Weatherford International PLC (WFRD) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2009 Weatherford International earnings conference call. My name is Carrisa, 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 call, Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Please proceed.

Thank you very much. Good morning, everyone. Andy, why don't you get started with your comments.

Good morning. For our second quarter of 2009, we report fully diluted earnings of $0.10 per share before nonrecurring items. This performance includes $18 million of after-tax costs incurred in connection with our ongoing government investigations and $10 million of after-tax charges for severance and facility closures. At $0.10 earnings-per-share are down 63% sequentially and are down 77% year on year. Of the $0.17 sequential drop, we saw a $0.15 decline in North America, a $0.03 decline out of international operations, and a $0.01 improvement below the line due to a lower tax rate for the year as a result of lower North American operating income.

This was a difficult quarter for Weatherford. During Q2 our operations experienced what we believe will be the trough quarterly for '09 and 2010 financial performance. The combination of historical record lows in Canadian activity and greater than anticipated pricing declines in both the US and Canada produced North American EBITDA margins in the low teens.

From an activity viewpoint, the US market performed much as expected with a 30% decline in average rig count. However, our Canadian activity levels were significantly worse than expected. What we anticipated in normal seasonal turn in Canada following more than two years of steady activity declines, actual activity levels were far worse. Canadian rig count was down 73% compared to Q1 and down 46% versus Q2 '08. Rig utilization hit 11%, and operating days were down 50% compared to the same quarter last year. At these levels it is nonsensical to think about covering one's fixed cost structure no matter how lean the operation may be.

In contrast, international revenue was up slightly, despite a 5% decline in rig count ex-Russia, and upper single-digit pricing declines. Pricing impacted margins as did increased overhead allocations due to the shift in geographic mix away from North America. Volume and share gains helped to ameliorate this impact as international margins were treated [200 then] basis points in line with guidance provided on the Q1 call.

Our financial results are at odds with performance in the field during the quarter. Field leaders, seamlessly prepared for the launch of two new projects in China and Russia. We also added six strings to our operations in central Mexico where we will add more than a dozen strings during the second half of the year based on contracts in hand.

In North America operations leaders continued an aggressive carve down of our internal cost structure, and we expect our financial performance to reflect this success in the coming quarters.

Also in North America, our new technologies continued to gain traction. In the Haynesville Shale, we successfully ran RSS jobs in high temperature applications North of 300 degrees Farenheit and completed our first ever pump down perforating operation, allowing perforating on wireline and horizontal and highly deviated wells without using drill pipe.

In the Deepwater Gulf, we continued to achieve successful runs of our new sonic technology, as well as executing nearly one rotorary steerable and LWD jobs.

In addition, we completed our first offshore floating application of managed pressure drilling for constant bottom hole pressure. We also ran our first commercial job on land for our compact die pulsonic tool in the US.

On a consolidated basis, sequential revenue receded 261 million or 12%. North America produced the entire sequential decline. International revenue was up slightly and accounted for 71% of our Companywide revenue. Meaningful growth in Africa, Saudi Arabia, Kuwait, Yemen, Oman, China and Mexico were offset in part by declines in Egypt, Libya, Romania and Venezuela.

Compared to the year ago quarter, Companywide revenue was down 11% against a 35% decline in rig count. North America dropped 44%, while international was up 17% on a 9% decline in rig count.

Through the first half of '09, international revenue was up 22%. Latin America was up 84% on a 5% rig count decrease, and the Eastern Hemisphere is up 5% on a 6% decrease in rig count. Consolidated EBIT before corporate and R&D declined $153 million sequentially with operating margins at 13.6%, down 520 basis points from Q1. North America precipitated most of this fall with EBIT basically breakeven, while international margins at 19.1% slide 210 basis points as expected. Year-to-date international margins were down 400 basis points to 20.2%.

Financial performance within our four geographic regions was as follows. North America 29% of total revenue. Revenue fell $266 million or 32% sequentially on a 39% decline in rig count. Revenue is down 44% compared to Q2 '08 versus a 50% decline in rig count. Year-to-date revenue is down 33% with rig count down 37%.

