Weatherford International PLC (WFRD) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2007 Weatherford International earnings conference call. My name is Latasha, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Bernard Duroc-Danner. Please proceed, sir.

Thank you and good morning. Andy, we will start off with your comments, and I will follow-up with mine.

Good morning. For our third quarter of 2007, we report fully diluted earnings of $0.85 per share. The combination of a strong US performance and a seasonally driven improvement in Canada bolstered North American results, while strong international growth continued to pace.

The ongoing uptake of our younger technologies fueled our growth in both North America and in international markets.

EPS comparison. At $0.85 earnings per share grew 25% sequentially from $0.68 in Q2. Our sequential improvement of $0.17 represents the largest quarter-on-quarter growth posted by Weatherford in the current up-cycle. The field contributed $0.19 of incremental EBIT, while nonoperational items took back $0.03. R&D, corporate and interest expense were up meaningfully over Q2 levels. A lower tax rate helped earnings by $0.01 as our effective rate for the quarter settled at 19% or 100 basis points below Q2's rate.

Operating performance. On a consolidated basis, revenue grew $156 million sequentially or 9%. Year-to-date revenue is up 18% over the prior year against a 3% increase in average rig count globally. North America, which accounted for 50% of total revenue, grew $110 million. Average rig count for the quarter improved by 235 rigs compared to Q2 with the bulk of the improvement taking place in Canada following an exceptionally low level of activity during Q2. Still Canadian rig count was down close to 30% compared to year ago levels. On a year-to-date basis, North American revenue is up $168 million or 6% compared to the first three quarters of '06, while average rig count is flat over these two periods.

International revenue grew $46 million or 5%. Middle East, North Africa, Asia led the way in dollar growth with Europe and CIS also posting strong gains. Latin America's sequential growth was a modest 3% as equipment moves for pending projects in Venezuela produced a temporary flattening.

On a year-to-date basis, international revenue is up more than $700 million or 34% compared to the first three quarters of '06. On the same basis, Eastern Hemisphere revenue is up $590 million or 38%. Consolidated EBIT before corporate, equity and earnings and R&D was $487 million, up $83 million with operating margins at 24.7%. Eastern Hemisphere incrementals of 31% were steady and as predicted.

North American incrementals were an exceptionally strong 65% due to a partial reversal of Q2's detrimentals in Canada and accelerating traction of new technologies in the US. In Latin America a $4 million negative impact on equipment moves resulted in flat EBIT for the region.

Operating margins in the East increased 40 basis points to 23.2%. These are the highest margins reported out of the East in the last seven quarters. North American margins recovered to 26.6% on the back of a modest recovery in Canada and cost structure improvements.

Geographic performance. Financial performance within our four geographic region was as follows. North America, 50% of total revenue. Revenue up $110 million or 12.5% on a 12.4% improvement in rig count. For perspective, last year revenue grew 13.6% sequentially on a 14.7% rig count improvement.

EBIT was $264 million up $72 million. Margins were 26.6%. Revenue grew across all product lines. Artificial lift, wireline and directional underbalanced accounted for more than 70% of the topline growth. Middle East, North Africa, Asia Pacific, 23% of total revenue. Revenue rose $21 million or 5% to a new historical high. EBIT was $104 million, up $7 million. This is also a high water mark. Margins rose 40 basis points to 22.7% on incrementals of 33%.

Year-on-year incrementals were 32%. Countries that showed particular strength included Oman, India, Qatar, Egypt, Australia and China. Directional and underbalanced, wireline, well construction and lift all posted substantial improvements.

Europe, CIS, West Africa, 16% of total revenue. Revenues up $18 million or 6% and up 43% compared to the year ago quarter. EBIT was $74 million, up $5 million. Margins grew to 23.9%, a 20 basis point improvement on incrementals of 28%. Year-on-year incrementals stood at 30%. Russia and Eastern Europe showed the strongest activity improvements. The strongest gainers by product line were directional and underbalanced, well construction, completion systems and lift.

Latin America, 11% of total revenue. Revenues up $7 million or 3%. EBIT was flat at $45 million with margins at 21.3%. Equipment moves related to projects expected to commence in late Q4 had a $4 million negative impact. Year-on-year incrementals stood at 44%. Brazil, Argentina and Columbia improved the most. Directional and underbalanced, lift, well construction all performed well similar to Q2.

Cash flow. During Q3 we generated EBITDA of $579 million with D&A running at 159 million as expected. Operating working capital, A/R plus inventory less AP consumed $223 million of cash with inventories up $123 million. Foreign currency fluctuations alone increased inventories and receivables by $49 million. At the end of the quarter, we stood at 137 days working capital. Our goal remains 110 days by the end of Q4.

After deducting interest expense and cash taxes, operating cash flow was $268 million for the quarter, an increase of $121 million over Q2.

Capital expenditures. CapEx was $403 million for the quarter net of lost and whole revenue. We project total CapEx for 2007 at approximately $1.4 billion, which is an increase of $200 million from our most recent estimate.

Latin America, CIS, West Africa and North Africa have all accelerated investment in conjunction with planned growth in these markets. This incremental investment will be concentrated in those product and service offerings, anticipating the greatest growth over the next 18 months, as well as the incremental addition of training facilities.

Capital structure. As of September 30, our ratio of net debt to net cap stood at 32.2%, a decline of 60 basis points with total net debt at $3.4 billion. Cash balances totaled $132 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.

2007 net interest expense, $175 million for the year, up $15 million from prior quarter's guidance. We would expect Q4 interest to come in at $55 million or $5 million higher than Q3. Increases in both Q3 and Q4 are due to higher debt balances and increased interest rates.

