Weatherford International PLC (WFRD) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2008 Weatherford International earnings conference call. My name is Francine, and I will be your coordinator for today. (Operator Instructions).

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

Thank you. Good morning, everyone. First, prepared comments from Andy and myself. Andy?

Good morning. For our fourth quarter of 2008, we report fully diluted earnings of $0.53 per share. This number excludes approximately $16 million of costs incurred in connection with our ongoing government investigations.

Field finished the year strong, despite a general weakening of market conditions during the quarter. Continuing growth in the Middle East, North Africa and Latin America more than offset pullbacks in North America and Russia, as well as the unfavorable impact of an unusual strengthening in the US dollar.

The $0.53 understates the strength of our operating performance. First, above the line a $0.04 improvement in regional EBIT was entirely offset by $0.03 of asset write-offs and facility moving costs, as well as a $0.01 increase in corporate and R&D expenses. The write-offs to moving costs are included in the reported regional EBIT.

Second, below the line items took down earnings by $0.02 in the aggregate. The main culprit was a foreign exchange loss on our non US dollar net monetary assets. This is separate and distinct from the revenue impact mentioned above. This expense alone increased $24 million sequentially, although it was partially offset by improvements in minority interest and diluted share count.

Consolidated overview of operating performance. On a consolidated basis, revenue grew $94 million sequentially or 4% with the growth coming from our Latin America and Middle East, North Africa, Asia Pacific regions. The strengthening of the US dollar handicapped companywide topline growth by $130 million sequentially or 5%. Consolidated EBIT before corporate and R&D was $637 million, up $5 million sequentially with operating margins at 24.2%.

Before moving to the details of our Q4 performance, let's consider our report card for all of '08 both from an income statement and a cash-flow perspective. At this time last year we communicated to you that we expected to grow our Eastern Hemisphere and Latin American revenue by 40% and 25% respectively over 2007 levels. Our rig count forecast supporting these international growth targets was for 9% growth in the underlying average rig count. We were less certain about the prognosis for the volatile North American market.

At the EBIT line before corporate and R&D, we expected to edit revenue to produce 30% incremental margins. The above performance would have translated into $1.2 billion of revenue growth in the East and a bit more than $200 million of revenue growth in Latin America. Combined this $1.4 billion of incremental revenue would have represented 36.5% growth over '07 levels for our international business. In 30% incrementals we expected $420 million of growth at the EBIT line before corporate and R&D.

We estimated that the required investment to achieve this international growth to be a little more than $2.2 billion. Of this one $1.8 billion was to be invested in CapEx, and $0.30 of every incremental dollar of revenue was to go to operating working capital of $420 million. Had we performed against these targets, the short answer is that we grew internationally a bit less than expected with regional contributions varying from initial prospects and a market growing slightly less than forecasted. North America was stronger than we had hoped.

Companywide revenue was up almost $1.8 billion or 23% over '07 levels against the 7% increase in average rig count globally. Global revenue per rig grew 14% over '07 levels. North America accounted for a bit more than $500 million of the growth, while international topline grew $1.25 billion, accounting for 70% of our overall revenue growth. Our 2008 growth rate in the international markets was 32% compared to the 36.5% expected.

International rig count increased 8% in '08, short of our expectation of 9%. Although international revenue finished $180 million shy of our targets, we still manage topline growth of four times the underlying rig count similar to '07 as revenue per rig grew 22%.

This marks the seventh time in the last nine years that we have grown international revenue per rig by 20% or more.

Looking more closely at the $180 million shortfall, our Eastern Hemisphere operations underperformed by $285 million. Severe currency movements, project delays and this quarter's pullback in Russia restrained growth in the East as did our exit from sanctioned countries. Latin America, on the other hand, outperformed by more than $100 million, posting remarkable progress across all countries.

Full-year regional EBIT was up $420 million or 22% on incrementals of 24%. International regions accounted for 73% of this improvement with North America posting $112 million improvement for the year. International EBIT finished the year $120 million short of our targets as full-year incrementals ended up at 25% as compared to the 30% targeted. Despite this, international margins still ended the year higher in '08 than in '07.

From a cash-flow perspective, we invested $3 billion in capital assets and operating working capital during 2008. This was comprised of $2.3 billion of CapEx net of loss in whole and $700 million in working capital. Of this number, $500 million was invested in North America for working capital growth and selected CapEx opportunities.

Recall that North America topline grew more than $500 million in '08 despite a weak Canadian market and strong US dollar. In addition, approximately $100 million went to corporate and nonregional investments. Thus, the net investment in our international business was $2.4 billion or about $200 million more than anticipated. All of this related to awards of incremental projects that were not expected or planned for at the beginning of the year.