EBIT was a loss of $1 million, down $124 million sequentially. Canadian activity was approximately 30% worse than anticipated with a rig count bottoming around 60 rigs. Less than 800 wells were released in Canada during the quarter, representing a 52% decrease from Q2 '08. Pricing in both US and Canada continued to take a beating. The regional management team continued on a path of aggressive cost control. Through the first half of this year, North America trended $475 million annualized from its cost structure, $150 million of which was fixed cost, representing a 13% improvement year-to-date.

In addition, we have reduced headcount by more than 3000 and have closed more than 20 facilities. We are not done. We will continue to identify and execute on improvements to our cost structure, including our infrastructure throughout the remainder of 2009 and 2010.

Well Construction, completions and fishing and reentry weathered the storm the best, albeit all still declined at the top line.

Middle East, North Africa, Asia Pac, 30% of total revenue. For the first time in our history, this was our top ranked revenue region in terms of size. You should expect to see this region at the top of the revenue hierarchy for Weatherford for some time to come with Latin America giving it a run for its money.

Revenue increased $11 million or 2% sequentially against a 2% decrease in rig count. Strong performances in Saudi, Iraq, Oman, Kuwait, India, Pakistan, Yemen and China were partially offset by weakness in Egypt and Libya. Revenue is up $37 million or 7% compared to Q2 '08 and is up $97 million or 9% on the year-to-date basis. EBIT was $124 million, down $10 million sequentially, and margins were 20.8%, down 220 basis points. Year-to-date incrementals were 7%. Under-balanced drilling, wireline, Well Construction, Artificial Lift and completion systems were among the top performers.

Latin America, 23% of total revenue. Revenue was essentially flat at $466 million. The declines in Venezuela, Argentina and Colombia were offset by strong sequential growth in Mexico and Brazil. Venezuela and Colombia were particularly severe with a 20% plus decline sequentially. On average we operated 33 strings in Mexico during Q2, up six strings from Q1. During the second half of '09, we will step up to 48 strings. Revenue is up $194 million or a 72% compared to Q2 of '08 and is up 84% year-to-date '09 versus year-to-date '08.

EBIT was $86 million, down $6 million sequentially with margins down 130 basis points. Improvements in Mexico were more than offset by headwinds in Venezuela and Argentina.

Artificial Lift, stimulation and chemicals and integrated drilling stood out as the top sequential performers. Europe, FSU, West Africa, 18% of total revenue. Revenue declined $4 million sequentially against a 14% decrease in rig count.

While Russia appears to have troughed in March, the market lingered near the bottom for the quarter. Central Europe declines were on par with those of Venezuela and Colombia. Revenue was down $25 million or 6% compared to Q2 of '08 and was down $3 million or 1% year-to-date '09 on year-to-date '08. EBIT at $63 million was down $12 million sequentially. Margins were 17.2%, down 310 basis points, with sales mix and pricing declines being the main culprits. Drilling services, stimulation and chemicals, and integrated drilling were the strongest performers from a product line perspective.

Cash flow -- during Q2 we generated EBITDA of $398 million with D&A running at $214 million. Operating working capital, A/R plus inventory less A/P, provided $37 million of cash. After deducting interest expense and taxes, operating cash flow was $333 million for the quarter. We still remain focused on achieving $500 million of free cash flow in 2009 and are on track to do so. Capital expenditures were $368 million for the quarter and add up lost in whole revenue.

For the full year, we still anticipate CapEx of approximately $1.4 billion. This level reflects our prognosis for H2 '09 and full year 2010, as well as our continued buildout of tools incorporating recently commercialized technologies.

As of quarter-end, our ratio's net debt to net capitalization stood at 42% with total net debt at $6.3 billion. Cash balances totaled $204 million at quarter end.

I have the following updates for you on 2009 non-operational items -- corporate expense, $160 million; R&D expense, $195 million; net interest expense, $380 million; tax rate full-year effective rate between 12% and 13%, again due to the sharp decline in anticipated operating income in North America. Share count, you should expect the average share count to be 729 million during Q3 and 737 million during Q4 with the increase attributable to the TNK acquisition.

I will now hand the call over to Bernard.