Two, investigation costs. During Q3 we incurred approximately $4 million of expenses related to ongoing investigations. We expect these costs to continue at a similar rate until the investigations are concluded.

Third, share count. We exited the quarter at 339.2 million basic shares and 349.1 million fully diluted shares outstanding.

I will now hand the call over to Bernard.

Thank you. Q3 was a strong quarter in both hemispheres. We posted $0.85, which equates to a 25% improvement sequentially and 27% year on year. The East continued its strong progress, building on what we expect to be a multiyear high-growth process. North American did well. Canada recovered some ground, while the US posted another strong quarter. Western Hemisphere revenues rose $118 million. The growth was driven by North America which accounted for 110 of sequential improvement alone or 12.5% and year on year 4.2% in spite of Canada's decline. The East added $39 million of revenue in the quarter, growing sequentially by 5.3% and year on year by 34.4%. Companywide the EBIT operating income incrementals were 51%.

Canadian market recovered from the extreme trough of Q2. Rig count increased seasonally to an average of 347 rigs, but was 29% below Q3 '06 levels. Basically the market showed signs of life but remains subdued.

Pricing weakened throughout the Canadian oilfield hitting the rigs, tubulars and pressure pumping hard. Pricing for our product service lines was down more modestly with the drop occurring essentially in Q2 and Q3. This was in part -- in a large part actually offset by cost and productivity gains.

We substantially changed our operating structure in Canada -- management, people and equipment. The country leadership was also changed early in the quarter. Paid dividends. We grew revenues per rig to the highest level in our Canadian history to $262,000. Our productivity indices showed some of the highest performance levels in the Company. We are running Canada at much higher people and equipment productivity than throughout '06, and as a result and in spite of lower pricing, Canada's EBIT incrementals were sequentially very strong.

Our operating structure and portfolio breadth in Canada are real assets. The US did remarkably well, posting another quarter of good sequential growth in spite of unfavorable weather patterns in Texas, Oklahoma, a weak Gulf and a meager 1.8% sequential rig count increase. We gained traction in another product line primarily directional, wireline, ESP and chemicals, all of which have small Weatherford marketshares in the United States.

We also had strong sales in well construction for the deepwater market. Deepwater is today one of our fastest-growing market segments in the US. For us incidentally it overwhelms the Gulf of Mexico, our shelf, by a factor of at least two to one.

As to technology in general, witness, for example, the fact that seven out of 10 of our directional jobs offshore US are using other (inaudible) systems and temperatures about 310 degrees Fahrenheit. We routinely replace competitive systems on those wells. I would remind you that we hold a number of industry records in pressure and temperature off the directional systems. All these factors help to counterbalance the flattish US market environment.

The related shift in product mix kept US incrementals strong sequentially. Product service mix shift is a gradual process that has been underway in the US for the past 18 months. The top three grade product lines in North America were wireline, directional and artificial lift.

A year-on-year comparison all shows a strong performance. NAM managed to grow 4%, 4.2 in Q3 '07 compared to Q3 '06 and 6.2% year-to-date '07 versus year-to-date '06. These are modest numbers but truly remarkable if one remembers a concurrent decline in Canadian activity in our prior high Canadian presence. As a percentage of North America, a legacy of pursuing acquisition.

I say our prior high Canadian presence because by way of reference Canada's percentage of our geographic mix has been cut in half since the Precision acquisition. The US is to be credited for shouldering strong growth, while Canada was shrinking hard in absolute and relative terms. Canada is to be credited for managing its cost structure and revenue generating capabilities so well and without delay in a poor market environment.

Latin America was modestly up while operating income was flat. Latin America is gearing up for a step-up in business volume in '08 and '09. Latin America grew year-on-year 22.8% and 21.7% on a year-to-date basis. The prognosis of Latin America is very strong. I touch upon it later.

The strongest performances in Latin America have been Argentina, Brazil and Colombia. All have been growing in '07 this quarter at maturity above this region's average annual growth rate. Mexico and Venezuela were expected to be big movers in '08 and '09 and were down sequentially year-on-year.

You may recall last year we sold all of our rig assets that we are operating in Mexico, which makes for uneven year-on-year comparison. As to Venezuela, it reflects the decline in Orinoco where Weatherford has a large marketshare and substantial business. That decline is temporary and will reverse itself powerfully in '08.

Eastern Hemisphere was strong across the board. The sequential 5.3% was split evenly between 6.2 after the European/West African market and 4.7 out of Middle East/Asia. Product line growth was broad-based, but here again directional underbalanced was the fastest-growing product line. Artificial lift and wireline showed the next greatest improvements in the hemisphere. For coincidental reasons these are the same top three performances in North America.

The strongest performance this quarter by country in absolute and relative terms were Angola, Australia, Azerbaijan, China, Egypt, India, Oman, Qatar, Russia, Saudi Arabia and Romania. All have been bringing materially above the 40% annual growth rate.

Eastern Hemisphere year-on-year growth was 34.4%, while year-to-date on year-to-date growth was 38.3%, probably the industry's highest growth rate.

I will give you now the numbers on the product lines for the quarter, starting from the largest to the smallest. Artificial lift $347 million, up 38.4. Drilling services $313 million, up 32. Well construction at $312 million, up 19. Drilling tools $223 million, up 6 completion, 202 million, up 7. Wireline $158 million, up 29. Reentry fishing $147 million, up 3. Chemicals and stimulation $127 million, up 3. Integrated drilling at $90 million, up 2. Pipeline and specialty services $50 million, up 14.

All product lines grew. The relative ranking is changing. The highest dollar growth was experienced by artificial lift, directional and underbalanced, which we call drilling services, and wireline. Directional and underbalanced is now our second-largest product line in the Company, closing in on artificial lift. We expect directional and underbalanced to be our largest product line and cross artificial lift sometime in the course of '08. This is not a negative view on artificial lift. This is actually just a disproportionately positive view on directional and underbalanced.

