Weatherford International PLC (WFRD) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Weatherford International earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr. Bernard Duroc-Danner, Chairman and CEO. You may proceed, sir.

Thank you. Good morning, everyone. Andy, why don't you get started?

Good morning. For our second quarter of 2008, we report fully diluted earnings of $0.43 per share before non-recurring items. During Q2, our operations extended their streak of consistent execution. High quality well site performance, successful ramp up of younger technologies, and incremental seeding of new product lines all continued as expected. Predictably, however, Q2 was a challenging quarter for Weatherford from a financial point of view, given the seasonal decline in Canada and acceleration of immobilization costs associated with new contracts.

Our reported earnings this quarter exclude an uplift of $71 million after-tax or $0.10 per share from the following three items. First, an $81 million after-tax gain on the establishment of our joint venture in Qatar with QPC. Second, $17 million in after-tax costs incurred in connection with our exit from sanctioned countries and our ongoing government investigations. Third, a $7 million after-tax gain related to our discontinued E&P operations.

EPS comparison -- at $0.43, earnings per share are down 14% sequentially and are up 26% year-on-year. The sequential drop of $0.07 was comprised of the following -- the $0.06 of sequential decline from the field, and a net $0.01 decline from non-operational items. Increases in corporate, R&D insurance costs $0.02, while the 15.9% effective rate for the quarter helped by $0.01. Our effective tax rate for the full year is projected to land between 17% and 18%.

On the corporate side, investments in process improvement, supply chain, service delivery and support functions added to expense. A $4 million loss in FX added to other expense. Year-on-year, the field contributed $0.12, while non-operational items hurt earnings by $0.03. Operating performance consolidated overview. On a consolidated basis, sequential revenue grew $33 million or 2%. International revenue was up 10% or $111 million with double-digit percentage growth posted by Latin America, and Europe, West Africa, CIS regions. Revenue growth in the United States also ran into the double digits. These strong performances were muted by the traditional seasonal decline in Canada.

Excluding Canada, revenue grew 10% sequentially and is up 24% compared to the same quarter last year. Through the first half of '08, our international revenue is up 31%, with Latin America up 23% on an 8% rig count increase, and eastern hemisphere up 33% on a 9% increase in rig count. We expect international rig count growth to accelerate in the second half of 2008.

Consolidated EBIT before corporate and R&D declined $54 million sequentially with operating margins at 23.0%. Severe decrementals in Canada, coupled with immobilization costs in Mexico, more than offset EBIT improvements in the US and the broader international markets. North American margins are up 40 basis points compared to the year-ago quarter. Year-to-date, international margins are up 170 basis points to 24.2% on incrementals of 30% compared to the first six months of '07.

Geographic performance -- financial performance within our four geographic regions was as follows -- North America, 45% of total revenue; revenue fell $78 million or 7% sequentially on an 11% decline in rig count. For perspective, revenue last year fell 12% on a 16% decline in rig count. Revenue is up 15% compared to Q2 of '07, and is up 11% year-to-date '08 on year-to-date '07. EBIT was $224 million, down $67 million with margins at 22.2%.

Canada's decline in income was similar to last year's, although this year's stronger, sequential improvement in the US market in part compensated for the decline. All product lines grew in the US. Despite Canada's decline, Artificial Lift, Well Construction, and stimulation in chemicals still managed to grow top line in North America as a whole.

Middle East, North Africa, Asia-Pacific -- 25% of total revenue. Revenue increased $34 million or 7% sequentially. Revenue is up $121 million or 28% compared to Q2 of '07, and is up $248 million or 30% on a year-to-date basis. EBIT was $131 million, up $10 million sequentially. Margins were 23.5%, up 40 basis points with incrementals of 29%. Compared to the year-ago quarter, margins are up 120 basis points on incrementals of 28%.

Strong performances in Algeria, Kuwait, and Libya, as well as Australia, China, and Indonesia stood out. By product line, Wireline, Well Construction, completion, and integrated drilling, all experienced noteworthy increases. Europe, CIS, West Africa -- 18% of total revenue. Revenue grew $42 million or 12% sequentially. Revenue is up $99 million or 34% compared to Q2 of '07, and is up $202 million or 38% year-to-date '08 on year-to-date '07.

EBIT was $99 million, up $6 million sequentially. Margins were 25.4%, down 140 basis points, with incrementals of 14%. Product and service mix were strained sequential incrementals. Compared to the year-ago quarter, margins are up 140 basis points on incrementals of 30%.

Norway, UK, and Russia all had solid improvements. All product lines grew, with the most substantial moves put up by Drilling Services, Well Construction and Artificial Lift.

Latin America, 12% of total revenue. Revenue grew $35 million or 15% sequentially. Revenue is up $65 million or 31% compared to Q2 of '07, and is up $95 million or 23% year-to-date '08 on year-to-date '07. EBIT was $58 million, down $2 million sequentially, as accelerated mobilization costs increased current quarter expenses. Though not budgeted at the quarter's outset because we had not yet received the award, this acceleration was a conscious decision. Margins were 21.5%, down 410 basis points sequentially. On a year-to-date basis, margins are up 50 basis points. On a sequential basis, Mexico, Brazil and Venezuela were the top performing countries. Region-wide, revenue grew in all product lines.

Cash flow. During Q2, we generated EBITDA of $604 million with D&A running at $172 million. Operating working capital consumed $184 million of cash. At the end of the quarter, we stood at 136 days of working capital. Receivables balances are flat, with the growth in working capital attributable to increases in inventories in preparation for growth in the second half of the year and in '09. After deducting interest expense and cash taxes, operating cash flow was $280 million for the quarter compared to $147 million in Q2 of '07.

Capital expenditures were $527 million for the quarter, net of loss and hold revenue. In light of the Chicontepec awards in Mexico and incremental project wins in the East, we're increasing our CapEx forecast for '08 by $400 million to $2.2 billion.