Thank you. Q2 was all about North America. NAM's results were punitive with the NAM Canada's performances brutal. By contrast our international segment held its ground well, edging modest gains in revenues. Pricing declines brought about levels of margin erosion consistent with our expectations.

Q2 had six moving parts. Collapse of NAM, volume and price. Overall NAM market volumes dropped close to 39%. US was very weak; Canada was much worse. The Canadian market almost closed down. At its low point, only 63 rigs were working. Canada averaged 89 rigs for the quarter. This is 10% below '99 levels. It is hard to believe that Q2 beat Canada's historical low of 101 rigs in '99. For the Weatherford legacy, heavy weighting in that market was severely affected.

Two, our operations lost close to 32% revenues, and quarter on quarter our pricing erosion averaged best we can tell 14%. We showed essentially breakeven EBIT or a 1,470 basis point decline in margin. Some continued share gains helped in the US and overall cost cuts mitigated further margin deterioration but not enough or soon enough. The inevitable lag between NAM's faster eroding price and volume and the concurrent lowering of fixed and variable costs.

International markets were soft but obviously much better behaved. Overall market volume dropped sequentially by 5%, and we incurred a full impact in the quarter of international pricing declines negotiated or mechanically triggered in Q4 and Q1. Our realized pricing eroded overall by about 6% during the quarter.

In this environment our international revenues were up very modestly but up nonetheless. Our EBIT margins declined by 210 basis points, which is what we had anticipated. All-in-all, a decent performance.

A contrarian 11% increase in our international business volume more than offset market and pricing declines. Of particular note, Drilling Services, Well Construction, integrated drilling, stimulation and lift measurably gained share.

Five, activity and performance varied depending on the geographic segment. Performance deteriorated in ascending order of impact by region in Venezuela, Argentina, Colombia, Central Europe and Russia, Indonesia, Malaysia and Australia. In some instances this is nothing more than Q1's trough impacting the fourth quarter. Russia being a good example. In other instances, the conditions and performance deteriorated further from Q1's exit levels. That would be Venezuela as a good example. We showed relative strength in Mexico, Brazil and Middle East, and all three cases of building a backlog.

Integrated project mobilizations were in progress in China, Oman, Ethiopia, Algeria, Iraq and Russia, while the rig activity in Mexico ramped up throughout the quarter. By year-end we expect to add in operations more than a dozen strings in Mexico and at least 10 strings in the Eastern Hemisphere on integrated projects. Q2's mobilization performance was seamless.

Clearly Q2 was a very difficult quarter in NAM and horrifically so in Canada. Looking out NAM remains strained. By contrast, the international environment is stabilized. We constructed internationally on the second half of '09 and 2010. We feel this way even more so than in the last conference call.

The pullback in international markets during the first half of the year has been quick and complete. This puts us in a relatively healthy spot. Pricing moves appear to be behind us. With few exceptions we believe international markets and our own financial performance there troughed in Q2.

In Latin America Brazil will be steady to strong for the balance of the year, while Mexico will continue to grow as we ramp up new contracts throughout the year. Argentina and Colombia will stabilize. Venezuela is still vulnerable to further curtailments, but it is, at least for us, from a very reduced scale. We lost close to half of our business in Venezuela over the past few quarters.

In EH I look to Middle East and North Africa for strength. I look to Asia and Russia for some recovery. When the full year '09 is counted, we expect Weatherford's EH top line to achieve double-digit growth. We expect Weatherford's top line in Latin America to show quantum growth year on year. NAM should not deteriorate further. This is partly a reflection of Canada having seen seasonal and cyclical lows that are not sustainable. Activity has to increase.

As for the US, the market tone strikes us as weak but stabilizing, leading the way for a (inaudible) price and volume erosion. Curtailment of excess equipment, together with growing instances of negative EBITDA margins in subsegments is one to believe that a point of equilibrium is near. Much like in the case of international, we believe Q2 will be the trough in NAM market conditions and financial performance.

Product lines are -- I will take you through the quarterly performance of our 10 service product lines. I will go straight to the conclusion. Out of eight negative scoreboards, Well Construction was the best rather than the least bad product line with a near flat performance. Only two product lines managed a positive scoreboard -- integrated drilling and pipeline.

