. In other words, the rate of increase is very encouraging.

It is not the case in North America obviously. The clearer the case in the Eastern Hemisphere -- and you should expect this again for the next two or three years for no other reason that when a market grows, and these are tracked suppliers, and the suppliers need to broaden their infrastructure, add people, train people, bring equipment, etc., it is not easy. This is not a context in which pricing ought to weaken. It is not natural.

Jim Crandell, Lehman Brothers.

Bernard, what are the core competencies you think the most critical core competencies that you would have that a) are allowing you to win these integrated management contracts internationally? And secondly, what are the core competencies that you would bring to the table to have a customer choose you instead of perhaps the competitor?

I will try to answer on the latter. On the former, I think in general it's a combination of directional, underbalanced and completion. Those three together seem to be terribly important. The rest is useful but not quite as useful. I do think also at times the ability to either manage land rigs or bring land rigs, not always Euro land rigs but the ability to manage is also terribly important. It is a combination of all of these things that seem to make a difference. And not to belabor the point on infrastructure, but adding the fact that you have larger basins that can either be easily expanded incrementally or just don't need to be expanded because they are large enough and they are close to the field. All these are the ingredients that make for successful project management.

With respect to why does the client choose us as opposed to our peers? I think there is a lot of interest on and around the market for [NOC] clients in particular in different degrees of project management. It is not all the same. There is enough interest in it, and I think there's room for everyone to do well. So I'm not sure that we're crowding anyone out. I think we're just doing what the clients are asking us to do. I don't get a sense that it is a terribly competitive process, meaning there is enough work for everyone.

Okay. The second question I had Bernard is, what would you consider to be the most significant technology development for Weatherford in 2007?

Solid expandables.

Okay. Can you summarize what is going on now in that market? (multiple speakers)

I cannot tell you too much, except to say that we have been doing some live applications for solid expandables, and it has been a long time. So it is not like we have not worked on it diligently, but it has been a long time. But we're doing field, live well installations and solid expandables in a number of places around the world, and they are very successful.

And so I think in total it opens up marketwide in 2008, and so far it is very encouraging. That would be the single most important. There are others, of course.

Okay. And the last question is an operational one. What gives you -- you seem to be extraordinarily confident that Canada will be above last year's level if not by Q1 '08 then Q4 '07. What is it specifically that gives you the confidence in that outlook?

I think actually the oil and the heavy oil segments where our sense is that activity will be disproportionately strong. The gas is -- you're absolutely right if that is sort of implicit in your question. The gas is more uncertain as it depends really on the gas market in North America in general. However, the reservoirs whether the deep gas or the shallow gas, the reservoirs that are unattended show decline in productivity and in production rates. It is not tenable. You don't have a long-term viable solution without working the gas side.

So I think the worse we could be is maybe off by a quarter or so, maybe two quarters. That is the worst we could be, and I don't think that is going to happen. I really don't.

Okay. And I guess one more quick question is that your US revenues seem to be quite good despite what were some heavy rains in the Texas/Oklahoma area in June? Any sense as to how much that impacted your business and comments on the US business in general being pretty good relative to the activity that is going on out there?

You're absolutely right. June for the US is no good in simple terms. It is probably -- I am not sure how much topline it cost us. It is hard to tell, Jim, but I would say probably in the range of 20 to $30 million in topline. I don't know that. That is just a guess.

But otherwise, if you look at just April and May, it was remarkable to see that Canadian numbers come in and predictably being as challenging as they were, it is remarkable to see just south of the border how well the United States was doing.

So US is doing well in a sort of gradual incremental building up on some few service lines type of business with decent incrementals and so very predictable, and that is very encouraging notwithstanding the weather.

Robin Shoemaker, Bear Stearns.

Just actually following up one of Jim's questions was about young -- or early stage technologies, and you mentioned solid expandables. I wonder if you could say where on your kind of emphasis list you have got drilling with casings?

Just right behind it.

Okay.

Right behind it. In a sense drilling with casings, underbalanced, solid expandables, they are all tied either for drilling (inaudible) mitigation, which is one field of application, meaning drilling wells with less problems, and wells we're drilling today are more prone to problems, drilling problems. Or putting all these technologies together for the purpose of handling the issue of reservoir productivity at the sand phase.

They are all tied from an application standpoint. So yes, (inaudible) drilling with casings is right behind solid expandables. And it is not so much a sort of ranking with an allocation of capital. It is just where we see the breakthroughs taking place. So maybe in a couple of quarters if I am asked the same question, I will mention DwC as being the number one.

Okay. And so that is still principally two competitors, yourself and another competitor in that arena? And is the market share roughly -- how does --?

It is meaningless (inaudible) so young. First, we don't look at -- we don't view the other company as a competitor. We view them in a sense as a colleague in the development of something that could be terribly important to the industry. At this stage you have to -- I mean we hope that we continue to dedicate R&D efforts and so forth in developing their version of the technology. We really do. I would hate to do it by ourselves, so they are most welcome.

