Weatherford International PLC (WFRD) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2009 Weatherford International earnings conference call. My name is Fab, and I will be your coordinator for today. (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 call, Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Please proceed.

Good morning. We will do as we normally do. Andy and I will read the prepared comments and we will take Q&A. Andy, why don't you get started?

Good morning. For our first quarter of 2009, we report fully diluted earnings of $0.27 per share. This performance excludes $13 million of costs incurred in connection with our ongoing government investigations and $12 million for severance charges incurred mainly due to North American headcount reductions. Compared to our record Q4 performance, earnings per share declined $0.26 with a $0.21 decline in North America and a $0.05 decline internationally. Below the line items were flat in the aggregate as higher interest expense was offset by a sequentially lower tax rate 15.5% and lower FX losses. We still incurred $10 million of FX losses end of the quarter.

Operating performance. Companywide revenue declined $378 million sequentially or 14% with North America retreating $340 million and international operations down $38 million or 3%. This matches the sequential international decline experienced last year.

Seasonal declines in product sales reduced international revenue by $26 million, while the continued sequential strengthening of the US dollar handicapped growth by another $26 million. Absent these factors international revenue was up $14 million or 1% on a 6% decline in recount ex Russia and China.

Consolidated EBIT before corporate and R&D was $424 million, down $212 million sequentially with operating margins at 18.8%. North America was responsible for the brunt of the decline as expected with a margin deterioration slightly over 1000 basis points. International margins proved far more resilient to pricing and volume pressures, giving way to Q4 levels by 210 basis points.

Compared to Q1 '08, Companywide revenue increased $60 million or 3% despite a 19% decline in global rig count. International growth of $313 million or 28% was largely offset by a $253 million pullback in North America. This international growth was against a 2% decline in rig count.

On a constant currency basis, international revenue was up 38% as exchange-rate deltas reduced the top line by $110 million. Over the same period, global EBIT before corporate and R&D declined 25% with deterioration in North America more than offsetting a 10% improvement internationally. I will now go through the international performance by region.

North America 37% of total revenue. Revenue was down $340 million or 29% sequentially on a 28% decline in rig count. Pricing and volume impacts were severe with pricing concessions estimated at an average of 20% across all product lines. None escaped the bludgeoning. Canadian activity hit a 17-year low in March with 432 wells drilled, a level not seen since 1992.

At the same time, well completions were down 6% compared to Q1 '08. EBIT was $123 million, down $173 million sequentially with margins at 14.7%. Detrimentals were 51%. We have aggressively reduced our cost structure in North America with annualized savings of $250 million completed and another $90 million being implemented in Q2. Of the $340 million total, $110 million relates to fixed costs and represents a 10% improvement in our fixed cost structure in North America. These improvements have entailed the closure of eight facilities to date with nine additional facilities planned in the next 90 days. Redundancy of 225 overhead employees, as well as a $35 million reduction in costs outside of wages. We view these fixed cost reductions as permanent and necessary, a reflection of the reality of the reservoirs, our customers will pursue in North America for the foreseeable future.

Middle East, North Africa, Asia-Pac 26% of total revenue. Revenue declined $94 million or 14% sequentially against a 4% decrease in rig count. One-third of this decrease reflects the seasonal rhythm of customers' product-based spending patterns. Reduced recounts in Saudi Arabia, Egypt, Yemen, India and Australia, as well as project delays and muted ramp-ups, depressed volumes.

EBIT was $134 million, down $29 million on detrimentals of 31%. Margins were 23%, down 120 basis points sequentially. Year-on-year revenues increased $60 million or 12%. On a constant currency basis, revenue would have been up 16%. EBIT was up $13 million with incrementals of 22%. Latin America, 21% of total revenue. Revenue increased $80 million or 21% sequentially against a 6% decrease in rig count. Strong performances in Mexico and Brazil were partially offset by macro-driven weakness in Venezuela, Argentina and Colombia.

EBIT was $92 million, up $3 million sequentially. Strong incremental performances in Mexico and Brazil were weighed down by hefty detrimentals outside these countries. As a result, the margins were 19.7%, down 320 basis points sequentially. Year-on-year revenue increased $232 million or 98%. EBIT was up $32 million or 52% with incrementals of 14%. Europe, CIS, West Africa 16% of total revenue. Revenue declined $24 million or 6% sequentially against a 12% decrease in rig count. Excluding the impact of foreign currency, revenue would have been nearly flat. The United Kingdom, Romania and Russia showed significant activity reductions as expected.

EBIT was $75 million, down $13 million. Margins were 20.3%, down 210 basis points. Detrimentals were 55%. Year-on-year revenue increased $21 million or 6% and $87 million or 25% excluding FX impacts. EBIT was down $18 million on pricing declines and lower absorption.