Our 23% worldwide revenue growth and 20% earnings per share growth for 2008 strike us as strong performances in both absolute and relative terms. More importantly, they reflect outstanding progress across all regions and all product lines from an operational point of view. They have established a new platform for future growth for Weatherford.

Geographic performance. Financial performance with our core geographic regions was as follows. North America, 45% of total revenue. Revenue was flat sequentially on a 4% decline in rig count as increases in the US offset a 15% decline in the Canadian dollar. As anticipated, average rig count for the quarter declined compared to the prior quarter. Average rig count declined by 97 rigs compared to Q3 with 77% of the decline taking place in the US. We have taken and will continue to take measures to manage the anticipated downturn in North America during 2009.

EBIT was $296 million, down $16 million sequentially with margins at 25.2%. The most significant decline at the EBIT line occurred as a result of US dollar strengthening against the Canadian dollar. For 2008 North American revenue was up $523 million or 13% compared to 2007, while average rig count was up 7%. EBIT was up $112 million or 11% over this same period.

Directional and underbalanced, as well as stimulation and chemicals, generated the strongest sequential growth among all product lines. For the full-year 2008, revenues grew across all product lines with the exception of drilling tools and pipeline.

Middle East, North Africa, Asia-Pacific, 25% of total revenue. Revenue rose $38 million or 6% sequentially against a 3% decrease in rig count. EBIT was $163 million, up $17 million. Margins were 24.2%, up 120 basis points sequentially on incrementals of 45%. Fixed cost absorption helped incrementals.

For 2008 revenue increased 31% or $568 million, and EBIT margins climbed 63 basis points on incrementals of 25%. Countries that showed particular strength sequentially included Algeria, Saudi Arabia, Oman and India. Directional and underbalanced, well construction and integrated drilling all posted substantial improvements.

Europe, CIS, West Africa, 15% of total revenue. Revenue declined $16 million or 4% sequentially against a 6% increase in rig count. Foreign currency fluctuations decreased revenue by $45 million compared to Q3. EBIT was $88 million, down $14 million. Margins were 22.4%. EBIT was negatively impacted by the strengthening in the US dollar, as well as by charges incurred at Borets in connection with facility moves and severance. We own approximately 40% of Borets.

Full-year revenue was up 30% on a rig count increase of 20%. Incrementals for 2008 were 25%.

Declines in Russia due to reduced activity more than offset improvements in Central Europe and West Africa. Stimulation in chemicals and directional and underbalanced exhibited the most progress.

Latin America had 15% of total revenue. Revenues rose $74 million or 23% sequentially on the back of a 3% increase in rig count. EBIT was $89 million, up $19 million sequentially with margins at 22.9% and incrementals of 26%. Full-year revenue was up 37%, and incrementals were 23%. Fixed cost absorption helped to offset startup costs related to projects.

Mexico, Brazil, Venezuela and Colombia posted very strong results. Revenue grew across all product lines with directional and underbalanced, integrated drilling and artificial lift standing out as the top performers.

Cash and capital. Cash flow. During Q4 we generated EBITDA of $751 million with D&A running at $204 million. Operating working capital, A/R plus inventory less A/P, consumed $11 million of cash.

At the end of the quarter, we stood at 125 days of working capital, an improvement of four days compared to the prior quarter and our best performance in 2008. After deducting growth in operating working capital, interest expense and cash taxes, operating cash flow was $593 million for the quarter, an increase of $285 million over Q3.

Capital expenditures were $604 million for the quarter, net of loss and whole revenue. Total capital expenditures for the year net of lost and whole were $2.3 billion. Capital expenditures will be substantially lower in 2009.

As of December 31, 2008, our ratio of net debt to net capitalization stood at 40.2% with total net debt at $5.6 billion. Cash balances totaled $234 million at quarter end. Earlier this month we issued $1.25 billion of long-term debt with proceeds used to pay down our short-term borrowings. Our $5.75 billion of long-term debt carries an average weighted maturity of more than 13 years and a weighted average cost of 6.9% on a pretax basis. The first maturity is November 2011 in the amount of $350 million.

Following this offering, we have more than $2.5 billion of liquidity in the form of cash on hand plus untapped borrowing capacity under committed lending facilities.

I have the following updates for you for 2009 nonoperational items and housekeeping. On corporate expenses we expect $140 million for 2009. R&D expense, $220 million. Net interest expense, $400 million, up due to the recent debt offering. Capital expenditures, $1.2 billion. D&A, $900 million and an estimated tax rate of 20% slightly above where we finished 2008.