I mean in five years, if DWC becomes something of great industry importance, there will be time to talk about competitors and marketshares. Not today. Today we are really in our mind -- maybe they view it differently -- we are colleagues.

Okay. One final question. On Canada, what you were implying is that probably the winter season coming up is the first sign of a rebound or would you say possibly sooner?

I think you can just observe the numbers. I think Q3, Q3 in Canada appears to be decent. I do not know if Q4 will be up year on year. It might. It has a fighting chance. It really depends on the gas side.

The oil, the heavy oil will be very robust I can tell you that. And if Q4 is not up year on year, I will -- I'm sort of again reasonably, reasonably sure that Q1 will be up year on year. But we should not be obsessive about the up year on year. It is the same marker.

The truth is the prognosis of Canada is a constructive one. That market will do well. A lot of the factors that were hurting the Canadian markets are behind us. So I think what you have is degrees of recovery.

And that is sort of the choice is, the choice that you have is either recovery which is healthy or recovery which is very strong. The is sort of the deltas you have. So either one are fine.

Geoff Kieburtz, Citigroup.

A couple of follow-up questions. We will stick with Canada for a moment. With the reduction in revenue to single digits as a total part, how much is heavy oil and oil related of your Canadian business now?

It is a moving target. But I would think that 60% and moving up would be the percentage at this point. Or put another way I would expect Q3 it to be 60% and up, maybe two-thirds.

Right. And in the recovery that you foresee, is it going to be driven by expansion of that business, or are you counting as well on a recovery in the gas-related business?

I think it is really oil. That is the one that I feel very confident on. There is enough to sustain the assertion we made on being constructive. Yes, but I think the gas would be, no disrespect, the icing on the cake. I mean there is a difference between as I said a market which is healthy, a market which is very strong, and I think gas becomes the delta.

Got you. And then on the project management contracts, it sounds from what you described earlier that these are all really well construction related projects. Is that correct?

There are two types. You have the re-entry brownfield projects, and then you have either step-out or greenfield projects. And they are really quite distinct. I would say that although things are not pinned and finished quite yet, but I would say when we -- if the number of five projects on management are underway a year from today proves out to be correct, I would guess that three are brownfields and two are greenfields or step-outs, major step-outs.

Okay. And does that make a difference in terms of profitability of the --?

No, not really. Not really. Not really. I'm just giving you -- I mean obviously the brownfields you're greenside vertical wellbores and doing a series of multilaterals, etc. No, not really.

You threw out a number of around $750 million. I assume that was sort of an approximate revenue scale of supply projects?

That is absolutely correct. I would take it with a grain of salt because the numbers are moving.

But in that, I mean how much of that 750 is going to be related to Weatherford content as opposed to --?

That is 100%. The final numbers may be different, but there will be some pass-through there. That is just what comes back to us. The rest is really noise, but a good question.

Okay. So we could see more than 750?

That is correct. But it would not necessarily imply that we have gotten more business. Because what you really want to ask then how much of it is pass-through. Always an important question.

It is Andy. On the first two contracts, there's no pass-through. On the next several that we look at, if there ends up being pass-through, we will keep you guys posted so you can understand any kind of differentiation of margins.

Yes, and there will be pass-through on the others. Yes.

And then just finally, as a broad question specific to Canada, but I would be interested in your response on a kind of global scale as well. Where do you feel like you are in terms of cost management? I mean you have had various projects underway at different times in regards to improving supply chain costs and so on. Could you just give us a status report of where you feel you are right now?

I feel I'm still in the first third of what I have to do. Part of the problem in feeling that we are efficient in that sort of thing, is that it's a terribly difficult to do in a high-growth environment. In a sense where when you grow as much as we are trying to grow, it is the antithesis of being efficient. It is the nature of the beast.

From a supply chain meaning manufacturing and from a procurement standpoint, as Andy was alluding to from a working capital management standpoint, on all of them I think we feel we have by two (inaudible), we have either we can tell you that we are -- we think we have a lot of work to get done still, and there's a big emphasis on it. On the other side of the coin is I suppose you would say we have upside and we do.

The biggest emphasis I think today is really on and around manufacturing. Meaning shortening the delivery dates, lowering the cost structure, these sorts of things, and that is actually well underway.

Do you see anything of a step change nature in the next sort of four or five quarters, or is this just going to be --?

No, no, no, no. I would never have mentioned anything. If you find that at some point the margins look a little bit better than you expect it, it may well be that some of it has to do with manufacturing improvements. But we would not make -- we will not make too much fuss around it. But it is a big area of focus.

Dan Pickering, Pickering Energy Partners.

Borets, you are a third owner there. Do you have options to buy the remainder? Can you just talk to us about are you the controlling partner now? Just trying to understand how that is going to work.

No, we're not the controlling partner. We do have a, let's put it this way, a preferred status for the balance in terms of an acquirer. It does not mean we necessarily will acquire. But we're not the controlling partner. We're very anxious to keep the existing controlling partner in operating control. Why? Because they do an excellent job.