Integrated drilling represents about 12% of the Company's revenues. As of right now, we hold 12 confirmed integrated project contracts. We are operating eight, but not at full [clock] all year. The other four will get started up in the second half of the year and the first half of 2010 when all we will be operating will be running on integrated assignments approximately 80 strings in EH and Latin America. These numbers will change as the year progresses.

Acquisitions we spent $68 million primarily on two acquisitions. The most important was buying the balance of the control pressure drilling software technology we view as strategic to both our product line and Weatherford as a whole.

As a follow-up on the acquisition of TNK-BP's OFS subsidiary, we have just cleared the Russian government's antitrust process. We expect to close OFS within 30 days.

Forward views. As mentioned above, we believe NAM has reached its trough, but we don't have a particularly strong view as to the timing of volume recovery. We believe though that even with our volume recovery, margins in NAM will improve in Q3 and Q4, though progress will be gradual.

Credit low variable and fixed costs for that. Production in fixed costs are particularly important as they are designed to be structural and permanent.

In the last quarter's conference call, our comments were "We expect in '09 double-digit growth in our international business." We can confirm this with a high degree of certainty.

It strikes us also that second half of '09 will set the stage for 2010 as a year of particularly strong growth in our international segments both the Eastern Hemisphere and Latin America. The rigs will grow for '09 on 2010. They rival what we experience in '07 on '08, moving Weatherford back on its long-term international growth curve.

Direction -- no real change from three months ago. We are planning on a CapEx of $1.4 billion predominantly on infrastructure and equipment that will benefit 2010 and 2011 and over 85% of the CapEx for the international regions.

In closing, two thoughts to summarize our operating focus. We see more opportunities to permanently reduce our cost structure in NAM, and we will execute on these.

Two, we are focusing with the same intensity on delivering strong operating performance to our international clients. Operating performance is the sine qua non backbone of our plan growth.

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

(Operator Instructions). Jim Crandell, Barclays Capital.

Bernard, can you talk about the trend in international margins from here? I thought you said that the pricing may have bottomed and/or the pricing moves are behind you. And maybe you could comment on what you think is the trend in margins over the next few quarters internationally.

It is a complicated issue because you have so many different markets and so many different contracts. We do the best job we can to measure analytically where pricing has occurred, why it has occurred, and what is the timing for any kind of other pricing changes. Because of that analysis, which is about as real-time as you can have, we have come to the conclusion that there is about more than two thirds of our business, maybe 70% of our business in international markets, which has been in one way or the other either mechanically or by negotiation or simply new business, repriced. And the remaining, which is, say, 30, 35% of our business is not likely to be repriced in '09, and therefore, by the time it gets repriced, market conditions may be different.

So it strikes us that by and large the pricing effects in the international markets with a few exceptions -- there's always exceptions -- is behind us. That is statement one.

Two, in general I don't think the market is red-hot, not at all, but the tone is decent in the international market. The tone is better, which is also an environment which is less conducive to major pricing concessions. So between the analytical work and then the tone, I feel reasonably confident that pricing changes, at least in so far as Weatherford is concerned, are behind us.

Okay. Second question has to do with the domestic market. I think it is no surprise that stimulation prices have collapsed, but the magnitude of the drops in wireline and directional I'm sure were big reasons behind your poor results in North America. Can you comment on the weakness of that, and are these 40%, 50%, 60% average price declines you have seen since the peak of the market the new reality of the market going forward?

I think that my observation -- I will also ask Andy to share his thoughts -- my observation is that it seems that in North America there is no place to hide. Pricing was under severe pressure just about everywhere that I can think of.

There are degrees. I think what product lines like Artificial Lift, for example, had less pricing. Completion had less pricing. But anything that was drilling-related was heavily pressured by clients.

Andy, you might want to add to that.

I agree. I think our clients have gotten incredibly good over time at managing supply chain. They are doing a very good job of it with respect to the service industry today. We did see significant pricing declines quarter on quarter in places like directional and wireline. Not at the 60% level that you are mentioning, but certainly in the 35% to 45% level in certain instances.

Make no mistake about it, there is obviously with the focus on the unconventionals, there is not a heck of a lot of wireline activity going on there if you look at the shift of rig count. And on the directional side, there is plenty of appointment out there, and some of the unconventional work does not require incredibly sophisticated tools on the rotorary steerable LWD side.

