Weatherford International PLC (WFRD) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 Weatherford International earnings conference call. My name is Chanel and I will be your coordinator for today. At this time, all participants are in listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Bernard Duroc-Danner, Chairman, President, and CEO.

Good morning, everyone. As usual, Andy and I will read our prepared comments, and then we will take Q&A.

Good morning. For our third quarter of 2008, we report fully-diluted earnings of $0.55 per share, up 28% from the $0.43 earned in Q2 and the year-ago quarter. On a year-to-date basis, earnings per share are up 25% compared to last year. Our sequential improvement of $0.12 represents the largest quarter-on-quarter growth posted by Weatherford in the current up cycle. The field contributed $0.14 of incremental earnings while nonoperational items took back $0.02. Increases in R&D and minority interest expense, as well as a higher tax rate, reduced earnings by $0.02. Our effective rate for the quarter was 17.3%, consistent with last quarter's guidance.

Operating performance. On a consolidated basis, revenue grew $312 million sequentially, or 14%, with the growth split relatively evenly between North America and the international markets. On a year-to-date basis, revenue was up more than $1.3 billion, or 24%, over 2007 levels, against a 7% increase in average rig count globally. International markets generated 70% of this growth. Our year-to-date growth rate in the international markets was 34% versus an 8% increase in rig count, or a bit over four times rig count growth. Our international performance was virtually identical to last year's in terms of growth percentages.

Consolidated EBIT before corporate and R&D was $631 million, up $119 million sequentially with operating margins at 24.8%. Incremental margins were 38%. Year-to-date, regional EBIT was up $326 million, or 24%, on incrementals of 25%. International regions accounted for 78% of this improvement. At 27%, year-to-date incrementals outside North America are tracking as expected.

Geographic performance. Financial performance within our four geographic regions was as follows. North America, 46% of total revenue. Revenue grew $167 million sequentially, or 17%. Delays in offshore services due to hurricanes hurt the quarter's revenue by approximately $30 million. Average rig count for the quarter improved by 382 rigs compared to Q2, with 70% of the improvement taking place in Canada following an exceptionally low level of activity during Q2. EBIT was $313 million, up $89 million sequentially. Margins were 26.5% on incrementals of 53%. A strong recovery in Canada and incremental gains in US land helped to offset the hurricanes' impact.

On a year-to-date basis, North American revenue is up $398 million, or 14%, compared to the first three quarters of 2007, while average rig count is up 7% over these two periods. EBIT was up $72 million, or 10%, over the same period. Sequential revenue grew across all product lines, other than well construction, which was most impacted by the hurricanes.

Middle East, North Africa, Asia-Pacific, 25% of total revenue. Revenue rose $82 million, or 15% sequentially, against a 2% increase in rig count. EBIT was $146 million, up $16 million sequentially. Margins at 23% were down 50 basis points sequentially. Compared to the same quarter of 2007, revenue was up 40% against the backdrop of a 7% rig count increase. Operating margins were up 20 basis points.

On a year-to-date basis, revenue increased 33%, or $430 million, and EBIT margins climbed 110 basis points on incrementals of 26%. EBIT was up 40% over this same period. Countries that showed particular strength sequentially included Algeria, Libya, Saudi Arabia, India, China, and Malaysia. Directional and underbalanced, wireline, drilling tools, artificial lift, and integrated drilling all posted substantial improvements.

Europe, CIS, West Africa, 16% of total revenue. Revenue grew $19 million, or 5% sequentially, against a flat rig count. EBIT was $102 million, up $3 million. Margins were 25%, a 40 basis-point decrease sequentially on incrementals of 17%. Revenue was up 33% compared to Q3 of '07 and up 36% on a year-to-date basis. The rig count increase was 17%. Year-to-date incrementals were 30%, producing EBIT up 45%. Declines in the North Sea, due to reduced activity and repair and maintenance, were more than offset by improvements in Central Europe, Russia, and Kazakhstan. Directional and underbalanced, wireline, and stimulation in chemicals exhibited the most progress, offset by delays on product shipments at a well construction due to the hurricanes.

Latin America, 13% of total revenue. Revenue rose $43 million, or 16% sequentially, on the back of a 1% increase in rig count. EBIT was $70 million, up $11 million sequentially, with margins at 22.1%, and incrementals at 26%. Compared to Q3 of last year, revenue was up more than $100 million, or 47%. And operating margins were 80 basis points.

On a year-to-date basis, revenue was up 31% and incrementals were 25%, resulting in EBIT up 35%. The impact of pass-through revenue this quarter was de minimis. Mexico, Brazil, Argentina, and Venezuela all posted extremely strong improvements. Revenue grew across all product lines with directional and underbalanced, integrated drilling, and completions standing out as the top performers.

Cash and capital. Cash flow during Q3, we generated EBITDA of $736 million, up 26% over the year-ago quarter, with D&A running at $187 million. After deducting interest expense and cash taxes, operating cash flow was $356 million for the quarter, a 33% increase over Q3 of last year.

Operating working capital, AR plus inventory less AP, consumed $274 million of cash, with inventories up $109 million. This includes $39 million of working capital increases in connection with acquisitions during the quarter. At the end of the quarter, we stood at 129 days of working capital, an improvement of seven days compared to the prior quarter. Our goal remains 111 days of working capital by year-end.

We're nearing completion of a significant working capital improvement project commenced in Q1 of this year for North America. With the help of outside consultants, we evaluated our customer to cash processes, from order placement through collections. Based on this evaluation, we have begun to implement process changes and have commenced employee training. We expect the implementation to conclude in Q2 of next year. As part of this improvement plan, we recently reviewed and reset credit limits with customers, which we will continue to do on a quarterly basis moving forward as a matter of policy. We shared our learnings in North America with international regions on a real-time basis, in an effort to develop best practices that are customized to each particular market and to better prepare them for process changes in their regions during 2009. We believe that this effort will yield substantial returns during 2009 and beyond in terms of cash flow improvement.