Cash and capital. Cash flow. During Q1 we generated EBITDA of $537 million with D&A running at $201 million. Operating working capital A/R plus inventory less A/P provided $44 million of cash. After taking into account changes in operating working capital and deducting for interest and tax expense, operating cash flow was $454 million for the quarter.

Capital expenditures were $558 million for the quarter, net of lost and whole revenue. For the full year of '09, we anticipate capital expenditures of approximately $1.4 billion. This levels reflects our prognosis for H2 '09 and full year 2010, as well as our aggressive buildout of tools incorporating recently commercialized technologies.

As of March 31, our ratio of net debt to net capitalization stood at 41.8% with total net debt at $6 billion. Cash balances totaled $162 million at quarter end. As of March 31, we have more than $2 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 on 2009 non-operational items and housekeeping. Corporate expenses $140 million; R&D expense $210 million; net interest expense remains at $400 million; capital expenditures $1.4 billion; D&A $900 million and tax rate 15.5% for the year. This is reduced from our prior guidance as a result of adjustments to regional forecasts and incremental tax planning.

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

Thank you, Andy. Q1 was a difficult quarter, yet one that leaves us more constructive on H2 '09 and 2010. The basis of our outlook includes magnitude and speed of market declines to date; two, what we perceive as early troughing of a number of important markets; three, client indications in other markets, and four, early evidence of accelerating reservoir decline rates.

We will address Q1 and then move on to our outlook. With respect to Q1, we saw seven moving parts. The collapse of the North American activity, volume and price. The collapse of Russia and continental European activity, volume and price. In both cases the word collapse is correctly calibrated.

Three, a very weak UK, North Sea, Caspian, Saudi Arabia, Australia and Latin America ex-Brazil and Mexico. Activity pullbacks were somewhere between 10% and 20%. Weak pockets of Middle East, North Africa, Egypt, Qatar and Yemen. India and Asia Pacific adding up to pullbacks of circa 10%.

A few markets were measurably flat -- Norway, parts of Persian Gulf, West Africa and Brazil. Across the board integrated project mobilizations were slowed down or altogether delayed until second half of '09 or first half of 2010.

Finally, Mexico bucked the trend for idiosyncratic reasons.

Markets moved at different rates of decline, but they shared to varying degrees the same factors. One, seasonality. Traditionally Q1 sees a drop in international business driven by weather and customer buying patterns. Three, it affects product sales. There's a powerful factor in the Eastern Hemisphere, and this Q1 was no exception.

Two, aggressive action. IOCs and selected NOCs hammered volume and price, and they did so early and hard. A large number of industry projects onshore and offshore were canceled, cutback in size or postponed.

Thirdly and different from aggressive actions, client paralysis. On the back of the October/December event in the financial markets, another subset of our client base was unusually hesitant on setting a definite course of action for '09. This translated into budgetary decisions being adjourned for much of Q1. Activity was suspended, which is another way of saying suppressed. In geographic markets, they were not expected to show significant weakness. China, Caspian, Malaysia are good examples.

Although volume declines are widespread throughout the international markets and above and beyond what rig counts show, pricing movements were less homogeneous. In the course of the quarter, we renegotiated pricing with our largest IOC clients and a few NOCs. On balance in the quarter, EH, Eastern Hemisphere, realized pricing declines of low single digits and Latin America, ex-Mexico, of mid-single digits.

Taking stock of how we fared in this environment, international revenues were down 3% and margins down 210 basis points. Although I would only focus on sequential comments, note year-on-year international revenues were up 28%, Eastern Hemisphere was up 9%, and Latin America was up 98%. Adjusting as in keeping even for foreign exchange movements, our year-on-year international growth rates would have been up 38% with EH up 19% and Latin America up 108%.

Sequentially EH top line was down 11%, and margins were down 150 basis points. About 3% of the 11% top-line decline was traditional product sales decrease. The balance or 8% was the result of a combination of declines in pricing and volume. The volume losses were held back vis-a-vis the market by apparent share gains in a few geographic markets.

Most of the margin erosion was the net of price and cost. Cost structure almost matched price declines one for one on a percentage basis, yielding the quarter's 115 basis point lower margin. Integrated projects did not help in the quarter. They incrementally impacted both revenues and margins as clients imposed delays and in one case scale-backs, pushing the projects into H2 '09 and H1 2010.

Latin America's top line was up 21%, and margins were down 320 basis points. We had severe detrimentals in Argentina, Venezuela and a few other smaller markets due to a combination of sharply lower price and volume. Mexico and Brazil by contrast had healthy volume increases and solid incrementals.

North America was a fast-moving target. Top line was down 29%, and margins eroded by over 1000 basis points. The volume and price erosion were brutal.

Variable and fixed costs are being driven down just as fast as we can make it happen.

After the somber review of Q1, why is it that we have feel more constructive on H2 '09 and for 2010?