Capital structure. As of quarter end, our ratio of net debt to net capitalization stood at 34.6% with total net debt at $4.3 billion. Cash balances totaled $268 million at quarter-end.

Guidance. Bernard will cover our operational outlook in his comments. I have the following updates for you for 2008 non-operational items.

Corporate expense, $140 million; net interest expense, $250 million; tax rate, full-year effective rate between 17% and 18%. Share count, we exited the quarter at 682.4 million basic shares outstanding and 703.9 million fully diluted shares outstanding.

I will now hand the call over to Bernard.

Thank you, Andy. Q2 is never our easiest quarter to shine. As most of you know, we are, for historical reasons, heavy Canadian, far more than obvious. Not that long ago, Canada was 25% of our Company. This Canadian Q2 was worse than we expected. It wasn't any better than Q2 '07, which was a trough for us.

Summing up the forces in motion, Q2 saw five moving parts. One -- Canada hitting the same trough it reached in '07. Two -- early and impressive strength across the board in the United States, both volume and pricing. Three -- good performance for at least Asia-Pac, both top line and incrementals, while performance for Europe, West Africa, CIS, top line below percent incrementals due to mix. Four -- acceleration of bookings in eastern hemisphere was our highest level of bookings to date. And five -- a conscious decision early in the quarter to start and accelerate mobilization in Mexico.

Company-wide sequential comparisons aren't meaningful because of the relative weight of the Canadian breakout. Year-on-year comparisons coalesce around the number 25%. Year-on-year, Q2 '07 on Q2 '08, we grew top line by 23%, earnings by 26.5%, and employee count by 25%. Year-on-year, the eastern hemisphere and Latin America grew by 30% and 31%, respectively. Sequential growth was 9% in the eastern hemisphere and 15% in Latin America. Adding the two together, the international segment grew sequentially by 10% and year-on-year by 31%. We expect eastern hemisphere and Latin America year-on-year growth to accelerate as the year progresses.

Sequential incrementals in the international segments were unusually suppressed in Latin America. The region's margins were affected by large mobilization costs in Mexico. By contrast, sequential incrementals in Middle East and Asia-Pac were 29%, in spite of their own share of mobilization activity, while Europe, West Africa, CIS's incrementals were lower in Q2 for idiosyncratic product mix reasons.

Year-on-year incrementals for the eastern hemisphere, both Middle East, Asia-Pac and Europe, West Africa, CIS combined, were close to the target at 30%. As discussed below, that level incremental should be a rival of the [off-tick] going forward for the international segment as a whole. There's always ups and downs from one quarter to the next, but it's essentially reliable on a trendline basis.

About our product lines -- I'll take you straight to the synthesis. One is the Canadian numbers distorted our true performance, of course, just to look on an ex-Canada basis. So on an ex-Canada basis, the three fastest-growing product lines were Artificial Lift, Wireline, and Integrated Drilling. Wireline and Lift had outstanding quarters. Artificial Lift includes our equity stake in Borets, the world's largest manufacturer of EPS's, is extremely strong from all perspectives.

Wireline built a very large backlog in new contracts, making its prognosis stronger yet than the trading results. The growth is driven by technology, both measurement and conveyors. Integrated Drilling encompasses much more than project management and rigs. I will cover in more detail progress on our Integrated Drilling later in my prepared comments. Other than Lift, Wireline, Integrated Drilling, we expect drilling services that is directional and on the balance of the fastest growth rates over the next six quarters.

A few words on world records on technology this quarter. In the Gulf, we ran our LWD Triple Combo at 32,600 PSI operating pressure. Also in the Gulf of Mexico, in a different instance, we ran our LWD Triple Combo at 359 degrees Fahrenheit circulating temperature and over 400 degrees Fahrenheit static temperature.

In Norway, we ran the world's first [top sea] installed optical fiber Bragg grating pressure, temperature and RA temperature-sensing. In China, we drilled under balance the deepest and hottest whole section ever attempted at 390 degrees Fahrenheit. Similarly, underbalanced technology was selected where it is likely to be the deepest and hottest well drilled offshore in the Gulf of Mexico.

Not a world record but of added note, a [first roster] of the installation of new carbonate reservoir drainage system, which includes inflow control technology, [12 elastomers], hydraulic packers, all that packaged modularly for horizontal limestone applications. This was completed in Saudi Arabia. Also in Saudi Arabia, we ran the longest expandable stand system at 2,300 feet of screen.

Technology is central to our identity and strategy, and will be increasingly so. We have acquired over the past five years over $900 million of intellectual property in early stages of development. We have grown our R&D, which is trading towards $200 million per annum, at the same rate as the Company's top line. We continue, in addition, to invest between $200 million to $300 million per year -- that seems to be the average -- on acquiring new intellectual properties. In the event some of you noticed that average moving up, you're right. It is. In effect, at this stage, Weatherford is investing between $400 million and $500 million per annum on R&D and new technology developments, probably one of the industry's highest ratios to revenues.

Employees. By the end of the quarter, we had 42,152 employees. The employee count increased by 1,563 over the quarter or 3.3% sequentially, and 4,286 or 11.3% in the first half of the year alone. Year-on-year, we added 8,500 employees or 25.3%, as per the comment above. The second half of '08, we expect to hire another 5,000 employees as we gear up for 2009.

Costs and pricing. Both costs and pricing are moving. Taking an overall view of our operations, we are seeing, on average, labor cost increase of about 8% and raw materials cost increases of about 25%. Weighted average of different steel grades and on the [metal] alloys, miscellaneous metals, fuel, diesel, elastomers and chemical feedstock.

Pricing has risen in all markets except Canada. Canada's turn will come. Pricing in the US is rising as we speak by 10% to 15% on a weighted average basis. The rise occurred in the course of Q2 and is continuing in early Q3. There are wide differences in product lines, though; this is an average.