Capital expenditures. CapEx for the quarter was $652 million, net of lost and whole revenue. We received large scheduled deliveries of drilling equipment this quarter. The completion of our '08 CapEx plan in Q4 will enable us to execute in full our 2009 growth plans. We project total CapEx for 2008 at approximately $2.2 billion.

Capital structure and liquidity. As of September 30, our ratio of net debt to net capitalization stood at 38.7%, with total net debt at $5.3 billion. Cash balances totaled $337 million at quarter-end. We have a very favorable debt structure, especially in today's credit environment. Our $4.5 billion of long-term debt carries a weighted average maturity of 13 years and a weighted average cost of 6.13%. The first maturity is November 2011 in the amount of $350 million. We have no other principal maturities before this. Although we expect to generate free cash flow in 2009, it's worth noting that we have over $1.5 billion of liquidity in the form of cash on hand, plus untapped borrowing capacity under committed lending facilities. Our syndicated revolver expires in May 2011.

I don't have any updates this quarter to the guidance previously provided on nonoperational line items. I will now hand the call over to Bernard, who will cover operational outlook.

Coming up the forces in motion, Q3 saw seven moving parts. One, good performance all around. The Company crossed the $10 billion revenue mark on an annualized basis for the first time in its history. Earnings at $0.55 were the highest quarterly performance in the Company's history. EBITDA came in at an annualized $2.9 billion level, also a record. Two, Hurricane Ike penalized the quarter by a measurable $0.035. That affected the US and international product sales. Three, strength across the board in Canada, both volume and margin on the back of the first year of -- back of the first year-on-year growth quarter in two years.

Four, the US is also very strong, both volume and margin on the back of technology traction, directional in particular. Five, standout performance Middle East/Asia and Latin America growth. Good performance for Europe, West Africa, CIS, topline in light of a weak North Sea and Ike-related lower product sales. Overall, we had strong incrementals of 38% sequentially. NAM, however, outshined the 21% incrementals in the international segment. Both Eastern Hemisphere and Latin America went through many active start-ups throughout the quarter, which penalized incrementals. This wasn't a surprise, as in the range where we expected. To date, we are mobilizing fast and well in both hemispheres.

Seven, acceleration of bookings in the Eastern Hemisphere and Latin America, our highest levels to date. Year-on-year comparisons coalesced around a 30% number. Q3 '07 on Q3 '08, we grew topline by 29%, operating income by 30%, operating cash flow by 33%, and employee count by 31%. Year-on-year, the Eastern Hemisphere and Latin America grew by 37% and 47%, respectively, for a combined international growth of 39%. Sequential growth was 11% Eastern Hemisphere and 16% Latin America for a combined international growth of 12%.

Product lines. I will take you directly to the synthesis as opposed to the details of the individual product line. All product lines grew, with no exceptions. Well construction was a laggard, near flat. Substantial portion of its manufacturing base was shut down for much of September by Ike. Deliveries were delayed to Q4. You'll find most of the regional impact in the US and in the European/West Africa/CIS numbers.

The three fastest-growing product lines were wireline, directional and underbalanced, and artificial lift. All three had outstanding quarters. Wireline built a large backlog of new contracts, making its prognosis even stronger than the trading results. Growth was driven by technology, both conveyance and measurement. Directional and underbalanced are benefiting from two interrelated factors. Reservoir drainage implies an ever-increasing rate, the use of horizontal architecture, and controlled pressure drilling. This is particularly powerful on land applications as the ratio of directional to vertical wells catches up with offshore. Second, bundled integrated contracts pull-through, directional and underbalanced. In this part of our backlog, it started up, expect continued performance improvements from drilling services.

Finally, artificial lift has the largest backlog in its history, and is showing strength in all of its segments. Much of our growth results from a combination of infrastructure development, equipment additions, and technology investments.

Employees. By the end of the quarter, we have 46,659 employees. Year-to-date, the employee count increased by 4,507, or just under 11%, and 8,793, or 23%, in the first half alone. Year-on-year, we added 11,160 employees, or 31.4%, as per the comment above.

Cost and pricing. Cost pressures are moderating. Taking an overall view of our operations, we're seeing a flattening of our average labor costs systemwide, particularly internationally. Structural factors are at work in those markets. We expect the same to occur in Nam, albeit for entirely different reasons.

And currently, raw material costs are decreasing across the board, whether different steel grades, non-magnetic alloys, miscellaneous metals, fuel, diesel, elastomers, and chemical feedstock. As an example, in one of the most meaningful, finished steel prices are already down 15%. Pricing in the US and Canada are leveling with no further discernible movement up or down. International pricing remains strong.

Incrementals. On a forward basis, we see two conflicting crosscurrents. Nonincrementals will deteriorate, given their markets' prognosis. And thusly, 30% incrementals in the international segment should be reliable in the uptake. For the first nine months of the year, incrementals for the East, both the Middle East, North Africa, and Europe, West Africa/CIS combined, were close to the targeted 30%.

As a sideline to our international business growth, the absorption of start-up mobilization costs will be increasingly easy and the declining percentage of a growing denominator. This applies to both hemispheres.

As a side comment, the issue of pass-through revenues with no margin in will not be a material factor on where those incrementals in 2009. The only case in point companywide is Chicontepec, at roughly $400 million in procurement revenues in '09. This should represent circa 3% of the Company's topline in '09, meaning no more. Meaning it is marginal.