So there is plenty of equipment out there, and pricing certainly hit us. Obviously we have fantastic legacy businesses in Canada in both directional and wireline. And again, when you start hitting along 60 rigs with not a lot of drilling going on, you are a price taker.

Okay. Next question in Iraq. How quickly do you think the government work ramps up, not just from -- not just the contracts of SOC in Missan, but perhaps other companies and those two companies, how quickly does their overall level of contracting ramp up, and how about discrete awards coming from IOCs outside of the normal bidding process?

It is hard to say. It is hard to say. You have a need for almost boundless drilling activity in that country to make up for really almost 40 years of non-activity. So that is one thing. And there is evidence of declining production in some of those reservoirs and declining bottom hole pressures in some of those reservoirs, so there is an urgent need.

On the other hand, you have got a combination of a difficult political situation, meaning that anything international is unpopular in that country. And at the same time, a very slow best described as opaque decision-making by the government.

So I'm not being very helpful in terms of timing, except to say that there are a lot of initiatives underway both domestically and special negotiations outside of major tenders. But I'm afraid I cannot give you a date or even a sense of timing on when these things are going to be officially granted or officially become business for any one of the large service companies, be it us or any of our peers. You have to take it, I'm afraid, month by month in that country.

Okay. And last question, Bernard, also pertaining to Iraq. Does it seem to you that because of the political security concerns or maybe the logistical concerns about Iraq that with even the IOCs that the business is likely to be awarded in some kind of IPM or modified bundled service approach versus picking and choosing best-in-class technology?

I'm not so sure that security is as much the issue as the absence of infrastructure. One of the reasons why you don't have much bundle or integrated anything in North America, although it is possible to have it, is because you have massive infrastructure. You have, in fact, too much infrastructure in North America.

Iraq will be exactly the opposite. You've got no infrastructure or you got antiquated infrastructure. So, as a consequence, it is sort of hard to pick and choose your 10 favorite vendors and put them together to do a program, be it a production or a drilling program. It is very difficult to do it that way. So you almost have no choice but to work with a small number of service companies who either will be responsible for infrastructure or have infrastructure. I think it is much more that, Jim, than security.

Security is another issue, but I think whether it is with 10 vendors or one vendor, I think it is manageable either way but equally difficult to management. It is the infrastructure, Jim.

Ole Slorer.

Bernard, I wonder whether you could just -- you gave us some numbers upfront in your commentary -- but just in terms of understanding the magnitude of the drag from Canada, could you give us a little bit more color so we can kind of get an understanding for the US margin structure --?

Well, whatever color I give you on Canada is going to be dark. Because we don't break it out, it makes life a little bit more difficult.

Let me just, by way of illustration, say that, as a percentage of revenue, Canada went from Q1 to Q2 cut in half. This is not a riddle I'm giving you, but I mean it is to give you an idea. North America was not cut in half as a percent of revenues. But Canada within North America was cut in half. That will give you an idea.

Look, Canada was -- will have its day, and in the meantime one has to live with one's legacy. Legacy not that long ago, Canada represented 25% of Weatherford's top line. Well, it doesn't represent 25% of our top line; it hasn't in a very long time. It is only because NAM is down to being altogether 29% of Weatherford.

But notwithstanding that, our legacy is one which is still to a degree quite dependent when it comes to North America. It's the ups and downs of Canada, more so than our peers. At times it helps us; at times it hurts us. In this quarter it hurt us.

So if you back that out using some basic assumptions on fixed costs that are stickier, would it be fair to assume that the US margins were sort of mid-single digits, something like that?

Yes, that is correct. You're -- you are not -- you are -- you are more right than wrong. You are in the right direction.

So with Canada at least normalizing going into the third, fourth quarter, would you expect that middle single-digit margin level could be sustainable in North America?

Yes. Put another way, I don't expect Canada to be a good market any time soon. I don't think it's going to fall off the map either. But in Q3 and Q4, it will be better than Q2 simply because it cannot be as bad as Q2. It is not possible. And, therefore, the negative numbers coming out of Canada, a combination of that and together with the fact we are not sitting on our hands, will mean that all things being equal, North American margins will be helped and not by the US, but by simply Canada turning.