Pricing in the international markets is a more complicated issue as the diversity of markets and situations makes trends more opaque. We isolate and analyze pricing on a real-time basis, and we do so by product line and geographic market worldwide. Our most recent analysis suggests pricing strengths to the international segment that exceed the US, with weighted average increases in over 15% for the most recent batch of renewed contracts and incremental volume. With the exception of a few idiosyncratic situations, pricing in the international markets strike us as an opportunity to push further, particularly as we get into 2009.

A comment on incrementals. As I said earlier on, on a forward basis, 30% incrementals in the international segment should be a reliable yardstick. This applies to both hemispheres.

Important events in acquisition activity. We spent in the quarter $72 million on six small acquisitions. The acquired assets and companies were all technology deals except for one, which is a very small company. The largest transaction was the acquisition of a tubular running services technology called Iron Derrickman, whose consideration represented more than half of the total acquisition expenditures. After last quarter's acquisition of Norwegian V-Tech, this is the second significant technology commitment in our tubular running services legacy product line.

Now, extended comments on integrated drilling. By Q1 '09, we expect to have nine integrated drilling projects underway, eight in the eastern hemisphere and one in Mexico. Two of the projects involve managing client rigs together with our downhole products and services. One involves combining coiled tubing units -- our own coiled tubing units -- with our downhole products and services. And finally six, or two-thirds of the total number of projects involve our own rigs in downhole products and services.

The eastern hemisphere integrated projects will run in total 37 rigs and two coiled tubing units. 24 of the rigs, which are essentially land rigs, except one offshore rig. 24 of the land rigs of the rigs and both coiled tubing drilling units are Weatherford-owned and designed; the rigs, on average, mid to heavy equipment.

The average contracted life of the eastern hemisphere projects is about three years. The eastern hemisphere projects are spread in six countries. All are in varying degrees of mobilization and all will be running by Q1 of '09 or in the course of Q1 of '09.

In the Western hemisphere, there is only one integrated project on a mobilization, and that is Mexico. The PEMEX Chicontepec contract calls for a 20-rig operation, albeit the rigs are smaller than our eastern hemisphere brethren. Although we normally do not comment on project details, either as a respect to my preferences or for competitive reasons, Chicontepec has gotten much attention. So we can report the following on Chicontepec. All our post-product lines have been contracted and priced. Delivery dates are within the project's anticipated timeframe. Of the 20-rig fleet, 10 of the rigs are contracted and 10 are Weatherford-owned.

Hiring and training in Mexico, as well as Colombia, Venezuela and Argentina, united support is well advanced. In total, we will add 715 new employees. The infrastructure is also well advanced. We are opening July 31 -- that's in a week or so -- our new headquarter in Poza Rica, which is a 50,000 square feet facility for assembly, calibration, testing, repair and maintenance. It is equipped with a full electronic lab for directional and wireline and all necessary pressure testing equipment. The facility will also have adjacent offices of 200 people, both Weatherford and PEMEX personnel.

By the end of September -- which is only two months away -- we will open our second base, which is within the field. That base will have also a 50,000 square feet facility with repair, maintenance, et cetera, and testing equipment on a 100-acre lot. The facility will provide housing for 100 people. By way of background, we had originally very little infrastructure on and around Chicontepec or Poza Rica.

As to the timing of the start-up, it is essentially now. The first two rigs and crews have been mobilized, are on location in Poza Rica. They will spud the first two wells within a week or by the end of the month. The directional Well Construction, completion, wireline and stimulation equipment with respect crews are also on location and ready for operation on both sites. The remaining 18 rigs and downhole parts and services are staged for initials spud in batches of about four months effective August. By year-end, the entire operation should be running. That's more detail than we provide for projects under mobilization, obviously.

[For] closing comments on the same contract -- Chicontepec is strategically important for PEMEX, in both scale and time. That's not an overstatement; that's accurate. It may be equally strategically important to Weatherford also in scale and time depending on our performance.

Two -- Chicontepec isn't any different in operating challenges than the other eight integrated projects we are starting up. If anything, it is easier, including conditions and infrastructure.

Three -- issued Chicontepec contracts for $900 million a business, which approximately half is our product lines. We do not expect much contribution to P&L in '08. We'd factor the returns in our assessment of '09.

To the degree Chicontepec is a pre-call, unless one assumes the project when started up will provide negative returns. We do not believe that to be remotely the case. On a forward basis, we see integrated projects as a very important part of our business. The rate and quality of integrated project opportunities are strongly rising throughout the international markets.

Forward views. One, Canada. With hydrocarbon pricing environments of $130 oil and $10 gas, the Canadian market has bottomed out. Client tone suggests a strong recovery in H2 '08 and H1 '09 led by heavy oil, shale, and broad scale new gas plays.

Two, the US market will strengthen further in H2 '08 and '09. The oil segment, lower 48 and deepwater and the gas segments are ready for a healthy volume increase. No doubt we expect at this time a robust '09 in United States.

Three, international play. Setting aside improved prospects in North America, quantum long-term growth remains predominately an international play. With each quarter that passes, we see more quantitative evidence of the international market's depth, breadth, and longevity. In both the eastern hemisphere and Latin America, growth rates will be strong and sustained. The growth process will be long, longer than any relevant timeframe for forecasting purposes.

In closing, let me provide you with some specific guidance. For 2008, the balance of the year, but overall we assess eastern hemisphere growth prospects at 40% per annum in Latin America at 25% per annum, matching our 2007 performance. This is a combined 37% international top line growth, '07 on '08, that we anticipate. For 2009, we'd like to suggest a 40% growth rate for the international segments, both hemispheres combined.

With that, I will turn the call back to the Operator for the Q&A session. Operator, please.

(OPERATOR INSTRUCTIONS). Jim Crandell, Lehman Brothers.

Good morning Bernard and Andy. Good to hear that things are going well at Chicontepec. With drilling conditions and infrastructure easier than other IPM workfare, all your subcontractors lined up and your facilities on or ahead of schedule, what are the risks, in your judgment, of this being a solidly profitable contract in '09? You talked about the chances -- I think you said that it was not even remote that it could be a loss contract, but what could go wrong here, as far as that project is concerned, that could make it a, let's say a lower margin project than what you are forecasting?