Important events in acquisition activity. We invested late in the quarter $521 million in acquisitions. International Logging Inc. was the largest. Setting [ourlyzed] aside, the remainder was technology and equipment purchases, some of which was from distressed sellers.

A word about our drilling projects. As you know, by Q1 '09, we expect to have nine bundled integrated drilling projects underway, eight in the East and one in Mexico. In the East, four of the projects are now running, albeit not at full-scale. Two additional projects will be started up in Q4, and the last two will be started up in Q1. The Eastern Hemisphere projects will run in total of 37 rigs and two coiled tubing drilling units. 24 of the land rigs and both coiled tubing drilling units are Weatherford owned and designed. The rigs are, on average, mid to heavy equipment. In all cases, the rigs will run together with our downhole parts and services. The average contracted life of the Eastern Hemisphere projects are between three and four years.

In the Western Hemisphere, there is only one integrated project and that is Chicontepec in Mexico. The contract was signed on June 24. Mobilization commenced on July 1st. Four months after contract signing, we have eight rigs drilling and five rigs waiting for site preparation to commence drilling. Site preparation isn't our responsibility. By year end, we'll have the entire 20-rig fleet deployed. Directional, underbalanced, stimulation, wireline, and completion equipment are on-site and operational. All of the above is at or ahead of what we told you we would do last quarter.

We opened during Q3 our new headquarter base in Puerto Rico, which is a 50,000 square foot facility for a 70 calibration testing, repair, and maintenance. In the course of Q4, we will open our second base, which is within the field. That base will be larger and covers a 100-acre site. By way of background, we had essentially no infrastructure on or around Chicontepec or Puerto Rico.

Lastly, during the quarter, we were rewarded by PEMEX in excess of $100 million of incremental work related to the project. What is the most critical for us in Chicontepec is to establish a highly efficient drilling operation with a fraction of drilling times currently modeled by our client. This can be achieved with a combination of time, training, experience, and selective technology. The reward is the opportunity to run in Mexico for years to come an operation larger than our entire business in Canada and provide high returns on a $300 million capital base. In our judgment, Chicontepec is a reservoir development project which, from a client standpoint, is urgently needed, important, and low risk. Should overall funding be lacking, we suspect the gas projects in the North will be at more risk.

Forward views. Although it's too early to be definitive on numbers yet, we anticipate significant pullback in drilling activity in both the US and Canada. The pullback will be in the gas segment. The oil segment will be relatively immune. We are operationally ready to adjust quickly and efficiently our operating level. We just finished two years of severe contraction in Canada, where for legacy reasons we are much more present than our peers. We reorganized Canada in record time to [doubt] both cost structure and asset base, but was a 25% lower level of activity. The reorganization was highly successful and is in part to be credited for this quarter's NAM performance. We know more than just growth. We also know how to restructure operations fast and efficiently when markets fall back.

Four comments on the international segments. We don't expect material change in '09 market prognosis. Activity increase has very long lead times, and for the most part, NOC/IOC backing. It is urgently needed to sustain production rates. And if the price of crude oil falls materially below its current trading levels and for an extended period of time, we believe that circa 10% anticipated rig count and rigless growth are reliable. At worst, there will be a shift to the right of some projects, meaning a delay from H2 '09 into 2010. This wouldn't be very dramatic or unusual. Even in the good economic environment, international projects get habitually delayed.

Two. Weatherford's '09 contracted business has no material exposure to exploration. Exploration strikes us as the most vulnerable client expenditure. Three. Echoing the view of one of our larger peers, we see overwhelming empirical evidence that suggest that the present level of drilling and production enhancement commitments are not sufficient to risk accelerating decline rates in oil, let alone secure the targeted one-plus million barrels a day capacity increase per annum the industry plans on. In a world of recession in the West and sluggish growth in fast-developing countries, it isn't a relevant problem. In a world of recovery and stronger GNP growth, this isn't a healthy or sustainable situation. Typically in manufacturing, one would define 95% operating rates as full capacity. Aside from transitory typical downturns, the world is running at an oil production rate in excess of 95%. The notion of running the world's oil and gas supply lines like a single location manufacturing facility, performing reliably at full capacity, and able to modulate that capacity at will is unrealistic, unreasonable, and irresponsible. When this typical downturn will turn, how will we accommodate the need for higher production levels, particularly for oil? Our industry response time thinks and acts in multiple years, not a few quarters.

Four. There is no reason at this stage to anticipate anything less than a very stout '09 international growth at Weatherford comparable to the two prior years. Only a sustained collapse in the price of oil can change that.

Direction. Throughout '08, and more specifically in Q2 and Q3, we spent the CapEx working capital and operating expense to finance and professionally execute on '09 international growth, and lay the seeds for a continued growth cycle in '10 through '12.

The Company, by choice, is on a high organic growth trajectory and has been since 2005. Growth is who we are and what we do. The implication, of course, has been ready with negative free cash flow from operations due to the rate of growth and the correlated asset requirements. Because of who we are and what we do, we also pride ourselves on acting quickly and unambiguously. We'll deliver high growth in '09 from our international segments at or near the anticipated rate, and in this respect in Q4, we will finish funding our 2008 CapEx plan. We will, however, moderate the rate and scale of CapEx and related expenditures for '09. Our original intent was to commit about $2.4 billion in CapEx for '09, or similar to the '08 level. The '09 level -- the '09 CapEx is the backbone to 2010 growth. Although the '09 commitment level isn't finalized yet, it will be less. Most likely, the '09 CapEx numbers will be in a $1.5 billion to $2 billion range as our best case.

We are monitoring CapEx commitments carefully. We can adjust expenditures real-time as required by the economic environment. Three implications. We see large-realization opportunities that may well mitigate the lower CapEx intensity. This is true in NAM, which is obvious opportunity, but also within the international infrastructure. It leads us to believe our rate of growth internationally will still be very strong in 2010. The forward operating strain and associated risks will be lower. This will be the opportunity for our operations to improve efficiencies.

