Weatherford International PLC (WFRD) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2008 Weatherford International earnings conference call. My name is Michelle, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. And I would now like to turn the call over to your host for today's conference, Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Please proceed.

Good morning. As usual, Andy will read prepared comments as shall I, and we will turn the call open to questions. Andy?

Good morning. For our first quarter of 2008, we report fully diluted earnings per share of $1.01. Our team's collective performance in Q1 was strong, especially in light of seasonal factors and the magnitude of our organic expansion under way at Weatherford.

As expected, Q1 was North America's turn to carry the load. They did. Sequentially North America posted a strong performance on the back of a seasonal improvement in Canada and a solid showing in the US, despite a slightly softer rig count.

Similar to prior years, international operations worked hard in Q1, attempting to hold our own as compared to the high watermark set in Q4. Historically Q1 pullbacks and product shipments, primarily lift and completion, provide a headwind to topline progress early in the year. This Q1 was no exception.

Strong performances in CIS and West Africa could not overcome the seasonal decline in the North Sea and event-driven moderation in our Middle East/North Africa/Asia-Pac region and Latin America.

Before moving onto the numbers, I have two housekeeping items related to events excluded from our results. First, our results of operations exclude asset write-offs in connection with our exit from sanction countries, investigation costs and severance and restructuring costs. These total $74 million.

Second, during the quarter we took an after-tax charge of $20 million related to our discontinued E&P operations. Recall that these went into disco in Q2 2007.

EPS comparison. At $1.01 earnings per share grew 2% sequentially and 22% year on year. Sequentially the field contributed $0.05 of incremental EBIT. Nonoperational items were flat, while taxes took back $0.03 due to a 248 basis point increase in our effective rate over Q4. The net improvement was $0.02.

Year-on-year the field contributed $0.18, all of which came out of international markets. Nonoperational items and an increased share count hurt earnings by $0.07, which is offset entirely by a $0.07 contribution from taxes.

Operating performance, consolidated overview. Compared to Q4 revenue was essentially flat, up $4 million on a consolidated basis. Improvements in North America were almost entirely offset internationally due to traditional Q1 declines in lift and completion. On a year-on-year basis, revenue is up 19%, against a 4% increase in average rig count globally.

North America, which accounted for 50% of total revenue, grew $37 million sequentially. Average rig count for the quarter improved 6% with declines in the US more than offset by seasonal improvement in Canada. On a year-on-year basis, North America revenue is up $84 million or 8% against a 1% rig count increase.

With measured optimism we take note that Q1 was the first time in the last seven quarters that we have seen anything resembling favorable year-on-year comparisons coming out of Canada, both in terms of rig count and our own financial performance.

International revenue was down $33 million sequentially. Consistent with our trailing six years, lift and completion product, international sales slipped $40 million from the levels of Q4 when customer budget cycles lead to higher product spending. The drop was similar last year.

On a year-on-year basis, international revenue is up $260 million or 31%, accounting for 76% of our year-on-year growth. This is against the back drop of an 8% growth in international rig count.

Eastern Hemisphere alone is up $230 million or 36%, against a 9% increase in rig count. Consolidated EBIT before corporate and R&D was $566 million for the quarter, up $23 million sequentially with operating margins at 25.8%, up 100 basis points. Much improved job mix in Canada, coupled with higher activity levels, boosted North American margins as did operating efficiencies earned in the US.

Latin America and Europe/West Africa/CIS managed to produce 80 basis points and 40 basis points of margin improvement respectively. MENAAP was the only region with a margin decline with 140 basis point drop. Half of this delta came from a self-imposed field shutdown in Australia. The remaining drop-off reflects expenses associated with the large number of startups in the region. Middle East/North Africa has the Company's greatest concentration of startups at this time.

I will move onto geographic performance. Within our four geographic regions, performance was as follows. North America, 50% of total revenue; revenue up $37 million or 3%. EBIT was up $35 million to $292 million, entirely on the back of Canadian mix and activity. Revenue grew across almost all product lines. Increased focus on pricing and utilization produced strong revenue and profitability performances in drilling services, wireline, fishing and reentry and drilling tools. Improved mix in artificial lift was also a contributor. These positive moves more than offset declines in US stimulation.

Middle East/North Africa/Asia Pacific, 24% of total revenue. Revenue dropped $16 million or 3%. This was almost identical to the $15 million decline in Q1 2007. Completion and lift product sales pulled back $25 million, and integrated drilling fell by $6 million due to the Australia shutdown.

Considerable improvements in drilling services, well construction and stimulation and chemicals helped to offset these declines. EBIT was $121 million, down $11 million. Margins were 23.1%. The shutdown issued noted earlier, as well as increased intensity of startups, accounted for the drop. Year-on-year revenue was up $127 million or 32%. EBIT was up $37 million with incrementals of 29%.

Europe/CIS/West Africa, 16% of total revenue. Revenue grew $3 million or 1%. Russia and the Caspian posted their strongest quarterly performance to date, compensating for weather and activity-based declines in Europe. The strongest gainers by product line were well construction, re-entry in fishing, and drilling tools.

EBIT was $93 million, up $2 million. Margins grew to 26.8%, a 40 basis point improvement and a historical high. Year-on-year revenue was up $103 million or 42%, and EBIT was up $38 million on incrementals of 37%.

Latin America, 11% of total revenue. Revenue declined $20 million or 8% following a long stride forward in Q4. Strong showings in Brazil, Argentina and Venezuela were not enough to offset delays in Mexico, Ecuador and Peru. Wireline remained a particularly strong standout performer. EBIT was $60 million, down $3 million with margins at 25.6%, an 80 basis point improvement and a historical high. Year-on-year revenue was up $30 million or 15%, and EBIT was up $12 million on incrementals of 40%.