So yes, you should expect to see -- there is a decent probability that you see margins in North America that are positive in Q3 and Q4 and along the lines of what you suggested.

Do the US pressures there as you exit the quarter at the weaker notes, and how does it look at the --?

No, no, no, I don't think the US exited the quarter as a weaker note, quite the contrary. No, I think the US had a hard time in April and May. Canada had a hard time for the whole quarter.

And with the oil rig count bouncing back quite sharply and you having Artificial Lift and other oil-related products, are these showing some signs of life at the moment?

Yes, they are. Yes, they are. Of course, there is not a large percentage of the US but yes, they are.

A lot of strength is to find some similarities. (multiple speakers). Finally, on Chicontepec could you give us some kind of operational update there in terms of something that could help us gauge how efficient you have become or how much more there is to improve?

What would you like to know?

Average cycle time on comparable wells a year ago -- sorry, six months ago. Anything that can kind of give us some sort of sense that of --

I will throw a number out, and immediately I will -- my number will be an oversimplification. But I think the drilling times have gone down by about 20%. That is one number.

A second number is that you are not in full-blown operation yet. You won't be until year-end. At year-end you will have pretty much, at least in today's contractual environment, all the strings operating that you intend to keep operating.

And clearly this is going to be a benchmark, I presume, for a lot of what you're trying to do in other parts of the world?

I hope -- actually I genuinely hope so in so far that nothing is perfect. But the quality of the operation is about as good as anything I have seen. And we have come a long way. We have come a long way in terms of infrastructure, mobilization and then efficacy in drilling.

And so I will let our performance speak for us, both financial and also at the bit in that particular market. And so we will see where Q3 and Q4 numbers come out for Latin America. But Latin America will not have to put up with declining at least for us Venezuela and so forth and so on to the degree we saw in Q2. I can comment on that as well if you want because there are specific things to Weatherford, which are not necessarily the same for everyone else.

We had when we acquired Precision, they had a large rig presence in Venezuela. That rig presence was not in a bundle integrated assignment at all. They were just behaving like rigs, nothing wrong with that. Although we are very interested in rigs as a step in the drilling string more so than in isolation.

Well, in the present environment and for reasons that I think many of you will understand, we are not anxious to keep very large amounts of equipment in Venezuela, particularly as the probability they remain active is rather low. So we are -- in the course of the quarter, we have brought down the number of rigs running there from seven down to two today, and five pieces of equipment are either exiting the country or will have exited the country already. If you do your math, that has an enormously depressing effect on the top line of that particular country.

At the same time, it reduces our exposure both in terms of margin and also in terms of receivables in that country. I don't think that phenomenon is described as that could be duplicated in Q3 and Q4 for the simple reason that we don't have the exposure anymore.

And in terms of this magnifying the impact, as a rule of thumb, will $30 million of annualized revenue per string be a good measure?

No, no, these are just rigs, these are just rigs. These are just rigs. Only in terms of strings, when you talk about integrating your products on strings, typically we look at somewhere -- $40 million is a conservative number. If you move towards the East, it ends up being more like $50 million or $60 million depending on the contract. The West is more $40 million.

So going from 50 to 80 is 30 times 40, should that be the increase in the run-rate between now and the end of the year?

That is correct.

Bill Herbert, Simmons & Co.

Bernard, back to the roadmap for non-North American margins, and if I heard you correctly you expressed that pricing, as painful as it has been, has basically from your standpoint largely unfolded and is behind you. And most of the damage has been done. I know it is difficult to be precise, but with regard to the margin impact going forward in non-North America, when do you expect the trough roughly to manifest itself, and what magnitude of margin erosion if any do we have on the international front in aggregate relative to the second-quarter margins?

It is very hard to know because you got mixed issues also. As projects turn on, you don't have anymore -- you are carrying the burden with nothing to show for it. You have a lot of that going on too.

So you have really three things that are in play -- pricing, mix and also in the startups. I would say that there is a bid and ask over here on that particular issue. The bid and ask is that Andrew over here, Andy believes that we could have 100 basis points declines in Q3 and then from that point on either be flat or rise in Q4. I don't want to speak for him.