Wireline is now our sixth largest product line, overtaking reentry fishing. We actually expect both wireline and completion to overtake drilling tools in terms of size and ranking also sometime in the course of '08.

Much of our growth results from intensive fears of ceding and technology testing with clients country by country. Once a particular technology is approved, commercialization can start with the support of our infrastructure. Growth occurs a few quarters later. This process which involves time and investment is at the core of our organic growth. Two recent examples illustrate this process, and they are not unique.

At the close of the quarter, four countries' clients tested repeatedly and successfully opened a wireline compact technology, not just compact. Some of the new technologies that are being introduced as part of compact. In each instance, the competitor was unable to perform. The countries were Saudi Arabia, Qatar, Oman and Ecuador. All four of the current markets were our wireline services; previously they were not.

Concurrently we successfully deployed and tested our solid expandables technology in two market (inaudible) for Aramco in Saudi Arabia and one for [BPD Porter] in the United States. All three were initiated and completed in the third quarter. Further expandables will be qualifying in other countries over the next 12 months.

The above examples are not alone, and they are not unique. They are ones of many concurrent events in the quarter covering a broad range of product lines and technologies in a host of new regional markets. This commercialization process has been typical of the past quarters and will become more intensive in subsequent quarters.

Forward view. We limit our forward view on NAM to two comments. One, Canada. In the trailing 12 months, Canada's oilfield has endured the lowest spot gas prices in North America, an unfavorable change in tax regime, a rise in foreign exchange value of the Canadian currency, a 30% drop in activity and a concerted drive by the clients to lower oilfield service pricing. With hydrocarbon pricing hovering above $80 for oil and $7 to gas, the Canadian market feels very right for strong recovery in '08 led by the heavy oil segment.

There are substantial additional capital programs close to 80 billion have been announced on and around Alberta's heavy oil. The proposed change of Province's royalty tax rate makes this uncertain or at least delayed. Until the government of Alberta firms up the decision, it's difficult to make a judgment either way our market direction. We expect the results, our results in Canada, to reflect our operating improvements, as well as our product line breadth.

We remain constructive on the US market and our own position there. The productivity limitations of the US reservoir base and its technology requirements support long-term a scenario of low single digit growth for the market, particularly for type and CBM gas supply. Separate existing from gas, there's also a healthy prognosis of deepwater lower 48 oil in Alaska.

In addition, Weatherford-specific we expect further US organic growth in directional, underbalanced, wireline, ESP, sand control and chemicals all have proprietary technologies. Setting aside decent prospects for NAM, long-term growth is all, really all international. The year 2007 should close as expected with stock up 40% growth, '07 on '06 in the Eastern Hemisphere.

Beyond '07 we see a multiyear growth process of a scale and scope that is unprecedented in our history. As far as we can tell, it will be sustained through the next five years, and there are reasons for that. Specifically we expect the Eastern Hemisphere to grow a similar 40% in '08 on '07. Furthermore, although the compound numbers are daunting operationally, in the end for us it is essentially an operational risk. We believe it is likely '09 on '08 will match the same sort of performance.

Latin America is expected to grow circa 25% range '08 on '07 and at similar rate in '09. Latin America in my judgment has some upside above these thresholds.

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, Venezuela, Brazil and Argentina to show the greatest growth year on year.

If we zero in on countries as opposed to regions, Algeria, Angola, India, Libya, Mexico, Qatar, Russia, Saudi Arabia and Venezuela -- all this in the case of Weatherford -- will have the largest growth year on year. These will grow by at least $100 million per year and/or a multiple of that number. Now I'm talking about '08 on '07 to be clear.

Due to the above prognosis, we are engaged in an intense process of recruitment and training. We hired 1800 employees net in the third quarter. This process will intensify in the next 12 months. Our recruiting and training is a key issue, completely key. There were no material acquisitions in the quarter, and I don't think there were any acquisitions of any substance at all.

You should not expect Weatherford to be particularly inquisitive. The relevance of acquisitions depends entirely on circumstances that may not occur. I will say that the investment in Russia's Borets, which was the only inquisitive step of significance this year, has a strategic role to play at Weatherford.

Taking an overall view of '07, we're likely to invest about $1.4 billion in CapEx as Andy mentioned. We're already well advanced in planning supply chain actions for our '08 CapEx, and of course, financing organic growth is the priority. We estimate an asset tax return on organic growth at between 25 to 30% per annum, and the math is very simple to explain. This is in spite of an increase in intensity of CapEx spend per dollar of organic growth reflecting materials cost pressure and increasing technology complexity of tool and equipment design. I think we sort of think our CapEx intensity is at around $0.80, 80 of CapEx per dollar of organic growth plus or minus. This is noise from quarter to quarter.

At the end of Q2, we bought 1 million shares. We have another $200 million left under our $1 billion share repurchase plan. We expect to renew commitments once this program is completed. In summary, this is not changed, and I don't think will change. We're completing our '07 growth plan while actively prepared for operational performance in '08 and '09, which is where our focus is. We have consistently believed that (inaudible) done folding in the oilfield service equipment market is a very long secular growth trend that mirrors acceleration of decline rates -- that is one -- non-OECD demography -- that is two -- and GNP per capita wealth effects -- that is three. We are confident in our multiyear growth prognosis in the international market. We are constructive on our prognosis in the US. We expect a reversal of trends to occur in the Canadian markets now or at a later date. But in the meantime, we rely on our operating strengths in that market.

Operator, I will turn the call back to you for questions.