Well, for one we feel the fast and hard pullback in the international markets is healthy. We feel it will be behind us quickly. There is no doubt that Q2 and Q3 will see continued volume and pricing erosion. We believe that on average international market volume, pricing and margins will drop soon. Our best guess would be in Q3 latest.

Some of the worst hit international markets have already troughed. Russia, North Sea, Central Europe, Latin America ex-Mexico in our judgment have troughed. The other international markets should be reasonably well behaved. Middle East, North Africa will show strength in North Africa, particularly Algeria, and a few select Persian Gulf markets.

Asia will experience further volume and pricing declines in secondary markets but not much and not long. India and China will be constructive for the balance of the year.

In Latin America Brazil will be steady to strong for the balance of the year, while Mexico will gradually grow as we ramp up new contracts throughout the year both onshore and offshore.

Summarizing the points above, Eastern Hemisphere will become gradually more constructive between now and year-end. When the full year '09 is counted, we expect Weatherford's Eastern Hemisphere top line to achieve double-digit growth year on year. We expect Weatherford top-line Latin America to show quantum growth year on year.

Finally, in North America NAM will be manageable. We anticipate a NAM trough of around -- circa 800 rigs in the US and 75 rigs in Canada give or take. You should also expect our EBIT margins to bottom out during Q2 and to recover gradually from there.

Product lines. I will take you through the quarterly performance of our 10 service product lines. Our product lines are ranked in size from largest to smallest. Drilling Services, just under $318 million. Artificial Lift, $353 million. Well construction, $246 million. Completion systems, $241 million. Integrated drilling, $235 million. Drilling tools, $210 million. Reentry fishing, $151 million. Chemicals and stimulation, $145 million. Wireline, $143 million. And pipeline, $53 million.

Out of nine negative scorecards, completion was the best or rather the least bad product line with a near flat performance. Only one product line measured a positive scorecard. That is integrated drilling. Integrated drilling represents about 10% of the Company's revenues at this time.

As of right now, we hold 12 confirmed integrative project contracts in eight countries. We are operating seven but not at full throttle yet on the seventh.

The other five are delayed until the second half of '09 and the first half of 2010. When all 12 projects will be operating, we will be running on integrated assignments approximately 40 strings in the Eastern Hemisphere and 40 strings in Latin America. These numbers will change though as the year progresses.

Acquisitions we spent $31 million in cash primarily on two acquisitions. The most important was the control pressure drilling software technology. We view a strategic to both that product line and Weatherford as a whole. Control pressure drilling is another way of calling under balanced.

Full reviews. As mentioned above, we expect NAM to reach its nadir by midyear. We do not know when NAM will recover from its volume trough. We believe though that even with our volume recovery, margins in NAM will improve in Q3 and even more so in Q4. Credit lower variable and fixed costs are that. Reductions in fixed costs are particularly important as they are designed to be structural and permanent.

On the international side, in last quarter's conference call, our comments were and I'm quoting, "We expect double-digit growth in our international business." We can confirm this with a higher degree of certainty.

It strikes us also that H2 '09 will set the stage for 2010 as a year of healthy double-digit growth in our international segments both Eastern Hemisphere and Latin America.

Direction. No real change from three months ago, except the small tweaking of the numbers and our planning on a '09 CapEx of $1.4 billion or $200 million higher predominantly on infrastructure and equipment that will benefit 10 and 11. Over 85% of the CapEx is going into the international regions.

We are monitoring CapEx commitments carefully. We can adjust expenditures down or up with 120-day response times as required by the economic environment.

In closing, three thoughts to summarize our operating focus. We see more opportunities to permanently reduce our cost structure in NAM. This is a good time to improve operational processes and service delivery in the international markets. Not withstanding the upward revision to CapEx, free cash flow from operations will be $500 million or higher.

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

(Operator Instructions). Michael LaMotte, JPMorgan.

A quick question on Latin America. Revenue looked a little light to me relative to the degree of activity in Chicontepec. Is that just offsets in Argentina and Venezuela?

Yes, Michael, yes.

Okay. And the $200 million in incremental CapEx, can you comment more specifically on where that is going either by product and service line or geography?

It's going to Middle East, North Africa and Asia-Pac. I would say about 75% of the $200 million is going there. But the balance is other areas of the Eastern Hemisphere.

And the catalyst being Q1 contract wins, I assume?

Yes.

Okay. And then lastly, can you comment on the status of the rotary-steerable tool and the introduction for this year?

Actually part of the original CapEx we had had a large allocation for the RSS and some of the other directional tools and also wireline tools that we're introducing. So that is proceeding as scheduled. I think most of the early market penetration will be in Q3.

Jim Crandell, Barclays Capital.

Andy, can you comment on the -- or give more detail on the fixed cost breakdown in North America? To what extent is it service locations, manufacturing facilities, and then also how much further you see margins going down in North America in the second quarter?