Due to the fact that we've assigned no P&L in '08, that gives us, I think, time to sort out what the crew, quality of the crews, good functioning of the equipment, just typical in those projects. So the answer looking into '09 is -- I can't think really of anything that will -- that could make this into a non-performing contract in '09. You have six months to sort out the teasing problems on the contract.

Okay. Bernard, have PEMEX's plans changed at all relative to Chicontepec? I know there's been some change orders already, probably some future ones to come, which I think have enhanced the outlook for you. Do you think your work in the next 12 months will ultimately exceed this $900 million and will change orders, even improve the margin picture from here?

Chicontepec is -- I try to mention it in my comments -- a particularly important reservoir field for PEMEX. It is a field that is in early development; is a large field. The development's scale, number of wells to be drilled per annum, is in the 1,500 to 1,800 wells per annum or something like that. And the time that it will take to develop the field is something north of ten years.

So clearly, the architects who are responsible for part of the drilling at Chicontepec, and who do well operationally, will be in a good position -- not a guaranteed position, but a good position -- to stay on that field throughout that period of time, and probably grow with the drilling activity to develop that field. So it becomes, in a way -- if you perform well, it becomes almost like a contract annuity, if I can use that term, of a large scale for a very, very long time; almost like if you had acquired a company, to a degree, by giving you a top line and a source of cash flow.

But again, you have to perform from an operating standpoint. It means you have to be efficient. You have to be fast. You have to be accurate. The wells are not difficult, but still you have to be the three things I just mentioned.

Okay, Bernard, on your three IPM contract awards in the East that you won this quarter, were these competitively bid awards? And are there any of some size you can comment further on?

Of the three, two were competitively bid. One was negotiated. I would say that if you take the eight projects that are being mobilized at different stages of mobilization right now, and you put them all together, the top line that it should represent in the aggregate for the first year of them all running together would be approximately $1 billion a year -- $1 billion, $1.1 billion.

Of that number, there is about $800 million to $900 million, which is our parts and services. There isn't much pass-through. The reason is that those contracts typically in the East do not include tubulars. Tubulars only run 25% or so of any project. The fact they're not there means the pass-through become a very small number as a percentage of the whole. It's different in Chicontepec.

Okay. And you've also commented, Bernard, about why differences in pricing in the US by product line. Can you elaborate on the areas where you've been able to put through more significant price increases and the segments where it's difficult?

I don't want to. I think that I can tell you that on the product side, we've been able to do very, very well. The products is, of course, across a broad range or moving from Artificial Lift through to liner hangers and completion, et cetera, et cetera.

On the service side, is where there are the major differences. Some of the services are doing very, very well. Other services are -- basically you're in sort of cost recovery mode, essentially. And that's where the difference is greater. So I'd rather not mention the product lines.

Okay. And last question for Andy. Andy, can you give us a sense, given the big ramp up here in Canada, over the revenue growth that you think you can achieve in Canada versus last year? And then from the second quarter level, the level of incremental margins that came from out of Canada?

So you're thinking year-on-year, second half versus -- of '08 versus '07?

Yes.

I think it should be in the 20% range.

Okay. And what margins, using the second quarter as a base, Andy, on the incremental revenue, do you think you can achieve coming out of the seasonal trough?

Well, they will be very, very healthy margins, obviously. They always are in Q3. In terms of incrementals, they will be north of 60%.

I think we might very well be in that area going into Q4, depending on how we do on pricing and volume. I think it's safe to assume from a rig count perspective of looking something on or around 400 rigs in Q3 and something north of that in Q4. The healthier that is, the better we do on utilization, the better we do on pricing, and it also depends on where the work is in Q4. You can see very healthy incrementals Q4 and Q3.

Okay, good. I'll turn it over. Thank you.

Bill Herbert, Simmons & Company.

Bernard and Andy, what was the dollar magnitude of start-up costs for Q2 in Mexico?

It's hard to be precise about these things because where do you stop when your start? I think $15 million is probably right -- 1-5 -- thereabout.

Okay. $15 million and we've got a couple of phases left before year-end. So how should we think about a roadmap for Latin American margins as the year unfolds? Are they flat from this point forward until we get to a sufficient level? Do they go down? Do they revive? How should we think about that?

I think you should see them relatively flat from where they were in Q2, for Q3 and Q4, with a substantial recovery. As that project margins grow on it, you get the kinds worked out and start-up costs behind you, and the rest of the underlying business for Latin America improves. So you should think north of 24% type margins for full-year '09.

Okay. And then thirdly, with regard to Mexico, once again, what's the current run rate of Mexican revenues? And what should we expect '09 revenues from Mexico to be?

You're running at $250 million in Mexico. Okay?

Okay. All right.

What was the second question? You wanted the '09 --?

Yes. A range is fine.

Bill, it depends on where it is. Just take that $900 million of the project, assume better than 25% underlying growth on the rest of the business on a per annum basis. And then how do you want to split that $900 million? And that just depends on when a well site is ready, how many wells get drilled this year. It's easier for you to figure out average costs, if you will, or average revenue per well.

Okay.

And so we'll -- I think it's better if we report that ex-post, so as not to get you too far ahead or too far behind.

Sure. Fine. So, the current run rate is $250 million. What (multiple speakers) --

$250 million, looking back, looking forward of stick on a 30% increase or thereabouts, and you put as much on Chicontepec as you want in '09. We will not be late. We are obviously not late. We're ready. So, we'll be ready.

And what were the Mexican revenues in '07?

'07? I'd say, 200? 200?

Yes, you'll be just south of 200.

190 -- 200?

Okay, great. And then last one for me. With regard to US pricing, pressure pumping pricing -- what are you guys seeing on that front? Is it bleeding modestly? Is it stagnating? What's going on, on that front?