Cash and capital. Cash flow. During Q1 we generated EBITDA of $659 million with D&A running at $169 million. Operating working capital consumed $222 million of cash. At the end of the quarter, we stood at 130 days of working capital, up seven days over Q4 due to seasonal payments by customers in Q4, an aggressive build in inventory including raw materials in Q1 to fuel '08 growth plans. After deducting interest expense and cash taxes, operating cash flow was $343 million for the quarter.

Capital expenditures. Capital expenditures were $560 million for the quarter, net of lost and whole revenue. Spending this quarter included more than $160 million in integrated drilling, largely in connection with rigs to be delivered to North Africa. We still budget $1.8 billion of CapEx for 2008. Approximately 85% of all CapEx investment went to markets outside of North America.

Capital structure. As of quarter end, our ratio of net debt to net capitalization stood at 35% with total net debt at $4.1 billion. Cash balances totaled $626 billion at quarter end. We did not immediately apply the cash received from our bond offering to short-term debt in those instances where breakage costs made it uneconomic to do so.

Guidance. While Bernard will cover our operational outlook in his comments, I have the following updates for you for 2008 nonoperational items. Corporate expense, $125 million. Net interest expense $250 million, up due to our bond offering.

Tax rate. Now that we have finalized our tax planning for '08, we feel comfortable guiding you to a full-year effective rate of between 18 and 19%, identical to Q1.

Share count. We exited the quarter at 340.3 million basic shares outstanding and 349.5 million fully diluted shares outstanding.

I will now have the call over to Bernard.

Q1 was a good quarter and typical of our Q1s in terms of dynamics at work. Q1 was also a major building quarter characterized by heavy rate of startups in international markets and intense efforts on preparing our business for the next leg of growth.

During the quarter we also witnessed a change in the tone of our North American markets. The sequential rise in revenues, operating income in earnings per share was earned in North America, which is predictably the case in Q1. The year-on-year rise in revenues, operating income and earnings per share was earned in international markets, both Eastern Hemisphere and Latin America. This has become and will continue to be a recurring event for Weatherford as the average per annum growth rate in the international markets is expected to outpace that of North America by a factor of at least three if not four over the next five years.

Overall top line was flat to modest (inaudible) increase of 0.2% sequentially as growth was largely offset by our customary pullbacks in lift completion and also well construction sales to international markets.

Operating income margins at 22.3% matched the highest in the Company's history. All regions showed improved margins except MENAAP. MENAAP, our usual seasonal event. MENAAP is in the most intense startup mode of all the international markets. Margins in MENAAP, though, finished 200 basis points higher then in Q1 '07, and you should expect Middle East/Asia-Pac margins to finish '08 with comfortably higher margins than those achieved last year.

Earnings per share was up $0.02 or 2% sequentially. Excluding the increase in tax rate over Q4, the sequential increase in earnings was $0.05 or 5% sequentially.

Sequentially the quarter's growth was North America. The international segment was down. The Eastern Hemisphere was essentially flat, while Latin America had a decrease of $20 million. Delay on number of projects in Mexico in particular, both online and in our case offshore, were the primary culprits.

The US did well in light of the quarter's uninspiring market. There was not a discernible trend in pricings up or down, albeit price increases in selected markets of specific product lines met with good success, despite increases that were put in late in the quarter.

The region booked substantial added contracts for the deepwater markets on and around new technology offerings and cementation, liner hangars and tubular running services. Canada did well both in revenues and margins considering the market. Recall that last year's Q1 had a stronger underlying market and better pricing from the outset. Indeed, Canada's rig season had a short quarter with an early onset of breakup. That's early days of March actually.

Furthermore, Q1 had a full 90-day impact to what amounts about a 10% lower pricing structure reached at different times during the second half of last year.

In spite of this, Canada managed to pull a good operating margin testimony to effective cost control and increasingly high margin product mix. Entering the traditionally low new activity quarter in Q2, we will try hard to further increase productivity but without hampering our ability to respond to upward moves in market activity later in the year.

Two comments on international performance. Q1's international performance, although essentially flat, is the best we have seen in our history for a first quarter. For each of the last six years, our Q1 typically drops off off seasonally from Q4. The predictable cause is a one quarter deferral in product shipments driven primarily by customer spending patterns, particularly for products while construction completions lift. International services are unaffected.

Second, the international regions are in the midst of intensive startups. All are drilling-related and cover a wide breadth of application, ranging from coral tubing, horizontal reentry in existing oilfields to high-pressure, high-temperature new gasfield drilling. We have major startups underway in Algeria, Libya, Russia, Mexico, China and Saudi Arabia. There are others too. These are just the major ones.

In Algeria, Libya and China, the startups are IPM type assignments where rigs and downhole services are blended in an integrated effort. The mobile (inaudible) were not a surprise. They were obviously expected. Activity in the quarter was intense in training, infrastructure expansion, equipment inventory build and field mobilization.

Similarly Q2 will be intensely busy. Q3 will have most of the various contracts on the startup in operation. Mobilization of the process, though, will be unrelenting through year-end.

The quarter also saw soft conditions internationally because the rig shortages in [off-sea], tough weather patterns in China and the ubiquitous delays in client programs, particularly Latin America. But every quarter I need to have a cocktail of issues like that.

My last comment is specific to Australia, what can be characterized as a tragic event. We experienced a fatality in late January. Our operations in the field where this occurred were shut down for the entire month of February for systemic review of operating procedures and safety guidelines. We have a zero tolerance for any shortcomings on safety procedures and performance. The shutdown was of our own volition.