And lastly, our regional plan calls for breakeven free cash flow in 2009, followed by large free cash flow generation in 2010. With the adjustment in our near-term plans, we will be free cash flow positive in 2009, most likely circa $500 million or higher. With that, I will turn the call back to the operator for the Q&A session.

(Operator Instructions). Bill Herbert, Simmons & Co.

Good morning. Bernard, it doesn't sound like you are tempering your international growth assumptions for 2009. I guess the question I have is how much of your growth, your anticipated growth today for '09, is locked in?

Well, sort of two definitions. What is -- what is things that I think are very reliable, and things that may slip. If you look at what is very reliable, you end up somewhere about 80% of what we thought we would do in 2009. And then, the rest actually goes above a sort of total dollars we're expecting to get in 2009. And for good reason, because some of it was going to slip anyway. So we're really playing between 80% to 120%, if you will, of what we thought we could get. So that's your high low.

And with regard to the small portion that is slipping, where is it slipping? Or where do you think --

We don't know yet. We don't know yet. It always slips, hence the fact we tried to book a bit more than we think we're going to ultimately do. Because stuff always ends up being delayed, and in this market it may get delayed a bit more. I don't know where. I don't want to guess, because I would just be guessing.

And second line of inquiry, as we head into the winter season with respect to Canada, sounds like you're pretty comfortable with regard to the oil-related projects. Walk us through your sort of prognosis for Canada as a general proposition for 2009.

We actually see a year-on-year decline on the order of about 10% in Canada year-on-year, '09 on '08, if we were to guess. This is a guess, again. Primarily out of the gas segment, so you'll say, what about heavy oil? Light oil is clear, light oil is not a big market in Canada. One thing one has to remember about heavy oil is you've got two segments. You've got the mining segment, which is one we are not concerned with, and that one, around $70 for WTI, is vulnerable.

However, the SAGD, or the drilled, if you will, heavy oil segment is a little bit different insofar as its biggest cost component is gas as in steam generation, and then a derivative of oil as indigenous to the pipeline. That's the biggest cost component, so you can understand there's a natural hedge, from a cost standpoint, when you are a heavy oil producer as the price of oil and the price of gas falls, that cost structure falls. The revenues fall also, but again, it's the largest cost component they have. Looking at that, our feeling is that the SAGD segment of heavy oil in Canada at the present level of pricing of oil is safe.

So, SAGD safe and overall rig count down about 10%.

A guess.

Thank you very much.

Ole Slorer, Morgan Stanley.

Thank you very much. Bernard, Latin American margins increased sequentially this quarter. Could you talk us a little bit through what triggered that increase in margins?

Really, performance predominantly out of Argentina, Brazil, Colombia, a little bit of Venezuela, and then Mexico. Mexico did not hurt. But it was a multiplicity of places, not just one.

If you look at risks, let's say of funding, if you take Mexico specifically, you highlighted that gas projects are more at risk than oil projects. Are you involved in any other gas projects, and what do you specifically think will happen there to the service rig count or the jackup rig count?

We're not involving in the gas projects. But that's not why I singled them out. Nor do I think they have anything to fear today. But as the credit markets spread the notion that there might be some liquidity problems all over the world, then the question becomes, can certain clients perform the full scope of the plans they had, so it's a theoretical -- . It's a theoretical question. If you ask that question with respect to Mexico, it is not for me to answer. It is obviously for the client to answer. But if I were to guess, I would think of all the projects they have in the South, offshore, the North, and Chicontepec in the middle, if you will, probably the most vulnerable would be the North. Insofar as gas is of less value than oil from a client standpoint, if I was

Anything to update us on Chicontepec with respect to extensions of the contract (multiple speakers)

Way too early. It's way too early for that. I think it's progressing -- progressing well, operationally. If you have some specific question, we can answer them. And I think it's too early to tell whether we will do well for the client or not. We are certainly trying, but it's progressing well.

Okay. Was this on speculation earlier on, on maybe perforating or a lift could be part of the (multiple speakers)

We got some additional commitments in excess of $100 million covering, if I'm not mistaken, perforation and artificial lift. Which was good. It's a good thing.

(multiple speakers) sign up this?

In the past two weeks.

And if you look at your flexibility in terms of taking the CapEx down or taking it back up to the old level, relative to free cash flow, could you talk a little bit about how you intend to go about monitoring what they'll take it to, one end of that aspect versus the other?

Absolutely. Obviously, the first place we look is North America, which didn't have an awful lot allocated to it to begin with. Just particular areas as you can imagine, unconventionals, deepwater, etc.. We always monitor the CapEx on a real-time basis. We have a very disciplined process on and around it. And earmark it, and we vet each incremental dollar that we're going to spend quite thoroughly amongst product lines as well as regional operations. And all the way through finance.

We will be watching how things develop in terms of economically. We will watch at the very margin internationally. If any of our clients seem to have a bit of relief in terms of the hectic level with which they pursue and vet projects today. We will also obviously watch the weather in North America. Very easy to see. What's most difficult for us is the way the incremental opportunities that we continue to have presented to us today, and we're not the only company out there that -- to whom they're presented. And to try to find and focus on those projects that we think are important to the client, that are very sustainable over a long period of time, and therefore represent a wise investment from a return perspective for us over a multiyear basis. And so those will, more than anything else, influence the degree and level of CapEx for '09 for us.

Finally, you mentioned, I think, $521 million of acquisitions. Could you just help us with how much revenue was associated with that in this quarter?