I will now hand the call over to Bernard who will cover our operational outlook.

Thank you. Summing up the forces in motion, six comments on Q4.

One, the Company posted the highest revenues in its history, costing a $10.5 billion revenue mark on an annualized basis.

Two, the quarter's reported results were good, but understated the actual performance. The quarter was affected by $0.03 of write-offs and $0.04 of non-cash Forex losses.

Remeasurement of monetary assets. From an operational level, we view the quarter as more than $0.53. That is not all. Reported international revenues and operating income was suppressed by foreign exchange. This is separate and distinct from the non-cash adjustments of monetary assets mentioned in two above.

A shift at 10 to 25% in foreign exchange values of energy-related currencies understated the translation of international revenue growth and earnings performance. Foreign exchange understated revenues specifically by about $130 million at Q3's exchange rate. It suppressed international reported revenues by about $90 million or over 7% sequentially. Canada's reported revenues were similarly affected versus revenues by about $40 million.

The quarter was obviously good. Our write-offs in Forex in the quarter would have been much better yet. The point here is not to suggest a highly adjusted EPS number. The point is to highlight the strength of our field level execution and underlying profitability on an apples-to-apples basis for Q3.

Strength in Latin America/Middle East/Asia carried the quarter with a combined $110 million of growth or 11.6% sequentially. The incrementals were strong at 45% in the Middle East and 26% in Latin America. Europe, West Africa and CIS slowed with a $16 million decline. That is not reflective of the field reality. Adjusting for Q3 Forex, the region would have been up close to $30 million or 7% sequentially.

And the region's apparent high operating income detrimentals were caused by write-offs, and Andy touched on with Borets primarily.

North America was flat with Forex declines in Canada almost made up by the US. North America's decline in operating income was also essentially a Forex effect Canada said the US could not overcome.

Looking at the calendar year '08, '07 and '08, the Eastern Hemisphere and Latin America grew by 31% and 37% respectively for a combined international growth of 32% against an 8% increase in rig count. That is four times the market rate and a repeat of Weatherford's performance in '06 and '07. The original 40% and 25% targets set would have yielded a 36% in international growth. We came in 4% short or about $185 million less in annual revenues, essentially a Q4 Forex effect and postponing of a few projects into '09 and 2010.

Incrementals at the EBIT line for the year were 25% in the Eastern Hemisphere, 23% in Latin America, 21% in North America. Total incrementals companywide '07 on '08 were 24%. These numbers include all write-offs.

Overall Weatherford posted 23% revenue growth and 20% earnings per share growth for 2008, which we view as very strong performance by our team. We suspect one of the best amongst our peer groups. It marks another year of tremendous progress for Weatherford improving toolbox, broadening infrastructure, developing human talent and raising client intimacy.

Product lines. I will not take you through the details of each product line one by one. I will go straight to the conclusion.

The three fastest-growing product lines were integrated drilling, chemicals and stimulation, and directional and underbalanced. All three had strong quarters for interrelated reasons, which is the growth in project management. Directional crossed the $1 billion level on an annualized basis for the first time since the Precision acquisition three years ago.

Directional and underbalanced, which we called Drilling Services, are now our largest product line. Underbalanced is increasingly marketed as a term control pressure drilling, which covers a broader range of applications.

They both benefit from secular forces. Reservoir drainage implies an ever-increasing rate, the use of horizontal architecture and in turn control pressure drilling. This is particularly powerful on non-applications as the ratio of direction to vertical wells catches up with offshore.

As a second observation, we believe bundled integrated projects will grow in absolute and relative terms driven by efficiencies at the field level. This will remain in international phenomenon equally powerful in Latin America and the Eastern Hemisphere.

All the other Drilling Services, all the other drilling completion and even construction product lines have and will benefit from project management pulls. Artificial Lift is still showing strength in all of its international segments. Lift benefits from accelerating decline rates and the problem of increased produced water. Lift is our second-largest product line, and as best, we can tell we are the world's largest Artificial Lift provider. Combined with our investment in Borets, we command about $2.5 billion of Lift revenues covering all forms of lift and field optimization worldwide. Wirelines decline was primarily a weak Canada and then periodic cycling of projects. Wireline had in the quarter breakthrough runs of the compact technology of several Eastern Hemisphere markets.