Sure. On the fixed cost side, it's not just -- it's really mainly service facilities. Not so much it's very light on the manufacturing side. Where we have been able to load shift, if you will, across various plants just based on total delivered cost that we can get out of each facility, and obviously we have a global footprint on the manufacturing side.

In terms of margins, Jim, I would expect at this point I don't know, but given the impact in the decline in Canada, which is more of a very seasonal thing as opposed to continued activity declines, exacerbating it a bit this quarter will be additional pullback that we see down to probably 800 rigs in the US. I would expect something on the order of 500 basis points of additional decline from Q1 to Q2. And from there I see us building back up on the margin side with 200 to 300 basis points each quarter subsequently of margin expansion in each of Q3 and Q4.

Okay. Thank you. Bernard, a question for you. Certainly Russia has dropped precipitously here in the last six months. What makes you confident that Russian activity has bottomed and will turn up over the rest of the year?

I think first it is what we hear from our clients. Our clients are saying that the level of pullback went too far and that there will be a correction going the other way for the balance of the year.

Second, an observation, which is, indeed, the decisions that were made by much of our client base in the FSU, was an extreme. In a way the decline in activity and the pullback on budgetary authorizations was more sudden, more vertical and more extreme than what you are seeing North America. And partly, I think it really has to do with a real fear in our October/November/December in that particular market of no liquidity at all. And so in situations of no liquidity, I think one tends to go to extreme decisions.

I think at this point (inaudible) extreme decisions may not be necessary. So you're coming to a sort of midpoint that is more reasonable. It's still down a lot. That's just where you were in '08, but not quite as dramatically as you were in late Q4 and in Q1.

And then the last aspect of the equation best I can tell, and this is just anecdotes and anecdotes should be viewed as such. They are not -- you cannot generalize from it, but they are what they are. There's enough anecdotes of significant volume declines in oil reservoirs. That also from a client perspective is something that one wants to rest by whatever means one can use. And one of the means is obviously a greater number of work-overs, greater expenditures on production and greater expenditures on infill drilling. Not exploration and development but infill drilling.

It is a sum of all three, which as of about a month ago made us believe that the European market, Central European markets have been as bad as a FSU market and also I think what I just described is applied to some of the markets in Latin America. Obviously not Mexico and Brazil that fall in a different category, but the other markets in Latin America also are not quite as perfectly but they fall in the same category as markets that perhaps reacted too sharply too fast, and sort of we are maybe experiencing now a bottoming out and a bit of a -- if not a bit of a recovery at least in the deterioration.

So would you think, Bernard, that given a sharper fall here in the first quarter in some of those markets that Eastern Hemisphere revenues as a whole would increase in Q2 over Q1?

It is always hard to tell from one quarter to another, the answer is yes. Certainly Q3 and Q4 but the answer then in Q2 the answer is most likely yes.

Okay. And last question, Andy or Bernard, can you comment on the operational and financial performance of Chicontepec to date versus what you expected going in?

I think I will just say I think it is good or better than we expected when we went into it. And, of course, we had some exogenous help, and so far there are a number of input costs that are lower than they were when we got into it. And also with time, operational efficiencies come to bear, simply because we have been running a large operation, running it successfully, and we have learned a lot along the way. And as the operation grows, we also benefit from economies of scale. All of that comes to bear. Andy, you might want to add some if you want.

The drilling results for March were fantastic. It is clear that we have continued to progress along the learning curve, and we are not giving up. We think that there's still more efficiency to be squeezed out of it. The increase in scale due to the addition of a new contract and some expansion of the scope of what we are currently working on also helps on the financial side. So we are very pleased net net.

And closing comments, every well is different. Not all wells call to the same number or amount of days to drill the well. But if you look at the performance on the per well basis, the number of days drilled you find that for similar shaped wells we have done increasingly well month on month on month. And in the end, the only thing that matters is how fast you can drill those wells. We seem to be doing very well on that scorecard.

Ole Slorer, Morgan Stanley.

Just following up on the international side again, Bernard, you mentioned revenues may be up sequentially. Can you talk a little bit also about margins and the key drivers on margins, the scale is your own cost structure, pricing on contracts whether it is renegotiated pricing or whether it is pricing that you might benefit from this year that might roll over for a lower price level for next year? Relative to what you mentioned on paralysis, to what extent you might have had contracts but [rigler's] activity workover, Artificial Lift since going to a halt and you get sort of killed both ways and helped the other way on volumes across a relatively fixed cost structure?

That is a complicated question. You have so many different variables. Of course, the ones that are most advertised is the fact that there has been -- this is not new -- a push led by [IOC]. They have been very vocal about it and also by [some IOC] on pushing down pricing. Some of the percentages one reads are ones that make the headlines, but our impression is that they mostly apply to different classes of services but on the offshore rigs.