Very little. Because the only one that carries revenues that I can think of is ILI. So -- (multiple speakers) Andy, how much would it be? I don't even know.

About $20 million this quarter (multiple speakers)

$20 million, this quarter, yes. The rest, you had, you had rigs, we bought rigs from distressed owners, and then there was technology. In both cases, we continue to buy technology. There is no timing for technology. It is whenever it's available. And there may be times we buy nothing. (multiple speakers)

So about $20 million was the nonorganic part of your revenue.

Correct.

That would be correct, yes.

Thank you very much.

Jim Crandell, Barclays Capital.

A quick one for you. If we dropped 400 to 500 rigs in the US over the next two to three quarters, what type of detrimental margins do you think would be associated with that?

Are you thinking an average rig count for '09 400 to 500 rigs down?

Let's say, if we dropped 100 by the end of the year, or by the holidays, and then another 300 to 400 by June. What would you think would be the trend of incremental margins over that time period?

Obviously, the margins will deteriorate. If I think of full-year '09 with 400 rigs dropping out, that would probably cost you about $600 million topline. And then, I think you're looking at margin compression from this quarter's levels somewhere around 400 to 450 basis points.

Okay. Thank you. Bernard, if you were to cut CapEx down to $1.5 billion, would this affect your rollout of new technology and in LWD, in rotary steerables? I know it's a big year for you in terms of new tool introductions.

It would not in 2009, which have actually essentially no bearing to 2009. It should have a bearing on 2010. What I don't know yet, what we don't know yet is how much can we optimize utilization of the equipment we put out there in 2008, and in 2009. In a lot of locations internationally, we seeded the location with equipment, we bought contracts, and then -- so we can start making a return. The equipment is not as highly utilized as it will be, and it was going to get more and more utilized over a period of time. Perhaps we can accelerate that. So that's the utilization internationally.

Of course, we can pull some equipment out of North America, which is more -- which is also [obvious]. So all in all, if we end up at $1.5 billion, as opposed to $2 billion, which is the range we're looking at, of course it will affect 2010. I don't know by how much. I just -- I am not equipped to know now. I don't think it will be as material as perhaps one might think. I don't. I think with the growth of -- again, we would like have a few more months to work on this, but my guess right now is that the growth in 2010 will still be very stout. I can't qualify stout, I don't know yet. (multiple speakers)

In terms of both wireline and LWD, not in terms of numbers of tools but in terms of percentages services offered, where do you think you would compare by the end of '09 to the larger companies in that -- in terms of what you offer versus what they offer in terms of measurements?

We never have enough. But I would think that in both cases, the same situation, whether on the Compact line or whether on the Revolution line or whether on the Precision line, you have a basic technology, which, after 10 years of being developed, strikes us as being in many respects one of the best technologies available in the industry. But in lacking the full [strength] of measurement. So very good, possibly the best, but incomplete. That process of making it complete has been going on now for three years, since we've bought Precision. And by the end of 2009, we will be as close to complete in terms of finishing all the add-on and measurements as you could have us. So in a sense, it will be the end of the chapter.

Different question, Bernard. Some people think that the independent sector in certain international markets could be vulnerable to cutbacks in spending, in particular, in the North Sea, Russia, and in West Africa. How much of your business is driven by independents, and, sort of, would you concur that these are the most likely companies to delay projects in '09?

I hate to categorize the whole -- the whole percentage or segment of our clients as being less reliable. There are a great deal of differences from one independent to the next. It is true, though, that on average, in down cycles, the independents are more vulnerable than the NOCs or the IOCs. Absolutely true. I would single out probably sub-Sahara Africa. I would single out the UK North Sea as being more subject to possible weakness because of the independents. Russia is a different kettle of fish. It's not independent this year. So those are the two areas I would single out.

As to how much business do we do with the independents internationally, I would say approximately 20% of our business in the -- internationally is with independents. So, though, there again, we have to be careful -- one has to be careful as to what is the definition of independent versus IOC. Some independents would classify as IOC because of size.

My last question, would you expect to see at this point delays coming out of Brazil in their drilling program versus what you would've thought three months ago?

Offshore, most definitely. I think on land, it's fine. Offshore was definitely -- as it was, offshore Brazil was going to be a long-term player. What I mean by long-term player, you have to wait a long time. Now it's become a very long-term player, insofar as it's hard for them to get equipment they need anytime soon. When I say equipment they need, a comprehensive fleet they need. So it is -- it's a very interesting thing, particularly for, obviously for Brazil. It's very interesting for us too, as a country play, but it is a -- the timeframe has got to be a little bit academic for you.

Okay. Thank you.

Charles Minervino, Goldman Sachs.

Good morning. So I guess the first question I had was, in your comments, you mentioned that costs were abating, but you still expect international pricing to be strong. I guess I was just wondering if you can just talk us through that a little bit more. Do you not anticipate that you'll get pushback from customers here on pricing if costs continue to decline?

Of course, of course, of course. I'm glad you asked the question, because in the prepared comments, sometimes the time period isn't clear. I was referring to where we are right now, today. I was reporting of -- on trailing, if you will, 60, 90 days. We've seen the cost curve flattening -- obviously declining now on the materials side and a flattening on the labor side, both international and NAM, and clearly, the labor cost curve is going to decline the NAM, for obvious reasons. But we also see the labor cost curve gently declining internationally, for entirely different reasons, which I can explain. And the materials side, I think you understand. That's clear.