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

Notwithstanding the fact that you have a perfectly commendable and strong outlook for Latin America in 2008, I'm surprised it is not actually stronger given the fact that Mexico for you guys is ramping pretty strongly, Venezuela recovering, and you will highlight both of those countries as being amongst the best growing regions or countries in 2008. So what is driving a similar rate of growth rate '08 versus '07? Because I would have thought that it would have been quite a bit bigger actually in '08 for Latin America.

I will tell you just two things, which is noise. Numbers from quarter to quarter are not predictable. There is -- you have got some things that are higher than you think and lower than you think, and they have pushed back into the next quarter. So you have some of that.

Second, I think the region lags on what we're doing in Latin America. The region lags everywhere really. It always happens. It seems to happen a bit more in Latin America. Net net I think you will be very happy with the performance in '08. I say this simply based on the backlog of work we have. Andy, you want to add to that?

I don't. Bill, I would remind you in Q2 there were contract rollovers in Brazil and obviously Orinoco on the heavy oil. The heavy oil has not returned to full speed yet. Planning takes an exceptionally long time in Venezuela to put projects together and what not. We had some substantial contract wins down there during the quarter. We will have to highlight contract by contract what we have progressed, but we are extremely bullish both on Mexico and Venezuela for '08. And things will slowly ramp in and roll in, but we do think you will be pleased with the performance next year.

Okay. And then switching hemispheres with respect to the Eastern Hemisphere, another year of 40% growth in '08 sounds arresting. You highlighted some of the logistical challenges in meeting that. Do you have the equipment and crews to actually prosecute that growth?

We have the business right. We have the equipment. I will put it another way -- we don't have the equipment in the right location ready now. But, as you might have noticed from our CapEx line, the supply chain is on overdrive. So we have the equipment which is on its way. Not too worried about the equipment.

Now the weak link is the people aspect. Recruiting and training and reading my notes, which is always cumbersome I think for everyone on the call to listen to, I try to add a few comments that are not in my prepared notes. And one of the comments I added is that the recruiting and training is extraordinarily important.

Well, that's the weak -- that is the weak link in the whole system. How many people we bring in and how well we train them and how well we do it on the rig floor is my number one worry. So when I highlight the fact that the growth in '08 is going to be about the same level of 40%, could be 42%, could be 38%, it is not surgery, but it is about right. And I actually think '09 is shaping up most likely to be in the same order of magnitude. It is too early to tell.

What worries me the most is not the availability of the business. It is not the longevity of the cycle. It is completely wrong to think that these things are about to be aborted. It is actually not nonsensical. If you spend enough time with clients in the Eastern Hemisphere, you understand how nonsensical a statement that is.

What worries me the most is the ability to get a minimally quality performance on the job with people that have only been trained for three, six, nine, 12, 15 months. That's still worries me.

Yet notwithstanding that challenge, you must be reasonably comfortable that you're going to be able to do that given the fact that you are prognosticating.

Yes, we're committing for it, not so much not Wall Street I'm worried about. It is my clients. We're committing to it towards our clients. So to the extent we don't disappoint our clients, we won't disappoint Wall Street. The people issue is everything. There is one thing I'm worried about here it is the people issue. Now it is not new, Bill. It was true a year ago; it was true two years ago. It just does not get any easier with time.

Last question, Andy, I think Canada cost you $0.25 or thereabouts in the second quarter. What did it contribute in the third quarter on quarter, and can you reveal what percentage of total revs does Canada represent today and where that number stood last year at this point in time?

Yes. I cannot go into since we have got those together as one region, I think I would be running outside the boundaries of fair play here to split those out at the EBIT line. But you should assume you know the Canadian numbers well for last year, and that was at about $1.2 billion of revenue for the year and US was about 2.5. So basically one-third of the NAM business was Canada. You can expect that that differential has shifted with the very weak Canadian market, and probably for the year you are down something on the order of 20% plus year on year '07 on '06 in Canada at the top line against some very nice growth in the US market.

I think two comments you should try to take to heart if you can that I try to convey is that if NAM did well and NAM with a few exceptions has always done well at our place, a lot of the credit goes to the quality operations in Canada more than the market. The market is not that good. But also the US did tremendously well.

Okay. Thank you very much.

Don't minimize the importance of the US in the quarter. It would just be wrong.

Jim Crandell, Lehman Brothers.

What was the impact of the Gulf of Mexico evacuations on third-quarter results?

Technically the exact number of lost days since one of our larger peers gave it was in our case 17 days as opposed to 15. So right. So that is that. What is the revenues of the shelf in Weatherford right now? It's about $100 million of the shelf business. Deepwater is about twice that number in the Gulf of Mexico alone. So the shelf is 100. The Gulf of Mexico is about 200, 300 in total. This is the yearly number and not a quarterly number. So it's not that material of a business overall in the end. It used to be enormously material at Weatherford. That got diluted down over the years. Five or six years ago it was, my goodness, the Gulf of Mexico was about 10% of what we did. Now it is more like 3%, 4% of what we do. So these are all the numbers.

Okay. Given the projected mix of earnings out through 2008, what is a good tax rate to project for the full year?

That is always a hard one.

Difficult. I would keep 21 to 22% for '08.

Why not 20% or less?

Believe me, I have challenged our folks to get there. So we will give updates if we can. Very structure intensive.

It really depends on the flow of business in a particular quarter.

Absolutely. 19% this quarter was exceptionally good. I would say better than we would have even expected given the uptick in NAM operating income.

Okay. Bernard, CapEx is running at $1.6 billion annual rate now based on the most recent quarter. My sense is numbers are building faster than you projected. What do you look at CapEx for '08 now, and where do you see the biggest areas of incremental change versus what you might have thought -- (multiple speakers)

We do everything we can to get the numbers to be as high as possible as early as possible. Not out of a desire to spend, but because I have got three challenges. One, business development and sales. Okay, that one I think is well covered. The second challenge was the supply chain equipment, and the third challenge was people.