The rough cost for the quarter was over $6 million of negative EBIT or about $0.015 per share.

Eastern Hemisphere year-on-year growth was 36%. Q1 on Q1, probably our industry's highest growth rate. For the balance of '08, our international segment will proceed with increasingly strong growth and up with year-on-year growth rates at the 40% and 25% levels for Eastern Hemisphere and Latin America respectively. This has been our history and record in '06 and '07, and you expect '08 and '09 to be no different.

Our focus is on execution in our business development or sales. Setting the geographic aside, I will take you through the quarterly performance of our 10 service product lines, product lines that ranked in size from largest to smallest. Well constructions $353 million. Artificial lift also $353 million. Drilling services, $337 million; drilling tools, $247 million; completion systems, $227 million; wireline, $205 million; re-entry finishing, $168 million; chemicals and stimulation, $154 million; integrated drilling, $97 million; and pipeline, $54 million.

Chemicals and stimulation had the best performance, followed by well construction and wireline. Chemicals and stimulation growth reflect the startup of stimulation operations in Russia, Latin America and Middle East, as well as a very strong performance out of the chemicals group. Well construction reflects gains made in and around the deepwater markets. As a reminder, well construction, regroups tubular running services, liner hangars, solid expandables and cementation.

We have a number one, number two market share worldwide in all of its segments. Wireline's progress this quarter was largely on the shoulders of the seasonal improvement in Canada. We ran over 700 jobs with our Compact micro imager this quarter as this technology, together with the Compact suite of tools, continues to gain market share at an accelerating rate.

Wireline is likely to overtake drilling tools and rival completion and become our fourth-largest product line in late '08 or early '09. There are a considerable number of new technologies that we are commercializing in wireline, particularly on and around our unique Compact system.

Artificial lift has exceedingly strong bookings and should be expected in the current oil price environments to do very well. This product line traditionally falls in Q1, but reaccelerates throughout the year. In fact, we've never had a market and backlog and lift like we have today with orders well into '09.

Artificial lift is a product line directly tied to the acceleration of decline rates in our reservoirs. It is a natural derivative to the aging of our reservoir productivity and increased produced water.

Strong growth in drilling services, which is directional and underbalanced in Middle East, North Africa, North America and Russia, was more than offset by delays in the North Sea, Mexico and China, both weather-related and project-driven. Notwithstanding an expected very strong performance by artificial lift later this year, we do expect directional and underbalanced to overtake lift and be our largest product line sometime in '08/'09.

By mid '09 or a little more than a year from now, we should expect our top five product lines ranked by size to be drilling services, meaning directional and underbalanced, artificial lift, well construction, wireline and completion. All five will represent circa 75% of Weatherford's business.

Important events and acquisition activity. One, we spent in the quarter about $115 million on 11 small acquisitions. The acquired assets and companies were all technology and/or engineering deals. The largest was V-Tech, a Norwegian engineering organization with proprietary tubular running services technology. You should expect our acquisition efforts to continue at a similar pace directed towards technology and throughout the year. Although this does depend entirely on opportunities.

We also opened two new R&D and training centers in Russia, one in St. Petersburg and one in Samara. Both have facilities that are in the midst of those two cities' engineering campuses.

Employee count. We ended the quarter with 40,500 employees. We added a net 2700 new employees to Weatherford's payroll. This is the obvious operating backdrop to the rate and intensity of the startups.

I might add also that if you look at the analysis of the payroll, the North American number of employees actually went down in the quarter by a few hundred people. So the net increase of employees in the Eastern Hemisphere and Latin America was actually more than 2700 people. It gives you a sense a little bit of what is going on.

Forward views. We would limit our forward views on NAM to two comments. One, in the trailing 12 months, Canada's oilfield has endured North America's lowest spot gas price, an unfavorable change in tax regime, a rise in the foreign exchange value of the Canadian currency, a circa 30% drop in activity and a concerted drive to lower oilfield service prices.

It has been a rough ride for Canada and Weatherford. There was exposed large service companies in that market. With hydrocarbon pricing environments of $100 oil and $10 gas, the Canadian market has bottomed out. And client tone suggests a recovery late '08 or early '09 led by heavy oil and broadscale new gas plays. The magnitude of planned investment directed at heavy oil projects is well-known. No need to belabor the point here.

Separate and distinct from heavy oil, broad trends in CBM and shale gas support a strong recovery in gas. The recent adjustments in the Alberta provincial government's royalty regime, although not enough of a concession to the industry, will help.

At this time we would expect '09 to be materially stronger in Canada than the market's expectations.

We are also constructive on the US market and our position there. That market is turning. The oil segment, lower 48 and deepwater and the gas segments are ready for a healthy volume increase. This double barrel positive will make for good margin opportunities.

We are extremely well-positioned on the lift side, which will be the frontline beneficiary of the growth in oil drilling and production. The same applies to directional drilling. The productivity limitations of the US gas reservoir basins imply technology requirements to directional but also managed pressure drilling, liner hangars, conveyors constrained to wireline, etc. that we are uniquely suited for, tight gas and CBM in particular.

We expect further US organic growth in directional, underbalanced, wireline, sand control and chemicals. In our case all have proprietary technology with small but growing marketshares. This will accelerate our US growth throughout '08 and '09. We do expect a robust '09 at this point, barring a more generalized recession in the rest of the OECD.

Setting aside improved prospects in North America, long-term growth is predominantly international. With each quarter that passes, we see more quantitative evidence of the international markets' depth, breadth and longevity. In both the Eastern Hemisphere and Latin America, growth rates will be strong and sustained. Growth process will be long, longer than any relevant timeframe for forecasting purposes. It is a necessary derivative of the condition of our reservoir base. Today's level of activity, whether it is drilling, rigless or production, are not enough to arrest long-term accelerating decline rates, let alone growth production rates in harmony with our underlying demographic trends.