I was reporting on that, and then I was sort of reporting on the pricing side, which there is not much to say on pricing in NAM. Obviously, on the forward-looking basis, pricing in NAM will not be so strong. And on international side, I was saying that pricing has been strong. That means the things that we've booked over the past three months have been, on average, at higher pricing, regardless of the parts and the service. Now there are differences, depending on the product line and the location. But it was a higher pricing. Our forward comment is a different thing. In an environment where the world economies are strained and the price of hydrocarbon is down, albeit at a level which is still attractive, but it's down -- obviously, pricing power internationally is not going to be the same. And I wouldn't want to suggest that we are in a position, or our peers are in a position, to be very aggressive on pricing internationally, no. I just think that it was strong, I would expect it to essentially be sustained now. NAM, different kettle of fish. It was sustained. I suspect that with the sort of pullback that we expect and that you expect typically you see some pricing weakness in different technologies.

And then, your growth assumption for next year, can you just give us some color? Do you have any pricing increases baked in to kind of that forward growth?

A lot -- the pricing is set. And so, the way we're adding our beans, one of your peers asked me before, how much -- albeit it was sort of already booked and so forth, and I gave him the answer, it was 80% to 120%, which is rather typical. Meaning that 80% was highly reliable, and 100% was what's booked. Now how much of it will slip? In a way, if nothing slips, we'd have an even stronger year in '09 than you guys anticipated three months ago when there was none of this credit crisis problem. But then again, things do slip, things do slip. But all of these businesses, whether their product sales or service contracts or combined things in a bundled way, all have set pricing. They're not going to have any escalation, sort of, over the year, but they're set. So we're adding both volume and pricing when we account for our projected revenues.

That's helpful. Thank you.

Mike Urban, Deutsche Bank.

Good morning. Obviously, most of the CapEx cuts we've seen so far have come out of North America. You did have one notable exception to that in Russia with EPC and [k]. Bernard, you've been very optimistic on Russia. Does that at all change or mute your outlook on that market?

I was optimistic on Russia until the credit crisis started. I remain, like my larger peer, very constructive on Russia long term, for the reasons that you know. Which is there are very few countries that have the hydrocarbon potential they have. End of story. Whether oil or gas. Now, that will never change. Now with respect to the very near term, given the level of taxation, royalties in Russia, unless that changes, it's clear that the cash flow of our clients is being squeezed in Russia. So the prognosis on Russia is not as strong in '09 as it was, clearly.

On the other hand, if the powers that be changed the royalty system in Russia, which they are likely to, but I -- it's not my decision, then I think the cash flow of our clients will not be as pinched and I think things are possible. All in all, I remain very constructive on Russia long term. You would have to be, in my business. For 2009, I'm cautious, until we're planning for -- are things that we feel are very reliable in terms of the need for the client to execute. We don't plan on anything more than that.

And what would that imply for a growth rate for Russia, just on the reliable backlog or book (multiple speakers)

Still very high, I'm afraid. But then again, we are coming from a small base, so think 50% growth rate in Russia for '09 for us. I know it sounds very high, but we don't have such a large base in Russia, so you have to take that into consideration.

Great. Thank you.

Brad Handler, Credit Suisse.

Good morning. Can we please come back to the acquisitions? I guess I'm just curious about maybe a bit of your process. For example, maybe -- at what level does an acquisition need to be approved depending -- based on a given size? So, maybe where I'm getting to is, where did -- maybe a number of things seem to have popped up in the quarter, and you were able to respond very quickly and close them. That sounds like it's very decentralized as obviously you all are (multiple speakers)

[Stop.] It's a good question. No, you are absolutely right. We favor decentralized management, and then we favor regional management. But that is for operations. And there's also in terms of the influence of regions upon technological developments. So for on both counts, we favor regional management on the basis that ultimately all business is local. That's clear, you got it right.

But things like acquisitions are -- there are times where there's a lot of things that are interesting and times where nothing is interesting. It really depends. And the decisions on acquisitions are actually completely centralized. It comes from operations. It is scanned by operations. It makes its way up to where the few people in corporate -- in interactions with regions this [side]. There's no acquisition, however small -- to think, an acquisition of $0.5 million to $1 million, all the way up to something large, like ILI, obviously. That gets done with our senior management specifically authorizing it, on its merits. And in light of the overall capability, balance sheet of the Company, etc., etc.. So you are absolutely right in terms of your judgment of how we run the Company, not that particular segment.

If I stick with that, just as a follow-up, how much of what you acquired in the quarter sort of had that flavor of, look, this is an opportunity that maybe didn't exist earlier in the year, as opposed to something that had been identified a while back.

Pretty much all of it. But to different degrees. There were different sets of circumstances, but across the board all of it.

Typically, we have 20 to 25 acquisition candidates on the board at any time. Very few of those make it through the process and get culled out at different time periods. Most of them tend to have a shorter gestation period, because we're quite decisive when we decide we want to get something and other times we're successful in getting things done because we are capable of acting quickly and making decisions quickly. But some do have quite long gestation times.

Sorry to drag it out, if you -- if we are just turning a corner with respect to credit here, would you expect that you're just starting to see lots of opportunities (multiple speakers) --

It -- again, it's highly -- we're interested in specific things. Whether it's product lines or technology or assets. Andy is right, there is on average about 20 or so things that are being put forth. But at times, none of them make it. Because they're not that interesting. Because they fall outside of the three categories identified, things that we're interested in, in terms of product lines, technologies, or assets. It's serendipity to a great degree. There are weaknesses of sellers. There's also whether what's crossing our path is of interest to us. Those two curves have got to cross. The first one determines the valuation, the second one determines whether we feel compelled to move.

Acquisitions are very much like CapEx. The question we ask is, do we have a need to do this, and the burden is on why should we do it. I mean, in other words, it's a burden of proof, because in -- the initial reaction is that we ought only -- we should only do what we absolutely have to do. And so, therefore, it sets a heavy burden of proof. So you may find that there are cases where we will have quite a few acquisitions, and small. You'll find, as you go back in time by quarters, we went through quarters upon quarters without doing anything.