As for the answer I gave to Bill early on, the people is the one that worries me. The equipment we have done everything in our power to bring up in time equipment on the food supply chain as early as we can. The reason being that some of those -- these might actually have on and around on the [net] materials for example just some of the more sophisticated form of manufacturing for high precision tools is extremely long. So it worries us tremendously that when we might not get the equipment we need on-time. So there's a purpose for it. It is a purposeful action is number one.

With respect to where we're going numbers-wise, Andy thinks we would still end up the year around $1.4 billion, even though you're absolutely right. In Q3 it was closer to 1.6. I would think my guess is that we will run '08 probably closer to 1.6 where we are right now to 1.4 plus or minus 50 to $100 million. It depends again on how much business can we cram into '08 responsibly as opposed to slipping into '09.

There is a ratio between the CapEx we spend now and '08. This says there will be a ratio between the CapEx we spend in '08 and '09. That is issue number one. And issue number two is, how well can a supply chain system at Weatherford, which we tend to be very proud of, how well can it function at a higher rate?

So net net all of this is to say the level of CapEx is purposeful. Actually it reflects the expectations of volume increase in '08. I mean there's a direct correlation. I think it still has a bit further to go out but not much in '08. Then again it depends a little bit on how well we do on the supply chain side.

Okay. One final question. You have a real good durable LWD tool that seems to be able to work where no others can, and you have replaced Schlumberger as I think you said on a large number of wells in the last -- bottom of the well. Is this a short-term or a longer-term advantage? And then separately, when do you see supply catching up with demand for LWD and rotary steerable?

First, I did not mention that it was Schlumberger, and I probably would not for a variety of reasons, some of which -- some of it having to do with being polite. That is one.

How durable is the advantage? The IP we have on and around LWD continues to expand. We file probably more patents than any of our -- well, not more than any of our competitors -- we file as many patents on and around technology than our larger peers. So I would have to say that the IP and the technology core advantage on and around high-pressure and high-temperature is one that I think you should expect to be sustained over the long-term, which is over the next three years. I don't see how we could not be sustained. These are very difficult things from a design standpoint to catch up. That is one thing.

With respect to supply and demand balance on LWD and RSS, well, the rate of growth of horizontal wells and directional wells, particularly on land, is extremely high. I don't know of a single IOC or NOC that isn't planning its new campaign, be it re-entry or be it further development or be it step-out/exploration, which is not doing it primarily or overwhelmingly horizontal and multi-lateral.

So remember the fact that the landmark traditionally has a little over a third of its business directional, and the offshore market a little over 80% of its business directional or horizontal. I think the line is moving to the offshore level. I said this two years ago. I think it is happening right now. It is going to happen over the next 5 to 10 years. It is that powerful. So I'm not sure the LWD/RSS supply chain will ever catch up with the market. Ultimately what will happen is that we will only be able to do the amount of work we can do, and so it will be spaced out over a longer period of time.

Ole Slorer, Morgan Stanley.

Bernard, you sound a little less concerned about North America than I think what other people on the call are expecting. So again could you go back and revisit how Weatherford specific is this particularly on Canada? What have you done to take your cost structure down, and how much more is there to do?

Well, there's two things in Canada. One, we just I guess genetically, if I may say that, we are very heavy oil-based. We always have been. So we are more heavy oil based as a percentage of what we do than any of our peers. Now heavy oil is not immune to ups and downs in Canada, but the production side of heavy oil, just maintaining the wells in production, that one is really completely immune to the ups and downs in Canada. You will not shut down a heavy oil well. You will not. It does not matter what Canada does because the economics just are compelling.

So there is that aspect. The other aspect is I guess we are -- one of the attributes of being very Canadian two years ago much less today is that it's a little bit like a cold shower. When things go bad on you, it wakes you up and you take action early. We took action very early on the operating side. We did not say anything to anyone. And, as of today, they were pretty drastic. Simplify the organizational structure, move equipment, move people. We actually moved a lot of people that are on loan as it were to the rest of the operations acting as trainers and/or as ceding management for deepwater applications around the world. And then we just took some people out.

On the cost side alone, I think the moving target, but more recently I think the best thing I can give you is that we took out about $40 million of cash costs out of Canada. It is actually a higher number than that. I'm not including the loans and all that sort of thing, meaning people would be on loan to other regions because they are still on the payroll. And we did this -- the number I just gave you just happened very recently. And we will take out some more as needed. It is more of a question of being proactive early than anything else.

Now the reason I'm confident on North America is because I don't also expect too much out of North America. I think it is -- I said it a long time ago, about a year ago that the US was in the tunnel. It is not going to go up too much or go down too much. When you enter that kind of environment, two things matter. Your operating cost structure, item one, item two. How good you are differentiating yourself from a technology standpoint and/or if you have new technologies where you do not have any marketshares, which is our case.

So we're working on the cost side and working also on the technology side, particularly in young technologies. What are young technologies? You know them. Directional, wireline, ESPs, chemicals, etc. And on those particular markets, we have traction. On the rest we fight on the operating cost side, and net net the region continues to do well. But it is not where you are going to make your money. You're going to make your money internationally. You just should not worry about North America.

I'm not worried about it, Bernard, but I'm just trying to understand how far into this process you are on the cost side. Are you almost as far as you can push it now without --?