Furthermore, there isn't a conceivable three-year trust or the equivalent that could create a surge of excess production and capacity. It is not real; it is not possible. Our industry has the urgent and serious need for a five to seven-year buildup in activity, coupled with accelerated development and use of technology.

We are in a long secular phase. Nothing else will work. You've heard us say this for the past five years -- we are more convinced of this today than we ever were. We are worried about integrated project management.

By year-end we expect to have six IPM projects underway, all in the Eastern Hemisphere. Truly IPM projects will involve managing client rigs together with our downhole products and services. One involves combining our coil tubing drilling units with downhole products and services, and finally, three or half of the total IPMs involve our own rigs and downhole products and services.

As a matter of policy, we will combine rigs and/or cultivate drilling units, but our downhole products and services whenever end wherever the client expresses interest in doing so. Our experience of pricing and operating condition suggest this is an excellent margin business for all constituent components of the IPM chain, and the offer (inaudible) for good long-term volume growth.

We also believe it can result in better operating productivity for the client, a view many clients share. In fact, the demand for land-based IPM is very strong. Given the above prognosis, it should not be a surprise that we engaged in intense process of recruitment and training. Our 2700 new hires this quarter are undergoing e-media training in our facilities, and of course, it should not be a surprise that inventory and CapEx have also been accelerated.

Also, consistent with the outlook, the board has authorized a split of two shares for one, which will be made effective with a record date of May 8 and a paydate of May 23. This is our fifth share split in our 21-year history, the most recent being December 2005.

Summarizing Q1 it was a good, intense and productive quarter, planning and building for growth. All signs point to it. Inventory up, CapEx up, headcount up, etc. Despite the substantial cost of growth, margins are up in all regions with no exception, other than Middle East/North Africa/Asia-Pac, which is a traditional occurrence in Q1.

For the first time, prognosis in both in NAM and international markets are favorable, making the next 21 months a good time to both build aggressively and optimize. We are intensely focused on execution of organic growth. We are confident that the potential for organic growth is unparalleled in our history, given the breadth and depth of our portfolio and the scale of our client's plans. We believe that the potential for financial performance has never been as good as it appears to be, not only for the industry but more importantly for Weatherford.

These are my prepared comments. I will now turn the call back to questions. Operator, if you might start the Q&A process.

(OPERATOR INSTRUCTIONS). Jim Crandell, Lehman Brothers.

The first question, Bernard, is about Russia and Algeria. With Russia where do you expect to be in terms of a run-rate in Russia by, let's say, Q4, and how do you see growth sort of the next two to three years beyond that?

Do you want the run-rate as in an idea of where the revenue of Russia will be by the end of the year?

Yes, Q4 '08 and then growth subsequent to that through let's say 2010, 2011.

By the end of the year, of course, there are some ups and downs depending on how things work, but Russia should be around somewhere between 400 to $500 million by the end of the year in terms of run-rates. That is Russia. That is not the former Soviet Union, which is a higher number. In other words, they are not including the sand.

And what would you see likely growth on a two to three-year time horizon from that level?

It is likely to match any of the other countries that have also very high rates of growth. I would say that it is -- the growth rate will be as high as we can manage from an operating standpoint. So I am most reluctant to put a percentage on it. But there's only a handful of countries that can compete with Russia in terms of growth rate, and I'm talking about important countries. Not those countries that go from 0 to a few million dollars where the growth rate is extravagant. I'm talking about countries already sizable who also have a high growth rate. It is hard to compete with Russia.

Okay. And Bernard, I know you just came back from Algeria. Can you comment a little about that market, what is going on now and the prospects there?

It is probably best described as a coiled spring, which is a market where there is a lot of activity which is about to get started up. Our activity covers both the traditional, which is reentering existing oilfields. It covers drilling of new oil plays and what can be best described as a very stout level of gas drilling to increase the volume of gas produced.

There is a lot of upfront work that has gone into preparing for the activity increase, and the upfront work is not only with us but with some of our peers. It is also an infrastructure-intensive type work. So much work being done is in the middle of the desert, so you have in essence no infrastructure support to be expected, other than large basins like Hassi Masoud. But the drilling itself will be at a distance from places like Hassi.

So, as a consequence, rich in infrastructure, very large volume work to be done. It is for us one of the countries that will arrival Russia in terms of growth, not the only one, though.

Okay. And then last question, Bernard, I was recently at National-Oilwell's Galena Park facility, and they had a number of rigs that were being built for you, in fact, more built for you than any other company there, and they were going to some places that were at least surprising to me. And you alluded to this in your comments and that you are willing to take rigs to I guess any area in the world in terms of integrated projects. Can you talk about this in terms of where you have contracts? I believe, I will not repeat the countries, but there were a number of different countries in different areas that they said the rigs were destined for.

Yes, I don't know what (inaudible) National-Oilwell told you, but it is absolutely true that I think we have ordered something like eight rigs from National-Oilwell or something like maybe six, I cannot quite remember. But it is a fact that we will engage in IPM contracts where we will combine rigs and downhole services where it makes sense and when it makes sense. Let's define makes sense.

One, it has to make industrial sense. In other words, we must show for ourselves and also for the client that combining rig operations, designing rigs already ahead of time and combining rig operations with downhole services and equipment will provide an operating logistics for the client and for ourselves.

So first is that the case must be strong. The second is the contractual terms must be strong also. And that means that the margins overall, rigs and services and equipment must make it worth our while. And the length of time in the contract also must be worth our while. Typically we will not commit to equipment such as rigs without a full cash payback on the contract.