But nonetheless, there has been a major push by IOCs and some (inaudible) IOCs on pricing, and a lot of that has been negotiated already. There is this perception, though, that, well, this only applies to new contracts. Well, traditionally that is correct. And in an environment where there is extreme economic stress and we are in an environment that has extreme economic stress, about as extreme as anyone on this call has probably ever seen, the negotiations tend to apply to everything, and of course, there is some give and take.

In other words, if you have a contract which is good for another year or two years and you are asked to sort of give a concession, which contractually you don't have to, you are in a different position than if you just want some more business volume and you expect it to take it at a lower price.

So negotiations have been held pretty much on the entire book of business. Much of it was done in December, January, February and March. There's still some more going on now, but our perception is that much of the price negotiation, much not all, but much of the price negotiation and so forth will be finished, completed by the end of the second quarter in the international markets. There are always exceptions.

Remember, all of you listening on this call, how many countries are we operating in? How many countries do we call a market? About 100. So obviously there are always exceptions. But by and large, by the end of the second quarter, much of what has been renegotiated will be completed. Already a lot has been done. We have a very good idea what it means, so that is a factor.

But the other factor, of course, is the cost side. The input prices -- I have alluded to it in the case of Chicontepec, but the input prices are down to. You know what the input prices are. It is steel. It is oil. It is elastmers. It is people that fail. The variable costs we have found, we have found it at least in Q1 it was a very stressed quarter for us. We have found it feasible to bring variable costs down in very short order almost by the exact same percentage decline of pricing. That is pretty good. Before you even take a hit at fixed costs, it allows you to minimize the price effect on margins.

Certainly you see it in the Eastern Hemisphere. But the second factor is cost. And I think I am quite red-blooded about what we can do in terms of speed of variable cost reduction and some fixed cost reduction. There is a third aspect, which is we have our -- we have quite a bit of equipment which is sort of somewhere between coming out of the yard and being on location, which had some delays in mobilizations. Some of it it is our fault, but for the most part it is simply clients that are putting the brakes on when they want the project started. As you can appreciate, that does not help margins. That also is something which is a moving target. I suspect that much of that goes away in Q3 and Q4 and Q1 and Q2 of next year. In fact, all of it goes away. So you have the reverse effect, which is positive absorption. Because it brings with it quite a bit of volume. There is a third effect.

And then, of course, there is the other effect that you are alluding to, which is that it is not measured by rig counts. Well, it all began with rig counts don't measure activity very well because many of the countries are not being measured properly. An example that affects you is, therefore, China.

But another segment of the business that is not measured by rig counts properly is workovers and production. Those were unusually depressed in Q1 no doubt. You can take a look at other people who are in the same realm that we are in, meaning artificial lift. You will find the results were not very, very good in Q1. This has everything to do with budgetary authority being withheld.

Well, then I think all things being equal it is likely to catch up some in the balance of the year, and that carries normally very good margins. So you put all of that in one bag, I think it is, what is going to happen to margins? Well, in the EH we really don't know is the answer except the movement is not going to be a big number. You're not -- we may very well have margins that bop around where we are right now up or down a few basis points between this quarter and the balance of the year and not move very much. If you take a very pessimistic view and think of some of the mitigating factors I describe are not as potent as we think they might be, I think the most you will see in EH in terms of margin erosion between now and the end of the year is something on the order of 200 basis points tops. So it really (inaudible) between zero to 200. I cannot give you any more precision than that because I don't know.

In Latin America you have the buildup of Chicontepec, etc. in Mexico, which is one factor. And then the fact that I think the rest of Latin America in our judgment is not far from its cross. So that one again you can draw your own conclusions as to what is going to happen to margins there. But then again, I think you should not expect anything bad at all. Quite the contrary.

So you have the two pieces both on the volume and on the margin side that we are not sort of born optimistic at all. We are actually very realistic. It is easy to be negative. It is a bit harder to be positive. So we're not doing this simply to buck the trend. Simply it strikes us that volume and margin wise there is no apparent reason why we would expect the situation to be worse. Quite the contrary, we expect the situation in the second half of the year to gradually get more constructive. Long answer, sorry.

That was very good, Bernard. And if I just take everything you've said and then try to do something on the back of an envelope, which is always dangerous, it strikes me that we could actually see margins both in North America and internationally troughing in the second quarter, and that the quarter might be a little weaker than expected. But that the full-year number must be something that you at this point feel very confident about?

Look, for all we know and we are just telling you what we know without holding anything back or moving it up or down, that is very much the way we feel.

But the shape is deeper into the second quarter and the rebound --

The second quarter we will see. I think the -- I do think that NAM will drop in the third quarter. I think that is not a controversial statement. I don't see how margins do any worse than actually defrac in the second half of the year or up with the costs catching up with the price curve.