By the way, I just got a note from Andy that I apparently called you by a wrong first name. So Brad, Brad it is.

No problem. Thanks for the answers. That's all very helpful.

Robin Shoemaker, Citigroup.

Good morning. Bernard, I just wanted to clarify one thing. When you spoke last quarter about the 40% growth rate in '09 for international, was that tied to your -- what you had booked, which we're saying now, some of it could slip in '09? But was that the booked amount that gave you the 40% growth?

What I -- I don't remember exactly what I said in second quarter, but presumably the same thing as I am saying now, which is that our assessment of growth rate is based on the amount of business that is booked, in our best judgment. And the situation today in terms of what we have booked is better than it was at the end of Q2, which is again to be expected. So therefore, when we discern that the international growth rate as a whole might be closer to 40%, which would be very similar to what it is this year, what we said then and what we're saying now is again based on what we've -- what business we have booked.

With respect to the comment of things slipping, I want to be very careful because -- as the song in the '60s, don't let me be misunderstood, which might characterize the interpretation of what one says in a conference call. Business has not slipped. Business is not slipping. Business sometimes slips simply because clients are late. That happens all the time. I assure you that some business from '07 slipped into '08, and some business of '08 has slipped into '09. This is the way of the world. With the respect to the credit market et cetera, et cetera, et cetera, and the GNP situation, anything I said is that it stands to reason, to expect perhaps some business to slip from '09 into 2010, maybe a bit more. That's it. So there is, there is -- I mean, I don't want to say things that are not. There is no evidence of slipping anything. It's way too early. And again, remember that habitually, internationally, business slips. It always does, but what slips from '08 into '09 will help '09. What slips from '09 to 2010 will help 2010. This is normal.

In terms of the '09 business volume and the -- how much of -- was there any '09 CapEx that was expected to generate revenues in '09 that would affect your forecast if you were to scale back CapEx as you have indicated?

I want to look at it again in great detail, but I don't think so. If it is, it has got to be immaterial.

Inconsequential amounts (multiple speakers)

Waste of your time.

Then lastly, if you do generate $500 million of free cash flow in '09, I guess one question is what -- the most beneficial application, you normally think of debt reduction or share repurchases, but do you have a plan for free cash flow on a reduced CapEx budget?

No. I think it's very difficult to have a plan for free cash flow then. The options are well-known as to what you can do with it. You named the two most important, and presumably it would be one or the other. But I would rather just decide when we get there.

That's all for me. Thank you.

Jeff [Kybers], [Whedon].

Good morning. As -- we're kind of talking about the CapEx in '09 and possibility of that coming down significantly, have your thoughts about the relationship between CapEx and revenue growth changed?

The comment I made, that there are opportunities on utilization of equipment and/or moving of equipment, which is -- two shades of the same coin. I relate precisely to what you're saying. Which is -- we know, depending on the product line, the ratio of CapEx to revenue growth. And, of course, then once you add up all the products on the service lines, you have a weighted average. But now that we have been growing the business, what is it, four years now? At a very steep rate, we have quite a denominator of equipment. And when you start focusing on the utilization of the equipment, let alone equipment we pull out of North America, it strikes us that we may have the opportunity to improve the yield of CapEx on revenues quite a bit in 2010, based on what we're spending in 2009.

Also, we are less supply chain strained et cetera, et cetera, and you do realize that all supply chains have been tremendously strained over the past 15 months. We should also do very well, or at least better than we have done -- again on the yield between CapEx expenditures and revenue growth. So the net answer is that this is a ratio that we hope to improve. That was the whole -- the essence of my comment in my prepared notes.

Is that structural, or is it just that -- is it just timing related, and if you are able to raise utilization in 2010, do you go back to the old sort of $0.75 to $0.80 of CapEx per dollar of revenue?

I hate to give you a number, but you just might. You just might. I don't know yet. Here's the problem. I don't want to say, yes, you're going to go from here to there, and you should bake that -- I don't know yet. What I do know is directionally, it stands to reason when you look at the detail of what we have, region by region, I would -- just comment sense -- that we should be able -- with will, with the will to do it, with the will to do it and the drive to do it, we should be able to increase the yield of CapEx to revenues. Get more revenues per dollar of CapEx, or less cents of CapEx per dollar revenue, whichever way you want to say it.

By the way, ditto on working capital. That's a little bit of a different tack, though.

Separate question. You characterize the status on Chicontepec as kind of being where -- if not ahead, of where you'd led us to expect. Given the delays on the well site preparation, where are you in terms of actual well completions compared to the plan that PEMEX had?

Andy, why don't you -- you're the aficionado of Chicontepec. Why don't you, why don't you --

Sure. The original expectation in the contract was for -- I believe it was 249 wells to be drilled and completed during 2008. Given that the contract was -- the award was made and the contract was signed about six weeks late, that number has been a moving target. And it is heavily reliant upon the pace at which sites are delivered. There are now five additional sites that will be delivered to us within the next week, which is good. There have been four wells completed. What's interesting about those, there is only one of them was drilled according to the original plan. There were change orders on the other three for coring, and for also adding additional feet down to the bottom of the well, about 100 meters each time, which obviously stretches out the days. Just -- on average, that extra work probably adds about eight days per well to the time required to drill it, on top of what your base expectation would've been. So we will see -- we're optimistic about -- it seems like the site delivery process is improving, and we're optimistic that that will continue to accelerate.

And the add-on that you mentioned, $100 million -- it sounds to me as if that's nearly 100% in-house, that is --

It's 100%. It's going to be 100%.

It's perforation and artificial lift.

It's completely what we do. We would not expect to have add-ons with more pass-through.