Full cash payback on contractual terms in international markets for land rigs is four years. It could be three, it could be four and a half, but four years is a nice conservative number. In other words, commitments have to be above and beyond four years of whole cash payback.

If all those terms are met, meaning it is a legitimate industrial case, one. Two, the margins are good across the board, not just one side subsidizing the other. That is utter nonsense. And three, the duration of the contract involves a full cash payback, yes. Yes, not only are we interested, we're very happy to engage in as much IPM projects, along those lines as we can responsibly manage. This (inaudible), by the way, the calls have been drilling, which is a smaller subsegment of the same.

With respect to how many rigs does that involve, it's not a great many. I think we have right now altogether between -- (inaudible) has been ordered -- about a dozen rigs that are being on order, and probably another six are right behind it. So you're looking about 18 altogether. We sold about 12 about a year ago, so we shrank the fleets getting out of the markets.

My interest in rigs is purely as a component of an IPM change, not as a class of (inaudible) per se. So we sold 12. We are building 18 more. That is over the next 12 months or so. They are all going to IPM projects.

But you should also know that I would say only half of the IPM projects that we run, we used our own equipment, and the other half we used client equipment. So it is not a prerequisite either for us to be using our own equipment in terms of rigs. We just like the combination of when it is well thought through from an engineering standpoint, operating management standpoint and financial standpoint.

Okay. And Bernard, one quick final question, and then I will get off. In order to fully participate in this offshore cycle that seems likely to accelerate here with all the new rig deliveries over the next two to three years, on the LWD and, let's say, the rotary steerable side, do you need the sonic, the formation tester, advanced resistivity measurements, or can you do very well with the very rugged, very capable tool that you have now?

I will say yes to everything. First, you can do very well without it. But then as it turns out, sonic, etc. etc. etc. is coming -- and formation testing, etc. are all coming out on the market -- in the marketplace in a matter of months.

So, on the one hand, the fact that we are unrivaled in high-pressure, high-temperature in the industry and this a fact -- we hold all the world records for high-pressure, high-temperature. So that is one sort of area of LWD performance where we are without any peers. On the other, just based on that we do very well.

With the coming on the market of the three competencies you described, which are add-ons to the basic other new technologies which are coming on the market in a matter of months, I think that becomes a closed issue. Whether we would need them or not in order to fully exploit, etc., etc.

Bill Herbert, Simmons & Co.

Drilling down a little bit more deeply here with regard to IPM, I think the only one that we have really had any light shed on is the TNK engagement, which I think is five years, $500 million for the rigs and $500 million for directional tubular running services under balance, etc. So if memory serves, about $1 billion over five years.

With regard to the other IPM or bundling arrangements that you have, can you just give us a rough sense of scale, please, in timing in terms of when they reach sort of a cruising speed in terms of revenue generation?

Glad you asked that. Alright, probably the best -- typically we -- and I think many of our peers do the same -- we tend to be coy about too much contractual discussion not because of Wall Street but because of competitive reasons. But, on the other hand, to try to help.

We have today we're working on six different IPMs. Two of the IPMs you actually are just running things. Sometimes there are -- sometimes we are running a large cross-section of other people's products and services, as well as other people's rigs and some of ours.

The other four IPMs are very much entirely our products and services and soup to nut. And in one instance, you have (inaudible) units, two (inaudible) units drilling large ones. If you come in my conference room, you will see a picture of one. And in the other instances, you have our rigs.

Okay. So far, so good. When all six will be running, I would suspect that the run-rate will be about a reasonable number, $750 million per annum, $800 million per annum. That should happen on and around Q4. If you will, please give us some flexibility. We could be a bit early. We could be -- it took about a month or two. This is not surgery.

The number, the run-rate 750 to $800 million for those six IPM projects I think is an honest and reasonable number. Obviously it is multi-year -- the commitment and the different IPMs have different longevities. The ones with our rigs are obviously long, four to five years. Others are short-term.

So the blended average is probably like a bit over three years maybe. So that gives you an idea of the overall sort of commitment on the part of the client.

I would also add that we are negotiating right now a number of other IPMs for startup in '09 and so on and so on. This is not an endpoint.

Yes, right, and I did not think that it was, which actually segues into my next query. Can you give us a sense as to the visibility in terms of number of projects that you are bidding on in dollar magnitude above and beyond what you have already won?

It mainly becomes speculative because as I mentioned in my comments, this is execution for us now. It is not business development and sales. Now you're talking about things that we are working on for startups in '09 and so on and so on.

So take my comments into context. It is at least as large as what we have; it is actually larger.

And thirdly, we have been on a hiring spree here for very good reasons because you have got more growth than you can really embrace at the moment. But from a resource capability standpoint, you are comfortable that you are able to prosecute all this stuff relatively seamlessly?

No, I think I'm not. What I mean by that is that one of the reasons why we have been for the timebeing very quiet on the acquisition front is because it requires every hour in the day of the week, every week in the month.

The organic path is hard; it is also the best one. So we do not take any excuses for granted. There is definitely a high-level of stress, operating stress here that I think we like to keep in order to ensure that we grow with a minimal amount of problems and disappointments, particularly client disappointments. Because if we do have good operating quality, I think the market in my judgment, in our judgment, the market is not an issue barring a large recession in the OECD. The market is not an issue.

In my opinion sales and business development is not an issue. I think it is, of course, an issue, but it is not the issue. The issue as far as I'm concerned is operating quality and execution quality, end of story. And, therefore, all the focus, all the stress, all the attention is on that, and we take nothing for granted.