The international margins -- international margin will be up in Q2. Make no bones about it. It will be up much stronger in Q3 and Q4. But international margins will either -- if they decline, they will either decline in Q2 and Q3 tops. That is it. I'm not even sure that they will. There are too many factors. Any kind of sort of simplistic oil well, IOCs will reduce price. Therefore, margins go down. It is true but it is not enough. You cannot draw that conclusion. It is not enough of an analysis. So I think that in terms of volume up international markets at least for us two, three, four for the quarter and margins may very well be flat. If they are down, I would suspect they will trough in two or three. That is my best guess.

Perfect, Bernard. So in other words, volumes coming back will trump whatever price --

That is an elegant way to put it, yes.

Bill Herbert, Simmons & Co.

Bernard, I think it is pretty straightforward how you get the double-digit growth in Latin America 2010. Walk us through the double-digit -- the bridge for the double-digit growth in Eastern Hemisphere for next year?

Right. It is a bit easy in Latin America. The Eastern Hemisphere is harder. I was afraid you would ask that question.

Well, look, it comes essentially from Middle East, North Africa. The premise is predominately that FSU and European markets and West African markets don't deteriorate any further, so I think is correct. I think if anything they do a little bit better, and then I think there are -- there is on the horizon for us volume that we expect to get through Middle East, North Africa and also Asia-Pac.

Let me pause here for a second. Much of the delta comes from essentially four countries. There are some smaller plays, of course, up and down, four countries. And I would rather not tell you the countries for competitive reasons. But I mean there are two countries that are in the Middle East and North Africa. And one in Asia and one in the other parts of the Eastern Hemisphere. Of those four I think -- and we shall see because many things ought to be concluded in terms of spudding or in terms of mobilizing and so forth by the end of the second quarter. The four secure enough volume, and even with sort of reasonably conservative assumptions on everything else, I think it would hold -- would make our assessments come true.

Okay. I would presume it's not exactly a state secret that one of those will be Algeria given the huge ramp in Sonatrach's budget?

Yes. (multiple speakers)

Sure. And then with regard to Russia, can you bring us up to date with regard to the TNK project.

You have got two out of four now. Well, we feel like we've got -- the first rig is spudding as we speak. The second rig is on location and is being prepared -- when I say rig and everything else, we're really talking about strings now because it is probably less misleading.

But okay, the second rig is on location, a different location I might add and is being ready to spud. So one would presume that one would spud before the end of the second quarter, and you have got two others that are being mobilized. Meaning they are in transportation to Orenburg as we speak. Presumably they will arrive on location and the proud location of [Bueseleug] before the end of the second quarter, meaning they should be spud in the third quarter.

So do this in Q3. That's another four behind it, which have to be -- you get into delays there. After we authorized to mobilize and hopefully for those four, the other four will be authorized to be mobilized sometime soon and then that progresses.

And we are still envisioning $600 million over five years?

That is correct. It runs about -- it runs about 120 or so per annum. That is correct.

Okay. Latin American revenues in the quarter, how much was Mexico?

Let's just leave it that it's a substantial share of the business at this point and like what it has become a lot more significant share of Latin America as the year progresses.

Okay. Got it. Last question for me, Andy,l is that we spent what, $558 million in CapEx in the quarter?

Yes.

And we are going $1.4 billion for the year. Walk me through how we generate $500 million in free cash flow?

Okay. Let's do it the simple way. If you look at on a net income basis, you are somewhere between 600, 650 if you want to use that number. It seems to be where people are, and it is not unreasonable.

600, 650 for the year?

Yes, and depreciation of 900 to give you 1.5, 1.55 less the 1.4 of CapEx, and we see 350 coming out of working capital, which is we are about 50 to the better on that thus far. With good improvements thus far on the receivable side, not only inventory due to on the product side, we've had a decent build there in preparation for chunks of business that are still good, and we will see the inventory levels improve as we move through the year.

Rob MacKenzie, FBR Capital Markets.

Bernard, I wanted to get some perspective comments out of you. With overcapacity in pretty much everything be it manufacturing, directional drilling tools and whatnot in the US and in other markets, how do you see that overcapacity affecting not just the US market but global markets, and how long does that weigh on pricing everywhere? I know it is a very broad question, but one of my concerns is the overcapacity due to huge reductions in activity is going to affect not just the US but everywhere. Can you give me some color on that and how I should think about that?

I think it depends on the products or the service line. Certainly things like you put your finger on one, which I think is affected which is directional. To the extent that the overcapacity in directional equipment, because of the demise of NAM is in the hands of the companies that have also large infrastructure internationally, so they can move it. It does not mean that every single directional company in NAM is going to move its equipment overseas. No, because they don't have the infrastructure. But the four companies that have large shares of directional in North America can, indeed, move that equipment in the international market, and that means that the glut of equipment is spreading around the world in that particular class of service. That is absolutely true.