I actually believe that in Q3 -- first, I believe we cannot tell because we have done as much analytical work as we can, and we are reaching the limit to what we can measure. Based on what I see, I believe that we will not have a 100 basis point decline in Q3. We will be flat or something like that or maybe better. But better is immaterial here. Let's just say that it is flat to 100 basis point decline in Q3. He and I both agree that in Q4 it is flat to up.

Would you agree with the comment that if you have above average IOC exposure that you probably have more pricing mischief in front of you on a relative basis relative to those who have more NOC exposure on a relative basis?

Undoubtedly. That actually is not as controversial whether we are going to have improvement in margin in Q3 or up to 100 basis point decline, which again I think is just a limit to what we can tell. That, on the contrary, is black and white.

Shifting gears with regard to TNK, I was struck by the fact that the capital investment or capital spending profile is not going to change all that materially given that we have embraced TNK. We close in Q3. And so accordingly, can you provide us with a roadmap as to the level of incremental capital investment you foresee as a result of having acquired TNK?

Yes. I think -- well, most of it is not going to hit or be spent until 2010. There is a small amount of maintenance CapEx that will go with those rigs during the four months or so that we own them in 2009.

Going forward you should expect the run-rate on CapEx just solely with respect to the business acquired to be something between $75 million to $100 million a year. And don't forget that with respect to the pull-through that we are looking for and additional services, expect another $100 million to $150 million of investment to go into that business during 2010.

Okay. That is -- (multiple speakers). That is clear. Andy, also any particular change with regard to the guidance provided earlier on the free cash flow front?

No.

Okay. So we still expect $500 million for the year?

Correct.

Okay. So that would imply a heavy harvesting in the second half, correct?

Yes, on the working capital side.

Michael LaMotte, JPMorgan.

Bernard, if I could follow up on your comments on Venezuela going from seven to two rigs, could you elaborate on what has happened in Colombia and Argentina as well? Certainly if I look at the quarter to quarter revenue and operating profit of your major competitor that reported today, it was consistent with yours, but they clearly don't have the Mexico business or the Mexico RAM. So I just want to understand what is happening perhaps on a competitive dynamic or line of business dynamic or even just your decision to downsize Venezuela.

Yes, I think Venezuela alone on the top-line side sort of absorbed pretty much all of Mexico increase. It is almost a one for one. It was not planned as such, but it's just these are two coincidental events.

With respect to Argentina and Colombia, it is not dramatic. I mean in both cases you're talking about -- I'm looking at the numbers right now -- you're looking on the one hand at an erosion of roughly $5 million on the one hand and about $10 million on the other from one quarter to the next. So a $15 million decline in those two if I read the numbers correctly. That is about right.

So, in fact, it is even less than that. Sorry, even less than that at any rate. Andy is signaling me that it's actually a higher number? (multiple speakers) 25, yes. Between the two of them, 25. But -- and then some of the other smaller markets did reasonably well.

But if you set aside Argentina and Colombia, which is just a market that for us at least in a particular quarter did not do very well and maybe does better next quarter, you have got ups and downs -- the key event has been a pull-down in Venezuela, which was essentially mocked up by continued scale up in Mexico. And that is about all you can say about Latin America.

But we should think about -- at the two rig level, Venezuela really should not be hurting you in Q3, Q4 --

No, it should not. And, by the way, the rigs are just an example. The thing about rigs that is useful is that it's easy to talk about them and it is easy to measure. But aside from just the rigs, there has been a scale down in general in Venezuela. It is not like we don't like that market. We like Venezuela very much. It is an important market. It's a market that will come back. It's just the market where it is just very difficult to have a large-scale operation without running the risk of having a very large receivables exposure.

Michael, and I take full responsibility for it, we delayed and held back shipments of product. You know, a lot of our business in Venezuela is product. We held it back during the quarter just because of questions on payment and specifics and some contractual terms. And I think that was the right thing to do from a business perspective, albeit it pinches in these little 90-day windows that we tend to focus on.