Right. The last one for me, Russia is one of the countries clearly -- I presume Mexico is another, perhaps Algeria. Where are the remaining countries where you have these bundling operations?

They are in the neighborhood. That I will not answer. They are in the neighborhood. Even if I had conversation, I probably would not say it, but it is in the neighborhood. I think you certainly have hit the obvious ones, but there are others. You do not have -- it is not a small number. And then do not dismiss also the countries that are running today at $100 million a year. But we will steadily go -- and actually in the next two years, three years tops, we will go to 250 million, 300 million.

They are not the same scale as the ones you mentioned obviously. But you have got quite a few of those, and it is a combination of both that makes them very strong growth. So attention to even the smaller markets also makes a difference.

Robin Shoemaker, Bear Stearns.

Bernard, I wanted to ask you if you could give us an update on some of your newer technologies that may become much more substantially commercial in the coming year or two? I'm thinking of drilling with casing, solid expandables, I think your Metal Skin product. Just give us an update on that if you would?

Too long, too long. I will just go quickly.

Well, you used to talk about a lot of this on conference calls, but you're so busy now that it kind of gets -- (multiple speakers)

You have got new technology which is coming in directional, in wireline, in extensions in Casing While Drilling. Solid is moving along. In traditional service lines like tubular running services, we have a lot of technology coming out, which I think is wonderful.

Let me back up for a minute and give you some examples on the directional. One of your peers ask me before, when are you going to come up with this well? Are you going to be hampered by the lack of sonic and formation testing and so forth and so on?

And the answer was no, they are coming out now. You have got that sort of phenomenon, which is completing what is a core technology which has superior attributes. In the case of LWD, it is temperature and pressure. In the case of wireline, which is the same phenomenon, it is convenience. It is small.

So in both directional and wireline, we're completing by adding all the various measurements that we did not have through a core technology, which we believe either because of 10% pressure or because the convenience is superior to anything out there in the marketplace. We have got that phenomenon going on.

Separately in the case of directional, there is technology coming out on -- well, I will leave it -- I will just leave it at that. The technology coming out by year-end, which we think it is really interesting, in one of the components one of the critical components of the directional process. I will leave it at that.

Casing While Drilling, we are extending its capabilities. We have done very well on the vertical section of Casing While Drilling or drilling-with-casing, same thing. We're now extending it to the directional horizon, which is obviously where it needs to go. On --

Bernard, does that involve a retrievable bit, or is it a different -- ?

I would not tell you this on the phone. I would not tell you this on the phone. I would not tell you on the phone. There is technology that is coming out on and around solid further applications. So zonal isolation on the one hand. On the other hand, it is the elimination of a whole string, a whole size of casing. It's not the (inaudible) yet, but we are inching our way toward that sort of application, and I will stop here. I will stop here.

It is true there is a whole section in my notes I did not read because my notes are too long. But there is a whole section in my notes which some of you can have access to which essentially describes how much money we spend on technology. And we spend approximately $400 million, $450 million per annum on technology. Over 200 ourselves within R&D centers and we buy a lot of intellectual property because you cannot develop everything yourselves. It is not possible.

You obviously are a believer, and I thank you for the question. I'm a bit reluctant to tell you anymore in a public forum.

Dan Pickering, Tudor, Pickering, Holt.

Actually Byron Pope here. With regard to the North American market, Bernard, I think on the last quarter call heading into winter when the outlook for North American natural gas is a little more uncertain than it is now, I think you guys talked about potentially being able to keep your North America op margins kind of flattish year-over-year. Given the outlook looks more constructive now, how do you think about operating margin enhancements as we step through this year given that you are continuing to gain market share in some high margin areas?

Higher. Obviously this is a starter in '08 versus what it was a few months ago. It was a starter in '09. Margin move will be a function of volume, which is according to scale, will be a function also of volume coming on an operation certainly in Canada, which is far more efficient than it used to be. It is also pricing.

It has also moved to a higher margin products and service lines. A lot of the products and service lines were growing the best in North America of the higher margins. So to combine all three should be very good.

I would keep in mind that -- I will say something that should be quite obvious. We will see what we get in Q2 out of Canada, running at 111 rigs right now versus 107 last year. Q2, Q4 will dictate a lot of that ability to improve margins year on year. So too will pricing in terms of the magnitude of jump up in rig count in the United States. We think that as a fundamental matter, it is probably pricing that needs to move before additional capacity and people are added. Because you cannot add those things as quickly as you might have been able to in the past.

Okay, fair enough. And then one additional question. In the MENAAP region, you mentioned that mobilizations are going to be an issue kind of as we step through this year. As we get more into 2009, once the projects are up and running? Is it fair to think about the all-in margins associated with some of this IP work greater than or at the very least equal to your standalone --?

Yes, they are. And by the way, I did not mean to -- I was striking my comment. There was a phrase that you misunderstood. I don't think that mobilization is so much an issue as it is a fact. It is a fact of life, and when you grow at the rate we are trying to grow it, and this is the same thing in '06, '07, there is nothing new. The process of growth is a disruptive process, and it is what it is. It is a good process also because it leads to our ultimately greater margins, greater returns, and that comes with greater scale. So, so much for that.

In terms of the margins of the IPM projects, they are -- well, time will tell. But they are good, and they should be higher than the region's existing margins. This does not only apply to MENAAP. It applies really to any place where we have IPM projects that we are engaged in or we're likely to be engaged in.

Remember that Q1 on Q1 margins are up 200 basis points there. Very similar to what we were full-year '07 on full-year '06. You should expect it to be very much the same full-year '08 on '07, up 200 basis points.

I think probably we look back at '09 and '08, we like to say the same forward things.