Comments on cost and pricing. Costs are moderating fast and steep. Taking an overall view of our operations, we are seeing a lowering of our average labor costs systemwide, particularly internationally. Both cyclical and structural factors were at work in those markets. We expect the same to occur in North America, albeit for purely cyclical reasons.

Concurrently 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 steel and non-ferrous prices already down 15% to 35%, while oil-derived products are down over 50%.

Pricing in the US and Canada is showing weakness across the board. Rigs, tubulars and stimulations are showing their strongest pressures. Pricing in the international markets is softening where and when contractual terms come to renewal time. Requests by clients to renegotiate existing contracts are yielding more modest price erosion, and there are also significant regional differences.

As a synthesis on a forward basis, North American margins will deteriorate given that market's prognosis.

On the other hand, the net of pricing and costs is hard to decipher for the international markets.

Acquisitions in the quarter, we spent $160 million in cash on 10 acquisitions. They were either technology or equipment purchases, some of which were from distressed sellers.

Forward views. One, North America. North America will be hit hard and fast. We're expecting the rig count in US to test 1000 before all is said and done. We do not expect it to settle there. We are as ready for the decline as one can be. We know more than just growth. We also know how to restructure operations fast and efficiently when markets fall back. We will take advantage of this major pullback to permanently change our cost structure in North America. Long-term North American needs technology and low delivery costs. We aim to deliver both.

Two, five comments on the international segment. One, we expect international oilfield expenditures to drop '08 on '09 by 10% to 12%. That is a considerable pullback in light of the inability to significantly grow production rates over the past five years.

The price of oil is showing exceptional volatility and could cross lower thresholds. Lower prices would push the year-on-year declines in international E&P expenditures further down. We do not think this is likely. This is an implicit judgment on the price of oil. The increase in physical extraction costs, meaning the quantity of parts and services per barrel produced, suggests that $40 in '09 is roughly equivalent to $10 in 1999.

Two, geographic markets will be very differentiated. Some such as Russia will be hit hard, while others such as North Africa will be up modestly but up nonetheless. Market coverage will matter. More than ever you you are, what you do and where you are will dictate how you do in '09 and in 2010.

Three, some segments will be hit much harder than others. Weatherford's '09 contracted business has no material exposure to exploration. Exploration strikes us as the most vulnerable client expenditure. The segments are more constructive. Production-related parts and services, for example.

Four, we see overwhelming empirical evidence that suggests prior, as in '08, levels of the drilling and production have some commitments are not sufficient to rest accelerating decline rates in oil and secure the targeted 1 plus million barrels per day capacity increase per annum the industry plans on. In a world of a deep recession in the West and sluggish growth in emerging economies, it is not a relevant problem. In a world of recovery and stronger GNP growth, this is a sustainable situation. When the cyclical downturn turns and it will, the sins of omission will come to roost.

Five, given the extreme volatility, we cannot provide you with reliable calibration that is usual percentage objectives for our international business in '09. Based on current market conditions and client commitments, we expect double-digit growth in our international business '08 on '09. That is as much as we can say.

In a world of $40 oil, we believe this is reliable. '09 CapEx, we expect an '09 CapEx of $1.2 billion or less predominantly on international infrastructure and equipment that will benefit 10 and 11. We're monitoring CapEx commitments real-time. We can adjust expenditures down or up to the 120 days response time as required by the economic environment.

There are three implications for all this. One, we see large utilization opportunities that permanently reduce our cost structure in North America. The keyword is permanently.

Two, this will be the opportunity for our international operations to improve efficiencies and digest four years of very high growth.

Three, our regional plan called for breakeven to free cash flow in 2009, followed by a large free cash flow generation in 2010. With the adjustment in our near-term plans, we will be free cash flow positive in '09. Free cash flow from operations will be $500 million or higher.

We remained a growth company at heart. It is who we are, and that is not going to change. We recognized that the market environment in '09 stands in stark contrast to that of the '05/'08 period. This year will require focus on efficiency and cash flow both for our clients and ourselves. We are well-prepared for this shift. We embrace it.

In many ways this is a healthy adjustment forward in an otherwise break net growth run. We expect '09 to mark another year of significant operating and strategic progress for Weatherford, albeit one that will be judged on metrics different from those focused on during '08.

This closes the prepared comments. I will turn back the call to the operator for the Q&A session, please.

(Operator Instructions). Jim Crandell, Barclays Capital.

The first question is in the environment that you outlined for international E&P spending growth -- I think you said double-digits -- what would you expect to happen to your overall profit margins in that scenario?