No, no, in the US we have got ways to go, which is actually very good news for us. In Canada obviously we have done a lot already. The latest number I gave you is just the recent number. We will do some more as needed in Canada. It does not seem to be needed right now. There's no point in doing things where it is not needed. Right now the focus will be more on the US, but the US is a combination of costs, true? Also, a combination of growth, which is those products and service lines where we are gaining traction. It is a combination of both.

And how much more do you think there is to go in terms of driving margins higher because your mix change in the US?

That I will let Andy answer.

Just due to mix change?

Yes. You are talking about solid expandables, compact wireline type pressure, high-pressure, high-temperature, MLWD. I mean all of those are (multiple speakers) higher margins.

That is absolutely true. Much higher margin. Remember we're starting off with very small base with those. I would like to think of it as something in the 100 to 150 basis points of improvement over the next 18 months just coming out of those growth opportunities and being very reasonable for North America.

So you could take North America back to a margin of somewhere towards where you were a year ago?

That is certainly what our goal is. That is exactly -- that is specifically our internal growth.

And then finally, on the phenomenal growth targets that you're outlining of 40% Eastern Hemisphere, 25% Latin America; you hired if I heard you correctly 1800 people in the quarter. Was that right?

That is correct. Net. There's always some people coming in and out, but net of any -- well, net, okay yes, that is correct.

And that is 7000 annualized more or less? So what is your current headcount now as compared to the gains?

35,500 is where we stand at the end of the quarter.

Okay. So you're growing your headcount at a clip of about 20%?

Right and remember it is not growing in North America in general.

No, it is not. You should not presume that. It is lopsided. In other words, growing at twice that rate because the international market represents 50% of what we do.

If I might try my luck, how much of that hiring is for people that have very high skills sets and be applied in these faster growing product lines but also product lines that --?

No, I mean the -- you've got -- if you break it down between high technical skills, medium technical skills, low technical skills. The high technical skills is only about 10% of that number. The middle technical skills is the overwhelming, something like 60% of that number, and the balance is the low technical skills, and it has everything to do with two things. One academic degrees and second training, prior training. These are rough numbers, but you are close.

Ken Sill, Credit Suisse.

Glad to be back on your call again. Bernard, looking at your growth or your optimism for North America, it seems to me that what you're looking at is there is growth or there is growth in the service side of things because of the type of wells and new technologies which is ex rig count? Is that a fair assumption?

That is absolutely right. I will also say that it is a -- I would not compare the optimism on NAM with the optimism of the international market. They are two different skills. You described it very well though. It is exactly what you said.

And how much of this is just like you're saying internationally, the growth in directional drilling, logging and measurement well drilling is just the market is growing faster than there is the ability to supply. So is most of this growth just it is just growing, it is not necessarily taking share from people?

That is also very fair. That would also be very correct. I mean put another way their share is not what we're after particularly and nor do I think it would be as easy for us to do if the market was not growing the way it is.

Okay. Well, I think that is very important to get because you're in a market where people are focusing on fear, not opportunities. So --

I was flying from overseas on Friday, so I was not very exposed to the events on Friday. By the time I landed I got quite surprised, so I understand what you mean.

Okay. And then another question, something that is kind of conspicuous by its absence is the talk about pressure pumping and stimulation. I know that is not actually that big a business at Weatherford. But I was wondering if you have any kind of a long-term strategic goal there. Obviously in North America it's a very commodity-oriented business, but gas production worldwide has probably grown faster than oil. So do you guys have plans?

Yes, we do. We actually do. There's only so much I can say on a conference call, but off-line I can tell you more. We're doing exactly what we thought we would be doing, which is we learned the skill and the trade in the United States. It is a great place to do that.

We have a certain amount of business there. It is not a big business, and it is not likely to grow. We did see early on two things, which is the fact that barriers to entry are quite low in the United States. And second, there was a number of people who thought their economics were very good for new equipment at the existing prevailing pricing structure. So we saw that the supply curve was basically shifting pretty aggressively upwards, which is never a good time.

Now we still went on with our plans to build up our capabilities. We did, together with an R&D center that supports our stimulation and all of this for one purpose, which is the use of that particular skill in international markets, which is where we are deploying our time and energy and completely joined at the hip with the other things that we're doing internationally. Where are we doing this?

For the sake of competitive reasons, I would rather not say too much except to say that it covers three regions, three regions. So, as we only have -- let me see, we have -- yes, we have three regions internationally. It is absolutely nothing actually, sorry, but I was trying to be more helpful than that.

We cover three regions of the international markets. We are completely joined at the hip with the other work we're doing. We're using our skills in pressure pumping. And your assessment of the future of pressure pumping from a gas reservoir standpoint and to a lesser degree oil in some markets, you're absolutely right. It is an important competency, even though the prognosis in the US is not terribly good for it because of the supply curve.

Yes. And then one final question. You guys are leaving some of the countries under US sanctions. It does not seem like that is having much of an impact on your revenue outlook. Is that because --?

Well, I can only -- I'm terribly constrained of what I can and cannot say. I will only say that the size of the business there was modest. It did not grow over the past whatever couple of years, and I don't think it ever factored in in our plans in terms of growth. It was just there and evidently won't be there anymore.

Yes, but in terms of replacing that revenue, it just does not seem like there is much issue given the strong growth elsewhere internationally?

It is not a big number, Ken. So the answer is you are absolutely correct.

Kurt Hallead, RBC Capital Markets.

Bernard, a lot of times investors kind of look at the comments that you make regarding market share, and the initial reaction would be well, they have got to be doing it on price. Could you provide us some color as to what the key driver is to your market share gains. It looks like they are fairly broad in nature; not just client based. There were specific -- (multiple speakers)

I think the comments to investors would be very fair if the markets we're selling into were not growing. If the markets are not growing, even if you have a fit for purpose technology, which may be do a better job than your peers and there's no growth, it is just hard to get a traction. But when you have a particular technological edge on the one hand, on the other hand, the markets are growing and they are rationed.