Mike Urban, Deutsche Bank.

I wanted to follow-up on a couple of the issues just raised there. I realize you don't want to get too granular -- and I do realize mobilization is kind of an ongoing thing and will be. But it sounded like from your comments -- maybe, I don't know if I'm parsing too much -- but the intensity is kind of peaking right now, and more of those projects are in revenue generation mode in the second half than in the first. Is that fair?

It is true, Mike. I think it was true, and it was very similarly true in '06 and '07. Part of it in some of the countries involved is weather. It is kind of hard to start up in the summer. So we start up in the easier months. But it was the same thing in '06 and '07, very, very similar.

Okay. Going back to the IPM business with respect to the use of your rigs versus third-party rigs, you went through some of the parameters that the Weatherford looks at in terms of deciding whether to build or apply its own rigs.

From a customer standpoint, what drives that? In other words, what I mean is, if you're getting full payback on that, that is obviously a pretty nice return, and presumably if the client could help it, they would use a third-party rig or even in a worst-case scenario use their own. So what are they getting out of it? In other words, are there unique efficiencies there? Are the rigs that you have or that you are building uniquely suited or have synergies with your tools? We would be interested on some --

First of all, not all clients are the same. Some clients wouldn't dream of having their own oilfield service operations. In fact, some clients are liquidating, selling, giving away in many respects their existing oilfield service operations. Other clients are actually building them.

So, first, you have got differences from one client to the next. There is no general rule. The client is interested not so much in many cases in trying to figure out whether he can source this service or that service from the cheapest possible source. The client is interested in getting a field drilled or redrilled with having good quality wells on time without any operating mishaps and minimizing downtime as much as possible so that we can get to production as soon as possible. They are so late as it is, and they are so limited many clients in terms of management capabilities because of the scale of the projects, that the number one priority is not, you know, sort of shopping around for the cheapest price and so forth and so on. Sometimes that happens, but for the most part what they are interested in is efficacy.

Now you sell efficacy sort of two ways. One is to say make me responsible, and I guarantee you we will be there on time as opposed to having five different contractors, directional and underbalanced, i.e. rig and the mud bid and so on and so on, and everyone is sort of supposed to be disciplined by then, which they are unable to do very effectively. Make me responsible, and I will make sure everything is on time.

The second thing you also present is an argument, which is to say that make me responsible, and given what I know about the field, it will be drilled. We will engineer the combination of above ground and below ground in such a manner as to maximize the probability of success of what you're trying to do.

You say it in the more engineering mode than the words I just used that is essentially what you say. Those two arguments carry the day with some clients. Not all clients. But enough clients will it carry the day, that the potential for that sort of argument is good enough to feed opportunities for us and some of our peers.

Got you. And last question would be when you're managing third-party rigs, you mentioned taking responsibility for everybody showing up on time. That has been an issue in the past with certain integrated projects. Is that something you're doing when you have third-party rigs, you're taking responsibility for the rigs that offer third-party contractors showing up on time, and if so, how do you manage that risk?

It is a very good question. In the case of the rigs we run, because then we have two IPM projects which are to going run on other people's rigs, it is actually client rigs in one instant. In the other instance is different contractors. Meaning rig contractors.

The level of responsibility of the IPM contract will be a little bit different with someone else's rigs. In other words, there is some measure of responsibility for us, but there is also some measure of putback responsibility onto either the governmental entity or the foreign contractor whose rigs are going to be working for us. So it is not quite the same in responsibility; it cannot be at least in our case. We do distinguish between being responsible for things being there on time, functional and where there is as much efficacy as we can possibly organize, versus relying on third-parties that the client contracted, and we have some measure of discipline but not the same.

Kurt Hallead, RBC Capital Markets.

I wanted to follow-up here on -- so your integrated project management is becoming a bigger aspect for you, right. And I'm curious as to whether or not we have heard from Schlumberger and some other higher third-party content; therefore, margins are going to be a little bit lower than the standard business. How are you guys approaching that, and your margins being (multiple speakers) in a different situation from your competitors?

We're not. I mean by definition we're in the same marketplace. But one of the reasons why maybe in the end IPM will not be as large for us as a percentage of the whole as it may be for some of our peers -- it will be large enough but not necessarily as large -- is because we are very careful that we get involved not only in circumstances as I described before where there is a legitimate case for doing what we know how to do; there is a legitimate case for integration; the client is the sort of client who really needs an oilfield service company's help, etc., etc., etc. and all the rest of the things I said before.

We will also not get involved in cases where there is just not enough downhole service equipment density. We are just not. And there is enough work, there is enough money to go around and we're actually short on everything. Short on time, short on people, short on equipment in the right place that we don't need to chase everything. So that we try to be as selective as we can and avoid things where there is a large ticket on and around things that we are not particularly good at or not in altogether, albeit clearly because we don't do -- (inaudible) we don't do bits. These will always be present as missing links, but it's not a big number.

Where we get in more trouble is if there are chunks of products and services that really we think we do very well, and for reasons of client preferences, we would not be the ones entrusted with it. We typically pass on that.

Right now, to be clear, of the six projects Bernard is talking about, no material component has passed through revenue.

I would say 90% of it, that number is made up. So take it with a grain of salt. 90% of the products and services are Weatherford.

Okay. And then give you credit where credit is due. You were kind of early on on the North American call on the downside, and it sounds like you are getting more optimistic here on the upside. Do you see Canada or the US being a bigger growth component?

That is an interesting question. That is a very interesting question. This is my view; I even have a different view. My view and I think timing would be a little bit different is that the delta may be greater in Canada than in the US. Or put another way, should be greater in Canada than US if economic rationale comes to play if only because they lost more. The last time I checked the US did not go down by 30%, did they?