It's not weakening any further, which is already a positive. There is recovery for some of the most painful cost increases. Example, fuel and the like. It does not have the bounce on the upside that the other parts and service lines have.

Okay. And would you expect before year end in pressure pumping that you would be the beneficiary of net pricing gains?

It depends how much new capacity. Some of the smaller players -- I mean, we're a small player ourselves, but we're static. The smaller players that are more aggressive and aren't so small any more anyway, how much capacity is put on?

Okay. Thanks very much.

Ole Slorer, Morgan Stanley.

Bernard, I didn't quite catch what you said about the nine large integrated drilling projects. Could you -- are these projects -- how do they compare in size on average with Chicontepec?

Well, it's -- you've got eight projects; nine is eight in the East and one in the West, the one in the West being Mexico. Okay? So, it's eight. Probably best to go look at the numbers. If I give two indications that the overall billings for '09 or the first year of all eight of them running together, which would be by the end of Q1, presumably, that runs at about $1.1 billion -- right? -- for a period of 12 months. And there's about three years commitment. So, you've got roughly $3.3 billion between the eight. So $3.3 billion divided by eight gives you an idea of what the overall commitments are. Some are large, some are not so large.

Okay. So these in aggregate are a little larger than Chicontepec? Is that the way we should view it?

I think the average project, the average project is about $400 million to $425 million. But Chicontepec, which is $900 million. Right? So there's eight of them. The other aspects of these projects is that they have a higher patent -- a higher Weatherford parts and service line intensity than Mexico insofar as they don't include tubulars. That's the major difference. And tubulars, as you know, is between 20%, 25% of any project. And so, the fact there is no tubulars means that the amount of pass-through in the East is something like 15% of the ticket on average, whereas obviously, Mexico is different.

Okay. So the run rates, the annual run rate on these eight contracts should be larger? It is larger than -- (multiple speakers)

Yes, it is, of course. It is. There are eight contracts and it's contracted for a longer period than Mexico. Mexico is just one year, if you think about it. These contracts run roughly, I'd say $1.1 billion give and take. And then of course, without pass-through, it's more like $900 million for one year, if you understand.

So what does that (inaudible) in your opinion this [step] change in integrated project management or project management or whatever you want to call it, for [you]?

First, I think it's rewarding to see that combining expertise in running rigs works very well with directional and under balance and the rest of it. It really does. It works not only from a marketing standpoint, it also seems to work from an operating standpoint. That is something that is gratifying.

The second is that it is what we anticipated. This is not -- doesn't come as a surprise. But perhaps the level of interest is a bit higher than we had anticipated, but we thought that would be a useful class of service for our client.

There is a concern on being able to run these things properly, because in the end, it's all about efficiency. It's all about speed of drilling and accuracy of drilling. And we spend a lot of time on making sure that we operate these things properly.

And then of course, the other reaction is one of managing the process by which we commit to more, because the backlog of interests for these things strike us as being strong. Actually, it's stronger than it was in the trailing 12 to 18 months. It was very strong already. So there's a lot of momentum. Albeit we don't see this integrated drilling as being more than -- right now it's going to be about 10% of what we do, roughly. If you throw in Chicontepec, maybe closer to 15% of what we do. In '09 and later on, we don't see that going much beyond 20% of what we do. But it's a very good 20%, a very good 15% -- as best we can tell.

So, you're forecasting an acceleration and international growth in 2009 relative to 2008. Could you talk a little bit about how you see the incremental margins? You talk about 15% pricing now on some of the revenues that you are re-contracting or growing. First of all, what percentage of your business is falling over to this new 15%? Are we talking about two-year contracts or --? And so, therefore, we're talking about one-third to one-half your business benefiting from this type of a roll-off or one-quarter in the second half of the year? Well, how should we think about it?

Hard to have very precise metrics on this, but I would say over a period, say, of six months, about one-third of your services and contracts in the international markets continuously roll, if you will. That's about right. It's a very iffy metric. And so that's -- now in terms of the margins, the incrementals, we -- I mean, from one quarter to the next, you're going to have things up or things down and so forth and so on. The numbers are what they are. But you shouldn't expect things to be exactly in the right bucket at the right time. However, on any kind of two, three quarter basis on a trendline basis, your incrementals in international markets will be north of 30%. We're quite certain of that.

So then comparing that with, let's say, Europe, Africa, CIS, we had a very strong sequential and year-over-year revenue growth, but sequentially your margins were -- didn't really go up. So can you talk a little bit about -- was this about pricing? Was it about the mix?

No, no. I mean think I would just say that we really -- I mean, in the end, it's a little bit of chaos in all situations and meaning that there is some randomness. And that if you were to look at the Q3 margins, I suspect they will be very good and I will not have much of an explanation for it either. It will be the times of delivery of shipments, new classes of products have much higher margins than others, and there you are. There is nothing more compelling about it. And we looked at it about as closely as anyone can.

Okay. So that [means it should not be through] on anything like execution or anything like (multiple speakers) --?

No. You see, of all -- of the eight projects that are being immobilized, only one in that subregion. Right? There's only one. The other seven are in Middle East, North Africa, Asia-Pac. They're the ones have good margins. Now we had lots of start up costs, mobilizations, blah, blah, blah. Actually the Europeans and Africa/CIS, they only have one project. It is a large project but I mean, it doesn't compare to the other seven. Right? So in a sense, it is counterintuitive. This is why -- the best thing I can tell you is there is always some measure of randomness in how numbers line up and that's the way it should be.

So based on that, Bernard, and we're just saying at the moment, Canada, do you feel comfortable about the third quarter consensus expectation?

I'm never comfortable, Ole, but I'm as comfortable as I can be.

Excellent. Thank you.

Dan Pickering, Tudor, Pickering, Holt.

You talked about pricing in North America, particularly in the US, picking up, Bernard, between 10% and 15% during the quarter. Can you give us a little bit more color there? Is that driven by costs going up there for just kind of holding the line? Or is this really an activity pricing move here?