Okay. But there is nothing contractual in terms of the remaining two-thirds of the business? You are a right of first refusal buyer, but you're not obligated to purchase the remainder going --?

That is absolutely correct.

Okay. Thank you. And then with respect to the acquisition, obviously Borets is the biggest one. Can you give us a rough idea in terms of timing of impact that we will see in the income statement and -- go ahead?

Yes, Andy, why don't you help us out?

Absolutely. '07, as I said probably in each to the final two quarters, about $10 million of revenue running through the topline in '07. De minimis EPS impact. In '08 you should expect $0.10 of EPS contribution.

Alright. Do you anticipate putting incremental capital into these acquisitions, or are they sort of stand-alone ready to go as is?

Ready to go as is. Nothing meaningful.

Okay. Alright. And then you had pretty good revenue growth sequentially in your chemical stimulations segment and I'm just curious there. I'm assuming that that is your pumping business. Do we have any international pumping business yet, or is everything we are seeing there domestic at this point?

We do not have any on the pumping side, any international topline in the number. I'm -- poor chemicals do not -- do not minimize what the young chemicals people can do. There is a technology that is proving to be very effective, but maybe it is an off-line discussion on the chemical side, which may actually -- may get your attention which is driving as much if not more of the growth than the pumping side.

To answer your question -- and that chemical topline progression is actually international as much as domestic. The pumping side is clearly domestic and will remain that way probably through the balance of the year.

Okay. Last question for me, and I apologize if you talked about it and I missed it. Bernard, do you have any cost reduction efforts targeted specifically at Canada at this point or given the --?

No, no, no, I think we are -- I think I mean -- I think two things. At the end of Q1, we have already allocated some equipment and a small number of people out of the Canadian market. And that was done. We did spend I think a large amount of money on the maintenance side in Q2, taking advantage of the fact equipment and tool was back in the yard. That is done.

At this point I think we have calibrated the size of the operation in Canada to what we think the business will be plus or minus, so I think we're pretty much done. It is actually quite efficient in Canada.

Pierre Conner, Capital One Southcoast.

Bernard, first my question is about management projects and your strategy. Glad to see that you are up and running with a couple and plan to expand it. But the strategy go forward, absent the pass-through type costs, do you see these management projects as primarily margin accretive through product mix that you will bring, or are they revenue growth opportunities primarily?

I think really both. It is just the way of doing business that the client welcomes. It is not that we are particularly enamored with project management. We're being more pulled into it than we're pushing into it. We were pulled into it by a client who was short of management talent. We are short of management talent too, but we have to somehow put it together for the client.

So if I could end up with the same volume of business and margin business, then our project management would be perfectly happy. I'm not necessarily obsessive about this. But the number of brownfield, the number of step-out, the number of greenfields both oil and gas internationally and the number of unconventionals also internationally, this is all international my discussion. And in our case Eastern Hemisphere, we don't really -- we are not really interested in project management in the West, in Latin America.

The number of all of these projects is such that you can visualize a mental (inaudible) shop that gives you an idea of all the projects out there, that ought to get done and they are not getting done. They are not even being planned simply because of management and manpower shortage. The one way in which one can make these projects happen for the client is by taking on more of a coordination, logistic efficiency type responsibility. And we're doing it.

Does your outlook for next year's international growth include -- obviously the project you have expected to start -- but further growth in project management, Bernard?

I would rather not say because I think for some time the assessment that we grow of 40% and 25 -- 40% Eastern Hemisphere and 25% Latin America -- was viewed as not reasonable. Now it is viewed as reasonable because we have done it, and it appears that it is likely that we're going to do it. Should we do better than that, I would rather just do it, rather than have you sort of bake (multiple speakers). I would rather leave that a little bit in dotted lines, just because I think the guidance is good enough as it is.

No, that is fair. I appreciate it very much, guys.

(OPERATOR INSTRUCTIONS). Bill Herbert, Simmons & Co.

Andy, you may have covered this, and if you didn't I did not catch it. But Borets equity income line accounting, what can we expect from a -- I mean what does that yield at the equity income line in the second half of this year?

In the second half of this year, not meaningful. Several pennies perhaps.

Okay. And (multiple speakers) when you talked about $0.10 in '08, did that include Borets or -- ?

Yes.

It did?

That is all seven. You're going to see $0.03 or $0.04 running through normal ops, and you will probably see $0.06 or $0.07, and I'm trying to be conservative on those numbers so you all don't run away with things and get crazy.

Alright. So $0.10 at least in '08 and perhaps something in second half '07?

Correct.

I think probably if there is one last question since we ran our full hour, if there is one last question, we will be happy to take it. If there is not, that will be the end of the call.

Well, there are no current questions in the queue.

Then I thank you very much to the audience, and we will close the call here. Thank you.

This concludes the presentation. You may now disconnect, and have a great day.