I don't think we know. We have forces -- different forces in motion. On the one hand, there is some pricing declines that are occurring on one-third of our business that rolls forward and gets renegotiated. On the other hand, you have absorption effects and the lower cost structure. I don't think we know what will happen to the international margins. It is not the same visibility as in North America.

Okay. Second question, Bernard, Chicontepec project seems to be to date both an operational and financial success for you despite your credits. Do you agree?

What are the risks from here, and given the scope of what Pemex has planned, do you believe you can take on more work during '09 than what you are contracted to do now?

I think we count our blessings. The project is successful operationally so far, and the project appears to be successful financially so far. Time will tell if between now and year-end it is a success.

I think before year-end you will have the full result of the projects, so within Latin America. So you will be able to judge.

Insofar as growing the scale and scope of Chicontepec, I think first we have to sort of leave it to Pemex to decide whether that is something there that is in their interest. Insofar as we are concerned, Mexico is a place of great focus. So we would welcome that.

Okay. This coming year 2009 seems to be one in which you're starting up a lot of integrated bundled projects. Will it be a year in which you will have a marked increase in startup costs for those projects, and if so, when will that hit the P&L?

I think you had a lot of startup costs in Q3. I think you have a lot of startup costs in Q4. I don't think you will have any higher rate of startup costs in Q1. I think it will be about the same.

I think just about everything that we were hoping to operate will be started up at least in part if not in full by the end of the second quarter. So I think by the middle of the year, for at least the project that we are working on, we will be pretty much done. I do not think the rate will be any different than it has been for the startup costs.

Okay. And last question. Bernard, a few months ago you outlined what was a very aggressive schedule for new tool development in your LWD Rotary steerable product line. Are you still going forward with the vast majority of that? And once that is completed, where do you think you will stand in terms of capabilities versus your competition at that time?

The first thing, the answer to the first question is yes. And I would add that we're not going to diminish in any way or form the commitment to technology at Weatherford throughout this cyclical down.

On the second part of the question, I will pass. I have no -- I do not want to increase competitive fury any further, so I will just want to stay there. We're focused on delivering the best technology that our clients can possibly want. I will leave it at that.

Bill Herbert, Simmons & Co.

Bernard, in your, I guess, prepared commentary, you mentioned this, to be polite, adjustment in North America will avail you the opportunity to implement permanent reductions to the North American cost base. What does that entail, and how do we do that?

Well, it addresses essentially fixed cost. Fixed cost comes in the form of construction costs and overhead costs. That cost is regional specific and corporate specific. I think the intent is to lower all three as systematically as we can. Some of it means some physical things, for example, consolidation facilities, and that will take a few quarters. It has to be primed, it has to be done in a manner that is not only efficient but also organized.

The other two aspects, that is in a faster. One has to access what does -- what do our clients need long-term? What does the region need long-term in terms of fixed cost support?

Okay. So I guess the question is, do we have a specified game plan, and what is the targeted reduction with regard to cost?

We do have a targeted -- we do have a very specific a bit more than a plan, but let's call it a plan. As to the dollar amount, I would rather not say on the call.

Okay. You also mentioned that the international markets were softening and that you were being confronted with contract sort of vulnerabilities, if you will, with regard to clients wanting to reset existing context and yielding some price erosion. You said there were significant regional differences.

Where are you seeing the most duress with regard to pricing vulnerability internationally, and where are you seeing pricing hold up the best?

I was making a theoretical point, a more general point rather than Weatherford-specific. Which is if I look at the international market and what comes up, you have got two situations. You have got the normal rolling of contracts. I think the industry norms is the third or three years sort of cycle. So probably roughly correct. So about a third of the contracts occur a few months ahead of time.

There is the negotiation, suggests that the issue, the primary issue is essentially pricing. So that should be clear. It should be obvious. It is not a Weatherford issue; it is an industry issue.

The second point I was trying to make is that there are a few instances -- it is not generalized at all. In fact, I think it is more the exception than the rule. There are a number of instances where clients will ask -- in a way ask for help on the basis that our economic conditions are different and so forth and so on. And on that -- in that sort of situation, I was making the point that pricing concessions are likely to be far less on the sort of renegotiations of a contract that comes to expiration. So, making a distinction.

I would not conclude -- that would be a mistake -- I would not conclude that in the international market, there is a generalized renegotiation of contracts. It is not true. It just is a few instances, and some of them are well-publicized. Think Saudi Arabia Aramco where many of the existing contracts are at the request of the client to be looked at. That is basically an act of read upon negotiation. It is not a sort of end of a contract situation.