It started off as cost, Dan, and almost as a sort of a -- something we needed to do. But bear in mind it was 50% product, 50% service at Weatherford. Some of our peers might be 80% service. And so we have a more material exposure right off the bat. We're very sensitive to materials costs. We do manage our supply chain with a lot of attention. So we spotted obviously the trends in all classes of materials early. So it becomes -- one, it was driven by necessity. But then when the necessity curve was joined by [sensitive] activity, had to go up -- and this was pretty obvious already in Q1 -- then gave us more momentum. And then we just went for more.

Thank you. And then we're beating the IPM thing to death, but I think it is important. The industry obviously indicated that Weatherford had been very aggressive on pricing with Chicontepec. And I'm trying to understand if your mix is different than their mix, your cost is lower than their cost, or their assumptions of margins are higher than yours -- just trying to understand why their view of this project and your view of this project is so different?

Well, I would always say consider the source, including what I tell you. But -- meaning that you've got some -- obviously some of our most beloved competitors who are less than happy.

First, we operate in Mexico. We have operated in Mexico for a long time. We actually operate in Chicontepec, very modestly, in terms of scale. But we know our cost structure over there, that's one. And two, the pricing that was utilized in Chicontepec is actually higher than the pricing we have in Mexico north and south. So just as a point of preference. So it's not like we decided to work in Mexico; we have no idea what the cost structure is and low and behold, we won a big contract because we were cheap -- no. We operate in Mexico. We know the cost structure. And that pricing is actually higher than what we have right now, for what it's worth.

Three, I could take you through the mechanics and tactics of contractual pricing. This is not the place to do it obviously, not on a public call. But I do chuckle when I listen to the comments [ex-pass] of the outrage of this and the outrage of that. If I take you through the mechanics, it is not at all the same thing as what is being discussed.

But to a degree, this is irrelevant. This is irrelevant. What is relevant is not so much why we won, but it is relevant that we did win. And the only question that you should ask is are you going to operate properly? -- Item one. And item two, do you understand your cost structure? I can't answer the first one because the proof will be in the pudding. The only thing I can tell you is that we are early. We are spudding in a few days our first wells. And at a very minimum, the client will not be screaming because the contract -- the service company is behind. Nine times out of ten, the client is unhappy about the timing; everything is late. We are not late. That is a fact, number one. It came out of costs in Q2, I understand, but in retrospect, I would do it again and again and again. It was the right move from a business standpoint. All right. So we're not late.

Will we operate well? I don't know. Time will tell. I think we will; just like the other eight projects in the East, we put a lot of time and attention on it. In terms of understanding our costs, there again, time will tell. But we know the cost structure in Mexico. I would sort of argue that -- the fact that a lot of our technology is one that is a cost-phasing type technology. These are in time of execution. I take EM or take open a wireline, the compact product line. We very typically are time savers.

But I won't even go down that road, just to tell you that best we can tell, with all the experience we have, not only is this a strategically very important contract for us -- because of the magnitude and longevity -- but also that's it's a -- it's quite easy from an execution standpoint; it's quite easy to understand the cost structure that you're going to have. I think we nailed it down; certainly on all the outside elements, we nailed it down very nicely. For us, I think we -- subject to us executing properly, I don't -- there's not a lot of movement on the costs up or down within sort of the range that we have estimated.

And Bernard, if you looked at, including all of your start-up costs and assuming you execute well, will the 50% of the revenues you generate from your products and services, that's going to be at least as good a margin as the rest of the Latin American business?

Oh, yes, I think actually higher. Just to make you happy, just the same, okay; but we actually think higher.

And two other quick questions. One is rig ownership something that you're going to spend more money on, on a go-forward basis?

And two, Andy, if you could just help us with -- on an all-encompassing basis in the second quarter, not just Mexico, but where do you think your start-up costs in aggregate for these ITM projects were in Q2? Thanks.

I think he'll have a hard time giving you the eastern hemisphere numbers, because we didn't try to isolate them like we did in Mexico. But I'll let him work on that while I answer the first question.

Only -- only, Dan, when, on the rig side, when there is an interest in combining a rig operation with parts and services; whether a formal interest or an informal interest, meaning in some instances, we actually have clients who would still contract all the parts and services separately from the rig, as if they were distinct. But it is clear that because we have one, we get the other. And the last circumstance, one that is formal, integrated drilling project type circumstance, we'll be interested in investing in rigs. Otherwise, no.

As for the other question -- do you want to answer that? Mexico you know.

Yes, Mexico we know. We've already pinned that right around $15 million. In the East -- and I'd really rather not go there in terms of where it is and where it's going to be for the remainder of the year, trust that start-ups in the East are factored into the 30% incremental guidance that we give. We have better visibility on that because we look at a portfolio of projects on any given time, and we feel that it's fair and we tend to be accurate on assumptions as to what will fall our way and what will not, and what kind of start-up costs are associated with those projects on average. We've baked that into our thinking for the year.

What was unique about Mexico was that we actually -- we were awarded the contract during the quarter, so we really had to get on with it. In terms of the mobilization, the start-up was much more rapid from a time perspective and things were compressed. So that was just not something baked into thinking after the Q1 call. And that's really the only reason we pointed out to you this time.

The Mexico decision was pretty much a -- we behaved like a private company. If you were a private owner, you would have moved immediately because your risk in Mexico is not performing operationally. Your risk is not whether you understand your costs and all that kind of stuff; that's not the case. The risk is are you going to operate properly? And that means being there early. That's step one.

David Anderson, UBS.

As I recall, about a year ago, you had about five -- I think you had five IPM projects under your belt and now you're talking about nine right now. Where do you think this goes another year and what are your constraints in terms of adding more of these projects?