The international markets, not all of them, there is a sequence, but meaning that they are not growing at the same time, not at the same stage of growth. But the international market I traveled to and I travel a lot, they are rationed. There is a shortage. There is scarcity. And, as a consequence, if you have one, infrastructure and the availability of people and equipment. Two, your technology not only can do what the client wants but would be able to do it better, growth is really what you can fundamentally organize for and do effectively. It is not constrained by competitive pressures, and I don't have a single example that I can think of and, as I said, I do travel a lot. I see and I like it. I don't know of a single example of a situation where we have to fight our way pricing-wise in the international market, not a single one.

Now maybe the day will come it will happen, but certainly for looking into '08 and the part of '09 it was already committed to, I don't see no evidence (inaudible). In fact, pricing and pricing is different with every country and so forth and so on. Each country has its own logic. But pricing is strong in the international market. It is not period.

I would add one thing. In fact, what we're seeing, and I can talk probably more specifically to Latin America, is we ourselves expect certain returns out of assets. You know, I don't have enough equipment in some of my fastest-growing product lines to supply everything that everybody wants to do today in both the West and the East. So we have got to make intelligent decisions in balancing that portfolio.

We have actually stepped back from some work in a specific market in Latin America to grow where folks are loading up on backlog in what we believe will be a rising price environment. So given the amount of capital that we can commit to that market, we wait. We wait.

So it would actually be a little bit different for us. I can understand comments from competitors that are making the point that you're making right now. But it is a bit different for us coming in new to new markets with less capacity than we wish we had. But we are working hard on getting that.

Now I hear your comments, Bernard, they are a rationed shortage scarcity that describe the international environment. So clearly you are in a position where in these markets you are really not seeing any influx of tools or equipment from, say, North America where there is a --?

God, no. The only people who could do that would be the largest three companies and ourselves. You heard me say we moved some equipment out of Canada, and we moved some people out of Canada on loan. Presumably our three competitors, largest competitors, have done the same thing, but it ends up being a drop in the bucket. It is a drop in the bucket in what is required in the international markets. The notion that the Eastern Hemisphere and Latin America are seeing (inaudible) equipment is fantasy.

And then finally, I believe you referenced an $80 billion number for investment in heavy oil.

Yes, the numbers go from 70 to 110 or $120 billion. I mean it is in the press. Those are not my numbers. And you have to be careful. These numbers are much of it is upstream cost in engineering and so forth. When you get down to the drilling in heavy oil, it is a smaller part of the cost. And the point is not to say that it is going to be 70 or $80 billion being spent in heavy oil in Canada, to begin with until the Province determines the change in royalty, nothing will happen in terms of the expansion.

The issue is that there are not that many places around the world left for IOCs and independents to get access to reservoirs. There just are not, particularly large companies. Okay? There is just not. Go around the world. Every single government has been raising taxes, changing the royalty regimes, etc. Start with Algeria and you go around the world. Those countries that control the reservoirs don't feel they need IOCs and so forth and so on. So they are behaving in a very rational way by basically keeping the economic rent.

Canada is just doing a mild version the best I can tell of what the other countries are doing. So the question really is, what are the choices for the IOCs, etc. and the large independents? What are their choices? Can they turn their back on the heavy oil market in Canada, which is one of the few places you can have access to lots of barrels, albeit this is a big part of the challenges. And the answer is there are not many choices.

And on that basis, I think the indications of expansion heavy oil are interesting insofar as no doubt they will be delayed by changes in the decisions of the Province. Of course, they will be delayed. But, at the same time, I would have to say that a degree of, a degree of capital investments are almost inevitable, simply because if not there, where will the oil and gas companies go? You tell me. You give me one country that has been generous with their tax regime and royalty regimes in an $80 oil environment. No country is. They keep the economic rent.

Brad Handler, Wachovia Capital Markets.

A couple of unrelateds, please. First, could you offer some thoughts on US pricing, just across a few of the perhaps lesser technology product lines?

We have two things going on. Let's call it, I think the term commodity products is always popular, so I will use it. In low barriers to entry, more commodity products and services, there has been some instances of pricing weakness in the US. And it depends where. On or round the Gulf Coast, definitely. You know all about pressure pumping and coil tubing, although in the case of pressure pumping, it is more an issue of supply curve than anything else, meaning expansion. But there are others.

Yes, in the rental tools business, you have had also instances of pricing weakness on and around a number of different districts in the US. It is not monothematic, meaning that there are other price parts of the United States where pricing actually is getting stronger. It really depends on the dynamics of the local market. And in, let's call, middle of the pact and higher technology content products and services, there has been instances where pricing has gotten higher also.

Net net on a weighted average basis in the US looking at the quarter, there is not much of a pricing move either way, which is exactly what I would expect. I think as you move forward next two or three or four quarters, you will hear some companies talk about pricing weaknesses. It will not be a major issue; it will be a minor issue. And in the end, you should expect that it should lower your cost structure. In a non-growing market or low growth market, this is normal. But it is not across the board. It is a few. It is regionally based, and it is on certain products and certain service lines, and you should not ignore it. You should not make too much of it either. It is to be expected.

You have to move the quality of the services up. When you stabilize, you can do that. When you grow, you cannot. And second, you have got to lower your cost structure and focus on the higher end, but still live with a lower end and lower cost structure and you will be fine. It is not a revolution in the US. It is a normal healthy evolution of a market that has stopped growing is now going to evolve at a very low growth.