So that being said, differences that are regionally, I would say that Russia is obviously a prime, prime market for renegotiations and requests for renegotiations of contracts. That should not surprise you. I think it does not occur much in the Middle East with the exception of Saudi Arabia, nor do I know of any instances of any significance in Asia.

I would say it is a North Sea, it is a Russia, and there's is a couple of instances in Latin America. I know you can guess easily where they would be.

Okay. And to close the loop here, if you would identify what you expect to be the best three markets for Weatherford in 2009 and the worst three ex North America?

Well, the best are straightforward. It is Middle East -- Mexico, Middle East and North Africa if you would distinguish them as two separate markets.

With respect to the -- well, the ones that will be the most strained are definitely Russia, North Sea, the third one Venezuela (multiple speakers) but I'm careful there because it is not a given.

Okay. Thank you very much.

Ole Slorer, Morgan Stanley.

Those are very good operations there, gentlemen.

Thank you.

Guidance I understand it is very, very difficult to have any crystal ball within your peer definition right now. But if we look at the first quarter, the earnings estimates appear to be absolutely all over the place. If I take your comments of a kind of rapid decline to about 1000 rigs and your comments on North American pricing and what we heard from others, especially on the North Sea, would something of an EPS in the mid-30s be a reasonable guesstimate for the first quarter?

I will probably defer that answer to Andy.

What do you think about this, Andy?

Well, I hate to get dragged into a game about estimates here. What I can say is that North America we expect it to be just a precipitous decline into Q1. I think it will be an extremely challenging quarter.

If you look at how we typically perform from Q4 to Q1, sequentially the Middle East, North Africa, Asia Pacific region really struggles to keep its chin on the bar because there's traditionally a pullback from Q4 to Q1 in Asia Pacific, and I think Europe, West Africa, CIS is going to in general be weak.

And so wrapping those things together, I think if you are thinking of a mid-30s, I would not argue with you about it.

Okay. That sounds reasonable. Bernard, on the stimulation of (inaudible) -- that is one of your top performing subsegments -- a little bit surprising. Could you explain what drove that performance? Was it international penetration, or was it something related to North America?

I think North America did all right, but I think probably what added to it was international stim and chemicals too incidentally. It is two separate segments. And they were helped -- well, stim, in particular, was helped by projects. We are just [fee-backed] and had growth both in revenues and in margins in projects that covered the entire drilling through completion end of a field. That is what made the difference.

And finally, Bernard, I mean you have been through a series of cycles now, could you give a little bit of some color on how confident you feel that the organization is sort of totally ready for what might come their way in 2009 compared to the previous downcycles?

I don't think one is ever totally ready for anything. One is ready for something after the event by definition. But I think we will probably -- it is fair to say we are far more ready both in terms of understanding our business and also in terms of being individually ready than we were in certainly 1999 or in '02 or '03.

The Company is also very different. The comparisons are hard to make. It is probably hard to make for everyone. It is particularly hard for us.

That is good, Bernard. Thank you very much.

Michael LaMotte, JPMorgan.

A couple of quick ones for you, Andy. First on the working capital, I would have assumed that maybe receivables grew in the fourth quarter, but with the change in working capital, it would suggest maybe that inventories were worked down pretty aggressively in order to generate that kind of delta from Q3 in terms of cash? Is that a correct read?

We've only consumed $11 million on the working capital side for the quarter. And so taking the 750 of EBITDA and 600 of CapEx, and obviously you can carve out interest in cash taxes, we were free cash flow -- almost free cash flow neutral. Our target was to try to get there by Q1, and we thought that that would be a good performance. So we're really pleased that that is where we are at the end of Q4 here this soon, and we expect to now be positive in Q1.

I mean I think that is sort of where I was going with it is a big positive shift. As I look at the $500 million target for free cash flow this year, I guess first is, on the surface it looks like it could be exceeded, especially given the improvements in working capital. And the second point to that is, how firm do you expect to be with that target? I mean if you get acquisition opportunities that come up or growth opportunities, how should we think about that vis-a-vis --?

I think, Michael, on the organic side, if the client is right, if the project is right, yes, we will pursue that if there is incremental organics that we do not have today.

Now in this environment, it is probably reasonably unlikely. But that is absolutely -- you can expect that.

On the acquisitions we do not want I think to let go of our free cash flow priorities. So it would have to be a very, very compelling situation for us to want to relax our objectives. It really would. But I think one should never say never. I think it is just not right. But there is a strong bias against pursuing acquisitions unless they are compelling.

Okay. That is helpful. Bernard, if I could address the first part of that, the organic side, are there integrated global construction contracts now? Has that market ceased up like a lot of else, or do you (multiple speakers) --?