I think that obviously of the five there are, of the five of a year ago, if I remember correctly, they should be already three that are running. And there were [based] by another three and then we add another four. And that's going to be a moving target. I think, David, that if we were to talk in 2010 -- I'll just go right about 2009 -- I think the integrated activity will be approximately 20% of our top line or something like that. And I'm trying to stay as close as possible to 20%, that would be essentially our own products and service lines, and not take on too many projects that have a lot of pass-through. Yes, I know Mexico is an exception, but Mexico is unique in many respects.

I think you mentioned it before, but what do you expect that to be in '09? What percentage?

'09, we expect to have in the East about $1.1 billion running, maybe $1.2 billion of integrated drilling projects. That's item one. And in South America, you're going to get a -- well, let's -- I don't know; let's call it $700 million, $800 million, $900 million worth of Chicontepec, maybe take $800 million. So, between $1.1 billion [and 800 million], you're at $2 billion. So, depending what your denominator is for us in 2009, that should give you a percentage.

Right. On a different subject, you had highlighted the high labor costs and material costs. Is there any particular region that you're taking more of a hit in than others, due to, say, a product mix or some other reason?

David, I don't know. Because I don't know probably that isn't the case, doesn't drop the -- steel and stainless and so forth and [syntax] pricing by and large.

Do you have any kind of sense -- is that kind of how many in terms of basis points, how much is kind of knocked off in terms of your margins?

So far, I think we've managed to cover things nicely with pricing. [I think] and I'll mention something else on the labor side. Let me not forget. But on the pricing, we managed to cover really the cost of [it and] I suspect we'll do a little bit better than that on a forward-looking basis. So that's one thing.

So I don't think you have any movement on the margin side at all; it's cost-driven. I reported on the cost because I think it's an important thing that people ought to know.

On the labor side, as I think it through, your question, let me modify my answer. I think it is -- on a training basis, it would be as much of a factor in the international markets as it has been in North America. On a forward basis, I suspect it will be less of a factor in international markets and more of a factor, relatively speaking, in North America. Why is that?

Well, it's the gradual process, David, of replacing OECD personnel with non-OECD personnel. Non-OECD personnel is being trained -- we certainly hire and train at a rate which I -- probably is one of the highest in the industry. And of course, once they are hired and trained, what is the difference between non-OECD and OECD personnel is much cheaper. As the non-OECD mix in the labor pool grows over a period time -- it doesn't take a lot of time, David -- actually your labor costs are going to go down.

So let me summarize. I think my comments on the labor side should be taken -- they are correct, from a training basis. Right? But they should be taken probably as more indicative of a cost issue in North America and in the North Sea.

For the rest, I think on the contrary, the labor side will actually go the other way. And I'm pretty certain of this, David -- the material side, you have the same everywhere you go. There are some markets where materials are regulated; there aren't that many.

There's one thing to add, David, is with the recovery in Canada that's expected, you should expect -- and we do expect and what's factored into our thinking is a decent rise in labor costs; always happens with an increase in activity, especially coming out of a slump. And US, not too different. We're at such a high level of activity -- I know it wasn't very exciting a year ago to talk about the US, as if we were stuck in a tunnel, of sorts, but still a tunnel that was a very high average rig count. And here we are stepping up above 1,900 rigs, probably going across 2,000 and higher, and labor gets expensive. And so with that, wages go up.

I guess one last question on Canada. I think, if I'm not mistaken, Canada comprised about 15% of your overall top line a few years back. (multiple speakers)

25% -- 25%, David. 25%.

Oh, 25%, excuse me.

As bad as that. As bad as that, yes.

Where do you expect that to get? Obviously, we have a ramp up coming here. How high can that get again? I know things changed (multiple speakers) [there].

Let me just have fun with that question, if I can, David, because it's not always easy to have fun on a conference call.

I suspect that Mexico will be larger than Canada. And I also expect Canada to do well.

Okay. Great. Gentlemen, thank you.

Michael LaMotte, JPMorgan.

Hi Bernard. Andy, quick question on some numbers for you. First of all, on the investigation-related charges, there's $0.04, I guess, in the first half. Where do we stand with those and when can we expect those to start coming out?

Boy, I hope as soon as possible. We keep everybody updated through our public disclosures and I'd like to stick to those in terms of progress and whatnot. But obviously, it's a distraction and we'd like to see it be finished up as quickly as possible. Until it is finished, we'll continue to incur costs, at least on the fees and consulting side, to take care of things.

Do you all feel challenged at all in terms of bidding for some of these international projects as a consequence of that?

No. I would say that probably the expense that we incur is partly because we try to -- the Company tries to do absolutely everything it possibly can, to look at every aspect of what we do, so that's not only compliant but I think, a bit of compliant. On the other hand, no, it does not; it should not, really.

Okay, good. And then on the acquisition front, what are we looking at in terms of run rate of annualized revenue contribution from the -- I guess it's 17 now, deals done year-to-date?

No, we should give you a list of how much is -- because so much year-to-date -- year-to-date has been acquisitions of -- and I hate to say it -- of technology, because that's not something that is terribly popular insofar as it has a bang later on, it has a bang a year later or two years later or sometimes even longer then that.

Andy, do you have a sense of how much revenues -- the ones that were not technology?

It would be very de minimis for '08, for those that are not technology, if we are -- let me just say, exceedingly fortunate, you might be looking at $40 million of top line contribution for all of '08.

Okay. For all of '08, right?

Yes. And where was the revenue going to go, Andy? Probably half and half?

Yes, it's going to depend, you know, especially on the technology side. I would say even spread with where we are today, but many of the things that we look at and try to get ramped up is obviously to push things through our supply chain. And it's going to depend upon where orders hit and how quickly. If it's a service-type business, we can set things up in international markets.

Okay. And then last one for me -- when did construction began on your facilities in Poza Rica? 100,000 square feet is pretty significant.

Andy, do you want to answer that?

Sure. We actually began construction almost two months ago. The facility that we have was actually an existing facility on a nice piece of land. We were very fortunate to get it. The remodeling -- I was actually just there about three weeks ago, and they've made a great amount of progress on it. And it will be a facility we're proud of. We haven't always been proud of our infrastructure in every place. We've worked hard to try to do better, especially in Mexico and other places; put up places that we can bring our clients to and that suit our operations and help us work efficiently. So, it was about two months ago that things started in terms of the acquisition of that facility and working on it.