Right. And last question, you referenced a couple times in your comments that this is the outlook unless we had a material further drop in oil prices. Do you have any ballpark number in mind as to where things changed dramatically?

Probably not any better than anyone else's. When you see pricing drop by another $10 a barrel and stay there for something on the order of 10 weeks, you need to remember that you'll start getting, I think, some element of discomfort, and it will have an effect.

Alan Laws, Merrill Lynch.

Good morning. I like the 10 and 10, making it easy for us, Bernard. A few things. On the cost inflation, or maybe even deflation, if we were lucky, I guess -- you mentioned a few times in the 3Q [earnings series] and so far, looking at this kind of currently with the trend, and considering your 80-20 -- 80, 120 range that you gave, how much margin do you think is potentially available to protect or maintain or maybe expand margins over the next year?

You're pretty analytical here, but I can't answer that question. To begin with, we -- we don't -- we don't know -- we don't analytically know well enough where labor costs are going to go. Materials side is a little bit easier. Of course, it's a moving target. Labor costs, we don't know where it's going to go analytically in part because we don't know what is really going to happen to NAM. We have expectations. They're not reality. With respect to international, what you have is you've got a, for lack of a better term, a change, a gradual change in the gene mix, as it were, insofar as the non-OECD personnel as a percentage of the whole is gaining on the OECD personnel. The difference between the two being essentially non-OECD is cheaper, much cheaper. There's also more available, as they go together. So that phenomenon, you can possibly -- sort of map it out and say, well, over a period of time, even though my training expenses are up a lot, but they have been up a lot in -- throughout '07 and '08. This year, we increased our training costs tremendously. But that's done up front. Now you sort of, in the back end, you benefit from a change in the mix of personnel you have and their related cost. So that you can map.

The NAM side, you can't, as I explained, other than just pure speculation. Materials, of course, is a moving target insofar as -- well, it depends on the commodity bit, doesn't it? For not only crude oil, but base metals and so forth. The other phenomenon there you have to watch it is how long does it take for the inventory cycle of your suppliers to actually deliver the lower price to you? Some are quick, some are not so quick. What can you do about it? Which brings up the whole issue of how you manage your supply chain.

So you put all that mix together, I think we spend most of our time trying to make sure that there is, to the bottom line, a lowering of our cost structure. Not sure we are able quite yet to give you a sense as to how much it could generate as a counter-hedge, as it were. Except that I suspect that over the next five quarters, Q4 through 2009, it's material.

Your point is more that the costs have stopped climbing, essentially.

Well, they have. And then, there is an unwinding of the cost side, both labor and materials. And it strikes me as being -- it's important. It's important, it's a hedge. Can't quantify it, although it's taking a lot of our time managing our supply chains to take advantage of it.

Fair enough. I've got a follow-up to Jeff's question there, and again, to the 10 and 10 thing, with respect to economics. Isn't it more -- isn't this more of the slippage that you're talking about? Isn't it, kind of, more than this in context of a potential global recession? I agree 2009 -- it takes time, it's likely on rails, but, like, further out, isn't slippage -- isn't it more than that?

You mean, will there be a contraction of the international markets late in 2009?

Yes. Like I know we all have longer -- have a long-term view that's bullish, but I guess, what could be the longest period of time that you would think a slowdown could last before we'd be so far behind the curve that we could, kind of, never catch up?

I think we are. I think we are behind the curve already. But setting these academic views aside, a slowdown internationally, let's just theoretically think in terms of -- activity moving down, at least not moving up the way it was planned, so projects are delayed, deferred, tabled, shelved, whatever term you want to use. I would be very hard pressed, and I will count this particular quarter as part of that time, I would be very hard pressed, very hard pressed, to see us slowing down internationally for more than 18 months. In terms of what it does, in terms of the ability -- you don't seek to just sustain production rates, let alone grow them. I take a quite stark view of the ability for reservoirs in general to increase production rates, beyond the press releases and everything else. I really do. This is not -- it's only empirical in the heuristic sense. But it is empirical.

So it's -- because I think it's the 2010 horizon, I think, that has more people concerned that if you go and you start to dip, like it takes a long time to slow the drain, but it takes maybe even longer to start it up again.

That's fair, very fair.

Thanks for the answers. Appreciate it.

Pierre Conner, Capital One Southcoast.

And then we'll stop it at there, operator, if you don't mind.

Thanks. Question somewhat related to timing of things. So for your CapEx plans for '09, what should we think about for your supply chain timing on CapEx? I think peers have talked about some of this being three months to nine months.

Shorter. It's shorter.

Shorter for you? Is there a little difference in terms of what you have?

I think it's shorter, actually. One of the reasons why we mentioned that we couldn't make decisions on CapEx, we're monitoring it, we make decisions with very quick response time. It has to do with the fact that, predictably, in this environment, supply chain is much easier to manage and response times are fast. In simple terms, if response times were at best nine months plus on supply chain, now they have become three to six. And they are moving to a three. And many of our suppliers now are -- and this is obvious by the week -- very anxious to be flexible, et cetera. So that I think we're moving towards a highly desirable three months of a response time. We're not there yet, but we're moving in that direction.

The other one, maybe, I know you didn't give us any updates on nonoperational, but just on the R&D side, larger in the quarter, and then maybe on a go-forward basis, what kind of variability is in that number?

We should run at about 200 for this year, and looking at something like 220 next year. We just happen to have quite a volume of projects, especially in and around the LWD and wireline side, that rolled through this quarter, of things going out to market.

And as far as that number in '09, is there any desire to affect it, or that's pretty well --

No, I think -- I don't -- this is really for the long term, R&D. You don't run it on a short-term basis.

Very good. Thanks, gentlemen.

I think that concludes the conference call. Thank you very much all for your attention.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.