The tone of everything is weaker, and people are not going to hurry anymore. That is our reply to everything.

However, I think if you look at the world of opportunities that we have, it is a more sparsely populated world obviously today than it was six months ago. If you look at the world of opportunities, you find that -- know the Well Construction project management bundled in all of its forms is doing best of all in other words on a relative basis.

But there are -- it is possible that we add to our backlog of projects and so forth in the next one to two quarters. I would not go and guarantee it, but it is very possible.

So it is not a total freeze up then?

No, it is not.

Is there an opportunity to reallocate some of the rigs currently not in IWC contracts to those contracts -- (multiple speakers)

Most definitely. Most definitely. And I would -- of all the rigs we got when we bought Precision that are just rigs -- they are just rigs working on rig contracts and pursuing the rig business. In a perfect world, we would like to convert, move or assign those rigs on projects so that we use rigs purely as a product line that is adjunct to project management.

So the answer is yes, most definitely. I think there is about 10 to 15 rigs that will roll forward in 2009. They will be Precision rigs, and so there you are. You'll have 10 or 15 rigs that, of course, could be just renewed by the client where they are, and we are not going to turn that down. But if we had an alternative, most definitely that would be the priority to move them to the alternative, which is to work on projects together with all the other product lines.

And the step-up if they were to go bundled, is it two to one in terms of revenue for Weatherford in an integrated --?

Do you mean $2.00 a downhole for $1.00 a day rate?

Yes.

Of course, it varies a great deal, but that is the reasonable yardstick.

Okay. And so the capital infusion to get that kind of growth would be significantly less than perhaps what we saw in '08?

Yes, because I mean a big chunk of the capital infusion in 2008 was on and around drilling and specifically on and around rigs.

Dan Pickering, Tudor, Pickering, Holt.

To come back to the cost reduction focus in North America, I understand you are hesitant at this point to talk about specifics in terms of dollar target. At this point given your plan, is this mostly a manufacturing focus? How big a component is headcount? I'm just trying to get a feel for the split. What level generally of long-term rig count are you going to size the business for?

It is not manufacturing particularly. It is facilities as in service facilities, of which we have a great many in the United States. That is the first thing.

The second thing again is our overhead, which comes in all forms and fashion. Again, regional overhead and corporate overhead as it pertains to the United States.

It follows the same pattern that we executed in Canada. Remember, Canada excelled through very, very hard times the past two or three years in a way in isolation for reasons of its own. You will remember also that we were intensely Canadian as a percentage of the whole.

And so for us we had a miniversion of what we have to face with, what we are faced with today or even back then. We are growing everywhere, but we have to retrench dramatically in Canada. And we did it in two ways in the variable costs obviously, which you should expect, but also in lowering our cost structure in Canada.

Now one is never finished doing things like that, but we did achieve a number of thresholds in Canada. We achieved them very quickly.

So applying the same methodology in the United States now, there's rig facilities and there's overhead. As to what we are sizing it for, actually, Dan, the notion is to size it to two where we could operate in the market we had in 2008, again by just moving the variable cost side. Again, it is the fixed cost side and the facility's infrastructure side we're hoping to make leaner.

So when we talk about a permanent cost reduction, it addresses really all the costs that in theory and in practice often do not move up or down much with activity levels.

So in a sense, we should be able to operate at a 2008 level or even higher just by moving the variable cost side. That is the sort of thinking.

Okay.

If you recall, Dan, last year at about this time, we were thinking about targets for North America on margin expansion. We met the 100 basis point expansion target in Canada against a very weak market, and that was really on the back of trimming the cost structure more than anything else. We did not make it in the United States, but we made it in Canada.

International in our mind is in the secular growth mode. It is going through a cyclical down. Being the secular growth does not shelter you from cyclical downs. But in our minds, the international market is in a very long-term secular uptrend. Therefore, in international markets, both the infrastructure and in a way the overhead support -- it is not an open checkbook. But we are more generous in those markets because we are in the next 10 years in a growth mode. Yes, with some downs but in a growth mode.

North America is different. North America does not have a bad prognosis; no, no, quite the contrary. It does not have the same long-term secular up that we see internationally. This is (inaudible) our view.

Therefore, in the North American market, which is also the most expensive market from a reservoir exploitation standpoint, when we make the point that we need technology and costs, low-cost and technology, we mean it. And lower costs simply means that you are able to deliver your variable costs with as little fixed cost infrastructure as possible without missing out on quality. So this is a theoretical point, but we mean it.