So you have more to gain out of Canada than the US, and they have new plays in Canada on the gas side, which I think are truly very interesting. So I would say that Canada should have more of a delta and so forth.

On the other hand, the US being more than two times the size of Canada, for what you care about, which is how big are the numbers going to move up, obviously the US is a bigger ship.

Yes, on a percentage basis, Canada; on an absolute dollar basis, US.

Amen.

And then lastly, Schlumberger's bid for Saxon here today, getting access to rigs, what do you think the applications are for the global service business? Is this going to be now a trend where others are going to start to see the value in now owning rigs for -- (multiple speakers) products and services downhole, or what is your take?

I think to pay homage to our larger peer, they have seen the value of adding rigs to downhole services a long time ago. They ran -- I do not know the numbers -- but they ran close to 100 rigs on and off within the confines of the Company. So they have understood that, both the drilling rigs and workable rigs. So I mean that is one.

There is no real implication for us. I think we do what we do at the rate we do it at. We don't need to get involved with private equity people. We do not need to get involved with drilling contractors. Therefore, for what we need to do in the end, we can manage our ship fine without having joint ventures or the like.

So I wish them luck with both the acquisition and possibly other joint ventures to go to follow-up on and around the rigs. For what we need, I think we're doing fine. There's no need to get more complicated or I think larger scale than what we have.

I do like the notion that just as a matter of industrialized legitimacy, I like the idea that the combining in some instances, I repeat in some instances, land rigs, I repeat land rigs -- I don't think it matters what you do drill offshore. Combining land rig competency both for operating and engineering were downhole. I thought from a reservoir development standpoint, you always made engineering stand.

So from an industrial legitimacy standpoint, I like what is going on. It has no bearing on us really that I can recall.

I suppose one last question given the time, please, operator.

Geoff Kieburtz, Citi.

I'm going to continue these questions on IPM a little bit further. Just to clarify, you are saying that the IPM margins or the margins on the IPM work or at or above the average for the regions that those are going on in?

In our case, yes.

Okay. And as you look out beyond this year, would you expect the IPM revenue growth is -- well, how would you expect it to compare with the overall revenue growth in the Eastern Hemisphere and Latin America?

It will be higher.

Okay. And you have mentioned that a lot of the growth -- you have mentioned some high-growth markets, in particular Algeria, Libya and China, are very heavily -- or at least have a strong IPM content. Are those markets in particular -- you gave us kind of an $800 million run-rate at the end of the year. Call it 8%, 9% of the total. Are those markets more than 10% IPM?

You know, I think you have to be careful. They are very different markets. China is experimenting with IPM. I would not say that is necessarily going to be a big part of the Chinese market.

Libya is very young. Libya is very young as a market. In other words, you have not seen anything in Libya yet. You have to wait until '09 and even 2010 for Libya to really take off (inaudible).

Algeria, on the other hand, as I described is a coiled spring. It has been sort of waiting and waiting and waiting in terms of getting things prepared and bid out and organized, and I think Algeria will have a glorious year certainly in 2009. So they are at different stages.

I would never put China in the same bag as Libya and Algeria in terms of IPM potential. It just so happens that we do have IPM work there which is good, and we are likely to get some more. But that does not necessarily make it over the next three, five years and does not place it in the same league as the other countries.

There are other places that have IPM opportunities which have not been mentioned, and that is a private conversation, not a public one.

More broadly than just IPM, when you talk about the -- I sense an increasing level of confidence in the start of 25% Latin America, 40% Eastern Hemisphere revenue growth in '09. How much of that would you say today has got identifiable contract commitments behind it?

I would give you an heuristic answer because it is not modeled as I speak to you today. But I do not think I'm wrong, and I will turn to Andy if he shakes his head when I say it. But '09 is firmly, firmly set for at least half of what we need to achieve those numbers. And I -- there are some things that I write in my commentary which I really mean.

One of them -- I suppose I mean all of it -- but some of it carries more of a personal meaning when I express the fact that this is about execution, not business development or sales. But business development services is always important, but I really mean it secondary. I do think the volume is there.

Okay. A couple of other quick things. You had a big boost in working capital for the quarter. Is that going to be seasonal in its nature, or are you thinking that this working capital build you had in the --?

No, it is -- and I will ask Andy to make some comments on it, but the short answer is it is.

It is definitely seasonal. This jump up, in particular, as we look by country and by productline is particularly tied to contracts that are in hand and/or opportunities that we're highly confident that we will receive.

Global supply chain is still very, very strained. Some things on order are 10, 12 months out. We will not put ourselves in the position where we get caught short and, therefore, are unable to perform for our customers.

So it will be seasonal. We're working extremely hard, especially on the receivable side as opposed to the inventory side, to improve our processes there and speed up everything from billings through collection and any kind of dispute resolutions. You will see progress in that part of our balance sheet throughout the year. But on an inventory side, carry, let's say, a smallish stick around the Company because we know what it takes to grow.

Alright. Headcount question, would you be willing to give us an approximate headcount by region as you ended the quarter or average the quarter, something like that?

I think it is probably -- this is the last question of the last analyst to be on the call. Maybe we could do that (multiple speakers). We will be happy to do that, and maybe, you know, Andy or I can give that to you.

What you will notice is that the headcount in the US and Canada is, well, down. Actually US is flat, totally flat. Canada is down, which is what you would have expected, even though it is a busier quarter than the sequential one, and the rest of the growth is all international. So about -- I will let Andy or I give you the exact numbers.

We will follow-up then. Thanks very much.

Not at all. Thank you, Geoff. That concludes our conference call for Q1. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.