That is very helpful color. I appreciate that. In an unrelated follow-up, Andy, your comments on working capital, you have commented for awhile now about goals towards reducing the working capital investment, and you have still got a pretty aggressive target for Q4. Can you just speak to the challenges there and some of the steps that you have put in place recently to help you get there by the end of the year?

Absolutely. High-growth environment, very very difficult to walk around with a big stick on things like inventory. With leadtimes, the capital supply chain, if you will, globally is extremely strained. There is no doubt about it. When I look at folks in the field who I expect to perform at a very high-level and they have 10 to 12 month leadtimes on certain items of inventory, it is very, very difficult for me to think that carrying that number of days of inventory is consistent with the growth. You have got to let people do that.

Receivables is a very, very key focus area for us both through software enhancement of our credit function and pushing that responsibility all the way down into the salesforce for collections. We have noticed those things in certain regions to be helping out.

In the East, okay, again, you have to be realistic with people. Some customers pay a lot less frequently than others. Some of those happened to be customers that you are growing exceptionally quickly with, so this is the cost of growth. Not one that we will sit down and complain about at all. We still expect to perform considerably better on the working capital side despite those challenges.

So I think you will start to see improvement. It takes awhile to turn the ship. I think we have it turned, and I expect substantial improvement in Q4 and then going on forward to reach quarter of '08.

I guess just following up on the comment, it sounds like with some of those twice a year payers, you will get that in Q4, right, so that should bring down the receivables a fair amount by the end of the year?

We certainly are pushing for that.

That is the point. Okay. It makes sense.

Mike Urban, Deutsche Bank.

I think I had just a couple of things left. One, I think you have kind of indirectly addressed this, but you mentioned the Borets acquisition or taking a stake there as part of the -- it is strategic and part of a broader strategy for Russia. I was wondering if you could within the bounds of competitive information tell us a little more about what that strategy entails and how we should expect the growth to play out in that market?

I cannot. What I can tell you it is not really Russia. It is not Russia; it is more ESP. Put another way, the strategic dimension of Borets for us is more ESP-related specifically than it is Russia-related. On the other hand, Russia in and of itself is an area of great focus. So -- but that does not necessarily involve Borets.

Well, one is not necessarily --

Borets, the strategic comment, which in retrospect I regret I made, has everything to do with ESP; not particularly Russia. Albeit they are the largest Russian player and so forth and so on, but the comment has to do with ESP.

Okay. Fair enough. An unrelated question but a popular one on the CapEx side, how much to the extent you can calibrate it, how much of the increment that we have seen -- I guess a year ago we were looking at $1 billion and kind of now $1.4 billion for this year and going to $1.6 billion. How much of the increase there is based on visible contracts versus a speculative attempt to get --?

100%. 100% on visible contracts.

Okay. 100% at that kind of 30 --?

Yes, 100%. (multiple speakers). I would say 110%. Yes.

Very good. That is all for me. Thank you.

Your next question comes from --

I think this has to be the last question, whomever it is, the last question because there is another call after us, and we don't want to keep people on too long. One last call, whomever this is.

Robert MacKenzie, Friedman Billings Ramsey.

Bernard, I wanted to understand some of the thought process in your guidance a little clearer. First, you laid out some aggressive guidance region by region. Can you lay out for us kind of in order of importance the bottlenecks or the risks to not be in the guidance, i.e. people, equipment deliveries, project delays? And on the flipside, what kind of events would lead you to be more optimistic that you would exceed your guidance there?

Well, the guidance is actually the same that it has always been. We have had the same guidance now on a forward-looking basis for the past two years. So that is one.

Two, I think the risk that we have is not the business being there. I don't think we really see equipment at this point. There still is always a risk of matching equipment at the right spec to the project. I think the quintessential risk we have is having the people side ready and also the people side will perform. That is it is significant risk. It was always a risk. It has not gotten any easier.

Project delays, you're absolutely right. There are always project delays. That is -- if there is one thing you can rely upon in the Eastern Hemisphere and in Latin America, it is project delays. It is the absence of project delays that should surprise you. There is your upside there. The numbers that we gave tries, tries the best we can. And if we are wrong, then we're wrong in good faith. But it tries the best we can to lay out some sense of cautious estimate of project delays within the (inaudible) of what we have to do.

In other words, we try to allow for some measure of project delays. And if it is worse than we think, then okay. We will not be as high. If it is better than we think, then on the contrary we will be above what we said.

So it is a combination of whether we are sufficiently pessimistic on project delays which always happens. Or put another way, we have got more business put another way that we could theoretically do in '08 than we're putting forth. As a sort of aggressive statement as it sounds, it all depends on how late people are and whether our estimates of how the people are going to be is a reasonable estimate. And the second thing is how decent of a job we continue to do in recruiting and trading which is very, very difficult. That is it.

And my follow-up question was exactly on that point, Bernard, recruiting and training. With the pace of personnel growth in your international markets, how are you managing to keep your safety record up, keep the operational success rate up given the very, very rapid growth? Almost any historical period in the past if you look at it, service quality suffers when you grow the people that fast.

That is very, very difficult, and the answer is that we struggle. When I talk about operational risk, this is what I'm referring to specifically. We struggled probably the way we found to be the most helpful for us at least is to breaking down -- break down the recruiting and hiring in lots of different efforts. We don't hire 1000 people out of one country two universities or three different sources of labor. We break it down into 10 different smaller sources of people. And it makes the training and exposure to operations to get filled -- it is immediately spread throughout our operations and close to where we hire people. It makes it -- it appears to make it more effective in bringing people's talents up a little bit faster as opposed to big numbers out of one place.

That is actually a long conversation on the operational side, probably best kept to our side of the conference call.

Thank you very much. I think that will be the end of the conference call for us. Thank you all for your time.

That concludes the presentation. You may all now disconnect. Good day.