And what -- is the equipment -- are the tools in North America usable around the world? Not always but often. So that is a very legitimate concern, and all things being equal, that will tend to depress the pricing in directional for as long as NAM is down or for as long as the tools take to be assimilated. Okay? But that does not apply to every single class of service simply because there are classes of services where the equipment is not movable or where simply the people who control the surplus of equipment do not have an infrastructure overseas. So I don't think it applies across the board to everything at all. And be mindful also that the few pockets of great strength in the international market that will also absorb quite a bit of that equipment -- think Mexico, think pockets of the Middle East just to name two.

Can you also calibrate your comments for manufactured items such as bids, etc.?

We don't get involved in bids. But in completion tools and in liner hangers, it's not really, for example, which would be our equivalent -- not equivalent to bids but it is manufactured items -- it is much less of an issue because you bring manufacturing down -- I think all of our peers are bringing it down hard. Volumes are being put out at or below market requirements. Inventories get liquidated rather quickly and you are done. Indeed, those tools are consumables, and it is entirely different than tools that are service tools like directional which I would like. It takes much longer for them to be absorbed. Therein lies the difference. That is why I tend to agree with your point on directional. I do not feel quite the same about lift or completion. I cannot speak to bids because again I'm not in it or tubulars for that matter. Tubulars have the same issue.

But you bring manufacturing levels down, which is one of the reasons why people who have a fair amount of manufacturing like us, have strained economics when you bring the levels down. But once you bring them down, you put out less than the market requires, utilize inventory. It is no fun, but of course, when the market turns, it has done much better. (multiple speakers) -- manufactured items are going through this process. The service items like directional and perhaps rigs is another example, is a much harder thing to absorb.

How much of the material cost deflation, i.e. steel prices and everything else, did you recognize in the first quarter, and how much more do you expect to see in the second and third quarters this year?

With the way the inventories are moving, you've started benefiting from it really in the last month of the first quarter. And so I think you can say one third of Q1 was helped, and I think all of Q2, etc. will be helped.

Mike Urban, Deutsche Bank.

Going back to the question on Eastern Hemisphere growth, certainly some of those projects are already underway. How much confidence do you have in those numbers given your conversation with clients? In other words, you have spoken to delays in integrated projects. How much of the growth that you are counting on in the Eastern Hemisphere is already underway versus we think and we hope the contract begins as planned, but there could be a risk of pushing it back further?

Well, I mean, of course, part of me would like to say that what we are engaged in is not a balance in nuclear physics to where if we have one molecule too many the world comes to an end. So one has to take it with a grain of salt.

Having said that, we try to provide you the best guidance we can. We don't try to simply put out things that are either too high or too low and hope to get there. No, we really try to give you the best information we have, and if it was any different, we would tell you.

Well, we look at the volume of things, and we've had a lot of delays. We had some scalebacks. Some things that were supposed to have been concerns have not been concerns. I can go down the list. We had a very, very long list of disappointments. Not a surprise. They started in October, and it has been a rough five months. Not a surprise to anyone. But if we look at where we are and what we were scaling up, what we still have left, which is definitely concerned, just add the numbers up, and it strikes us that, although Latin America is not controversial because of the very large-scale developments in Mexico that we benefit from, Eastern Hemisphere should for when the full year is counted, should show, as we've said, double-digit growth over year on year. And if it does not, we will be disappointed. If it does, we will be happy, but it is the way it looks right now.

Fair enough. Shifting back to North America, you have done a great job in recent years of picking up share, especially in some of your newer product lines. I realized it is difficult to base any -- make any judgments based on one quarter given the seasonality that you have with Canada. But you did lose a little bit more on the top line than rig count after a number years of doing better than rig count. Where do you feel like you are in your share of positions? Is that somewhat anomalous on a one quarter basis, and just give us a sense for where you are headed?

Well, Andy, I mean I can answer it, too, but Andy, you want to --

Michael, actually if you look and it is something we are tracking obviously as we -- as we become very customer-focused by customer as opposed to by product line in terms of our sales efforts in North America. But the market was down call it 28%. Don't forget about pricing in that, and what we gave up in pricing in essence a little bit less than what we give up in pricing we made up for in sheer improvements. So if I look at about half of the market decline was regained due to sheer improvements in things like lift and I could name others but probably don't really want to get into all the details, but on balance you probably gave up about 15% in pricing for the quarter. So weigh that against the results, 15% down in price, 28% down decline in volumes, and you think about the delta there is what you did on share.

That is helpful. That is all for me. Thank you.

Mark Brown, Pritchard Capital.

Just one question regarding the inventory of wells that have been drilled and not completed pertaining to North America. Do you have a sense of how many wells there are that would fit that description?

I'm afraid I don't. It is a good question though, and I can understand what you're after, but I don't and I don't know that Andy does either. He is being silent. The answer is unfortunately we cannot help you.

Okay. And just another question on tax rate. I think you said 15.5% guidance. Just if you could give any color for why that was lower than previously?

That we can answer.