Two things happened concurrently. On the one hand, we started mobilizing equipment, people, starting the training program, et cetera, et cetera. At the same time, we went on an expedited process for the two facilities. The one which is -- it's not really in the field, the second one; it's at the edge of the field. Poza Rica being sort of the more city or urban facility, even though it's outside, south part of Poza Rica.

At the same time, we commissioned the two building constructions. And as Andy said, the first one is an existing infrastructure; we just modified and converted it, et cetera et cetera. We did have a location on and around Chicontepec. It was very modest. It was appropriately modest. The business we have is very modest too. And that's that. With the -- not only the scale but the expected timing of the longevity of the contract, the cost of different infrastructure.

And I guess one more on the 750-people addition to the headcount. I assume, at least at the start, a good number of those will be non-Mexican nationals. Is that mix going to change over the duration of the contract? Are you going to sort of cycle people through?

First of all, PEMEX provides a number of people. That is number one, and that's so that you understand. And number two, now, I would think, Michael, that most of the unit price of the Mexican, it's true, you're right, there will be Colombians, Argentines and Venezuelan with some experience, that will be -- it's already happening, that are going to be directed towards Chicontepec. But to act more as, in a way, trainees -- trainers, I'm sorry -- and sort of provide some measure of guidance to the younger hires on the Mexican side. But I would say that the -- of the 750 people, and excluding the Mexican, the PEMEX contingent, I would say about 80%, 85% would be from Mexico.

Okay. Just trying to get a sense in terms of the training, I guess, component as opposed to reallocation of that human resource.

Very, very heavy on the training side.

Happening already.

To an extent, Latin America has been growing very quickly. We recognize that it's a cost-sensitive market overall, all of Latin America. And it behooves you to have locals. It's no different than any other place that we'd look at on a global basis. So there's been very heavy training out of markets in terms of local training on wireline, directional, under balance, what I call more blue collar technical areas. And the folks that have come out of the program, there's already 50 individuals who have already cycled through on the directional and under balance side, and about an equal number on the wireline side. And those folks are ready to go. Now -- so, stay local.

Yes, one last comment, Michael, is there's so much focus on this one single contract. If you sort of step back, we are doing the hiring and training and so forth and so on of more than twice the number of people that we are working on in Chicontepec, in the East. And I mean there's very little focus on that. This is going on at the same time.

You're going to be hiring something close to 2,000 people in different parts of the world. And you're doing it, as we speak, for the other eight contracts. And so, it's not unique. And we do not use ex-pats, unless we absolutely have to use ex-pats. And if we use ex-pats, it is a transition. It is not a permanent assignment.

Yes, thanks, guys.

Thank you, Michael. One last question, Operator, if there is one and we'll follow the end of call here.

Rob MacKenzie, FBR.

Thanks for all the color, Bernard, on Chicontepec. That helps a lot. I have a follow-up question to beat a dead horse, I guess, to -- probably for Andy here, though.

Andy, with your guidance of Latin American margins flat in the third and fourth quarter from this, however, in the press release, you guys talk about, is starting to mobilize four rigs a month starting August. So it seems like Mexican costs compared to 2Q should be up in 3Q and 4Q, once again. What else in Latin America is serving to offset that on the strong side to give you flat margins?

Well, don't forget to include the revenue. You'll have a healthy revenue uptick in Q3 and Q4, again, associated with that project as well as margin on it. So that does enough, if you will, to offset the costs that's associated with the start-up.

The rest, let's just think about outside of the project. But Heaven forbid, it becomes all of Latin America, much less all of Weatherford, this quarter we signed $450 million of incremental contracts, just out of Mexico. Don't focus on just one thing. Brazil market is incredibly vibrant. Venezuela is coming to life, doing very well. Both Mexico and Brazil were up 20% sequentially from a revenue perspective. Colombia is coming back; Ecuador with the strike stuff being resolved. It's a very healthy market.

Even Argentina.

Argentina, with their poor commodity pricing constraints. So, it's very widespread. For us, Latin America is not all about Mexico; it's going to be an important market for us, but there's a lot of other progress being made.

I'll add a closing comment, which is that if we did not have Chicontepec, I would still suggest that in '09, Latin America would grow at the same rates as the eastern hemisphere, which is 40%.

In other words, absent Mexico, absent Chicontepec, Latin America is as strong as the East and it makes now for one market, which is the international market, which is, we'll have differences locally, it's growing at the same rate, absent ex-Chicontepec.

Great. And then a quick follow-up, Bernard, to your comments on service pricing. Can you give us some color surrounding -- and our costs -- how much fuel cost inflation has impacted you? I guess, not just North America, but everywhere around the world. And is that kind of inflation, in essence, where your customer sells it to you, is that going to be the catalyst you guys need to get some of these underperforming product lines, vis-a-vis pricing, starting to recapture their cost inflation here?

We are getting protected on the fuel side outside of North America. Within North America, I mean, other than the logistic costs, there are just one or two service lines that have direct exposure to this, the primary one being stimulation. And that's just a North American phenomenon, because outside you're well protected. So there is no fuel charge margin erosion going on outside of North America. Within North America, there were certainly some on and around stimulation. I think now we are able to get proper protection on the margin side for fuel costs escalations; that's a good thing.

Probably the only comments I made on that particular class of service is that I am less red-blooded on increases in pricing for stimulation, if only because you've got an aggressive supply expansion, which is continuing. And so, therefore, it's harder to see major expansion, the pricing above cost recovery. But it's just stimulation in North America. There's a fuel aspect internationally and actually in other classes of services in North America is not an issue.

Okay, great. That does it for me. Thank you.

Thank you very much. Thank you and I think that concludes the conference call. Thank you very much.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a wonderful day.