Okay. If we could talk about Mexico for a second, again big focus by the street. I know you are own percentage of completion accounting there. Could you just give us an update on where you are in terms of percentage of completion, and have there been any changes in terms of your assumptions for the project over the past three months or so?

Andy will give some comments on the accounting of it, but in general I think the project is going well. I think in general the amount of attention on it is being driven by competitive fury, you know, but you know this, Dan. It is exaggerated.

But having said this, we're grateful that this project is going well. I will leave it at that. And Andy, you want to answer the question on the accounting side?

Yes, Dan, we are on percentage of completion. So that part of the project that we have completed we have recognized both the revenue and the cost for it. Other than that, I really do not want to encourage everybody to continue to I would say focus on this project. It has become completely blown out of proportion relative to what else we're trying to accomplish at the Company. So I will leave it at that.

Just allow us the time to show you that we are performing, and you will see whether we do or not in our financial performance in '09 in Latin America.

It is going to be over with, at least this particular contract, before the year is over. So you will see it by definition through the Latin America original P&L line.

So the numbers will speak for themselves this year?

Yes, I think so.

Final question from me, as we look at your CapEx flexibility, you have targeted $1.2 billion. How much of that is committed? How much -- I mean is that a $300 million run-rate every quarter? How do we think about the flexibility if things get better or worse?

Well, the amounts of money -- first, the amounts of money that one has to spend at Weatherford to keep things in good shape is around $500 million a year. Solid maintenance CapEx. That is the first number.

Second, the commitments are pretty much over in Q1. In other words, we did what we did in Q4 because you can only slow things down so fast.

Now there is a little bit more coming in Q1 but far less. The number will be already materially less than Q1. And so I would say that Q1 plus the amount of maintenance CapEx for the year, that is about all that is really committed.

Okay, great. Thank you, guys.

Brad Handler, Credit Suisse.

A couple of different types of questions, please. Just first -- maybe it is quick -- how many -- in the past you have mentioned a discrete number of bundled project you had. I think it was eight in the Eastern Hemisphere at one point and then the one in Chicontepec. Where do you stand today, and with some rolling off, where do you stand early part of -- well, today by the first half of '09?

We are still very young. Of the eight in the East, you have got six which will be at different stages of operations in the course of this quarter, two which are still being mobilized. So I mean you're very, very young. You will exit the year obviously with all eight operating and with a couple of years on average behind of work for them. Meaning that they will operate through the end of 2011, if my math is correct. So you are very, very young in these projects.

Okay. That is fine. I just wanted to get that. And then a couple of other issues. Can you just talk a little bit more about what happened at Borets? I know we're not talking about a big deal, but I recall that the facility move was back in the second quarter of '08. Is my memory right, and has something sort of lingered there that was -- (multiple speakers)

It is a very big plant. Your memory is absolutely, absolutely correct. It was initiated in the early part of '08. It took the balance of the year, and it was completed in the last weeks of Q4. And many, many costs came through in Q4, severance and final moving and some of the dismantling costs and so forth. And I think some costs also came through in Q2, Q3, particularly inefficiencies and an operating plant that is declining, and people know it is going to be shutting down and starting up a new plant elsewhere. But the real -- the bulk of the moving costs were really captured in Q4 by Borets.

The move is now complete, and what was a very large plant in Moscow is essentially closed down.

Okay. So you would anticipate that those costs have been accounted for in Q4, and you're going forward without any baggage there?

I think so. I don't -- we don't run Borets, although we like the way it is being run. But my sense from what I have seen is that if there's anything left in Q1, it should be a fraction of what it was in Q4.

Okay. And then another admittedly fairly small issue, but in terms of your exit and restructuring costs, can you give us some more color on that, maybe on the exiting side of it. You are finished at this point, or how much more is there? I know it is more complicated on some of the investigation costs, but --

We really don't want to -- we cannot comment on that on the call. What I would say is that it will take whatever course it needs to take, and that is as much as I can tell you.

Well, have you -- well, in terms of the exiting countries, perhaps that is something that is a little less sensitive, but is there still work that is tailing off there, or is that mostly done?

No, we're pretty much -- we are pretty much finished the best I can tell with the exiting process.

Okay. Fair enough. Thanks very much. I will turn it back.

Ladies and gentlemen, that concludes the Q&A portion of the presentation. I would now like to turn the call over to Mr. Bernard Duroc-Danner for closing remarks.

Well, thanks. There will be no closing remarks. Thank you very much for your time. We will take now questions just on a separate line. Thank you. Bye, bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.