That we can answer. If you look at distribution of earnings by geographic segment and the different rates both what I would call the statutory rates versus effective rates that we have been able to achieve and incremental tax planning that we undertook during the quarter in connection with our move to Geneva, all of those helped. Obviously we feel a lot more confident about putting our thumb on exactly where we will be by the end of the year in terms of earnings given the prognosis that Bernard just went through, and so I feel a lot more confident in that rate than where we were heading into Q1.

Okay. Just one more question in terms of your potential M&A activity going forward, you mentioned, too, that you did in the past quarter at about $2 billion worth of liquidity available. Is that something you are actively canvassing the market to do going forward?

We always are, but we always are not. We are agnostic on that. Meaning it depends on what there is. There are things that we are interested in. There aren't that many, and they are typically not available. So it depends when things cross our screen or cross our desks that fit that category of assets we think would benefit Weatherford. There may be nothing. But we are quite agnostic otherwise on the timing. Meaning let me rephrase it. It is less things are cheap now let's buy them in our case. It is more a very few things that we really are interested in, very, very few. Either they are available or they are not. And obviously if they are not, it is academic. If they are, we try to make things happen. But it is more that really than things are cheap.

I would remind you that things that are cheap and are plentiful are in North America, and we are not particularly interested in adding North American assets to our basket.

I think one last question, and then I think because we're trying to keep it to within an hour, so operator, if there is one last question, we will be happy to take it.

Dan Pickering, Tudor, Pickering.

Coming back to the IPM projects for just a second, could you give us a snapshot of what the rough percentage of your revenues or dollar revenues came from IPM in the quarter? Then if this ramps as you suggest, where would our exit rate for this year or our number for next year be in terms of IPM?

Interesting. Right now it is around 10%, and I'm not sure it captures all of the dollars that go to those projects. So I will tell you what I think I know. But again, a lot of the dollars stay within the product lines, even though they are sold through projects. So we don't do a very good job necessarily of accounting for that. (inaudible) 10%, but that's a number which I can support. But I think it's a bit higher than that.

I think by year-end it will be around 15 on the same basis. Meaning also understating also to the same degree some of the revenues that might be hiding in the product lines. I don't want to see a change of methodology. Otherwise, I'm not comparing things that are not comparable. So you go from 10 to 15 by year-end. That is pretty safe.

And is that 10% to 15% of total Company or the international revenue?

Total. Total Company. It is 10% of total Company today. Probably a bit understated. It would go to 15% of total Company by year-end, probably understated to the same degree.

Okay. And I assume that given some project delays, etc., you probably have some carrying costs.

Yes, we do. I was trying in my long, long, long, long beleaguered answer on the margin thing, which is probably a record as the longest answer I gave on any conference call, God help me, what I was trying to convey that part of the moving -- some of the moving parts have to do precisely with negative margins experienced by having those holding costs. That is right. And they presumably go away when you start actually getting active, and I wish we had gotten active before. Unfortunately you cannot go against the will of your clients.

Right. And are those costs do you think tens of millions, 20s of millions?

Between $10 million and $20 million per quarter.

All right. Thank you. If we look at the US margin discussion, I guess I was struck by the fact that just doing the simple math that you talked us through, Andy, that sort of implies Q4 exit rates are very close to the numbers that we saw here in Q1, maybe even above. Does that math work?

Q4 exit rate for NAM?

North American operating margins, yes.

Close a little bit shy, but close. You are in the ballpark.

Okay. As you think through that process, is that -- how much of that is cost driven versus activity recovery?

I'm not assuming any recovery off the 800 to 900 rigs?

Okay. And ongoing flow-through of your cost reduction efforts?

Yes. Always expect about a six months lag to get -- we see variable costs come about three months after perfectly if you do a good job. Fix costs come about six months after again if you do it very well.

Okay. So the $340 million number that you talked about, $256 million and another $80 million that you are doing here in the second quarter, we view those as actual cash. That is not just avoidance of cost of goods sold; that is actual cash cost reduction.

Actual cash cost reduction is correct. And it was $110 million on the fixed cost side, and the balance is on the variable. Something I did not comment on, but we have preliminarily tagged another $100 million on the fixed cost side that we are going after. And it will depend on -- whether we can achieve it is going to depend upon how long this downturn lasts.

And that would be a 2010 impact potentially?

Yes.

And then you may have addressed it and if you did I apologize. Just the incremental capital that you have added to the budget, is that all international?

Yes, I said 85% of the overall CapEx -- 85% will be non-NAM. The 200 incremental is 100% international. So 85% of the overall 1.4, but 100% of the incremental 200 from 1.2 to 1.4 is international. It is predominantly (inaudible).

So it looks like given cost reductions in North America, your international growth project would seem to me like 2010 is clearly an up earnings for you. It may not be for the industry, but it looks like it is an up earnings year for you guys. Again, does my math roughly work here?

That is correct. That is what we're trying -- that is what we are trying to communicate. That is correct.

Okay. Thank you, guys.

Which concludes our conference call. Thank you very much.

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