Fair enough. Okay, that is great color. I appreciate it. Thank you. And Andy, if I could ask on the exit and restructuring charges, at some point the nonrecurring becomes recurring, and we are looking at six quarters now and some $100 million. When do you see all this stuff wrapping up?

I wish I could tell you, Michael. It is not something with respect to the timing of the investigation or the substance of it, not something I should be commenting on in terms of the details in public. It goes without saying that I think in our experience if we were to just look at a statistical spread of how long these investigations tend to last, it tends to be quite a long time. It has been two years now, and we obviously hope and look forward to getting that wrapped up and resolved as quickly as we can, but we are not the ones in control of the schedule.

I think in general the investigation has been done as thoroughly as you can humanly carry out an investigation, which is a good thing. So that is one thing. What is thorough takes time. The other thing is philosophically I think typically the process is the governments take time also, Michael.

Has the change in administration slowed things down?

Not really, not discernibly. I think this takes the time it takes. The fact it is thorough means that it takes maybe more time, but I think that is actually a good thing. So we are very anxious for this also to be brought to an end, and we are hopeful that we are making progress. But then again, we are not in control of this.

Understood. Thanks.

Dan Pickering, Tudor Pickering Holt.

Bernard, you talked about international revenue growth in 2010 of something like '07, '08. I just want to make sure I understand. My model shows that has a roughly 30% number. Is that the ballpark that you are trying to --?

I don't expect people to, one, believe me; two, pay us for it. I fully understand that. At the same time, I have got to tell you what we see. And what we see with respect to Weatherford is that we've had a very long seating period over the past three quarters. We have a decline in some of our businesses, and at the same time, we have made progress in other very important markets. And it looks when you line up the numbers that 2010 will be a little bit of a catchup year. And that is my best observation. Again, I don't expect, one, that people will believe me on face value, or two, will give us credit for it. But I'm trying to give you what I see. If I saw it differently, I would tell you.

Sure. And I want to make sure that I understand what is included as you are talking about things. So I assume that TNK-BP is part of that one.

Yes, it is, it is. I don't think that is not the main driver, but yes, it is.

Okay. And I know that there are some fairly significant numbers out there in the marketplace right now regarding Iraq. We have heard $1 billion in Iraq for 2010. We have also heard Mexico at $2 billion to $2.5 billion. In your 30% number, are Iraq and Mexico at that size, or are you a little --?

No, actually -- I say no in the sense that at this stage -- look, we are in July, so we have another six months to go. What we have done is we looked at the high/low what is likely in international markets in terms of going through our P&L. Not just business, but in terms of being able to execute on it. There is a difference, which is the lags of mobilization, etc.

When you look at the high/low, what is likely in 2010 it looks strong, and that is where the comment comes from. Now it does not -- I mean on the high side you have a lot of things that you describe that take place and others, too, and on the low side, you have less of it. But even on the low side, I think it is a strong number, and that is what we are reporting. I don't think we want to be more analytical than that at this stage.

Okay. And the 30% number, the year over year is similar to '07, '08, that is the low side or the middle case? I'm not sure I heard you --

Because I did not say whether it was the high or the low.

No, I think you said low side, and I just wanted to confirm.

I think that is -- I think that is actually more on the low side than the high side did, and I really don't want -- that's not what I wanted to say now. But since you made me say it, so be it.

Yes, I'm tough that way. Coming back to North America, $150 million in fixed cost reductions discussed here during this call. Did we see all kind of $40 million-ish of that this quarter, or will there be a benefit next quarter?

There will be a benefit next quarter. We saw some this quarter, but a benefit next quarter for sure.

Okay. And last question, we dropped quarter to quarter. In North America profit dropped $124 million. With Canada, half that, more than half that, again just trying to dial in to the magnitude of the Canadian impact.

No, Canada was not half that.

Okay. All right. So still a big chunk of it coming from --

Yes.

The North American business.

Kurt Hallead, RBC Capital Markets.

I just have a dovetail to Dan's question and focus a little bit more on 2009 than maybe 2010. He talked about double-digit Eastern Hemisphere revenue growth in '09 versus '08. Year-to-date so far has been a 5%, and I just want to try to gauge, is that double-digit primarily going to be off of the TNK-BP acquisition? And if not, can you just give us some color on how we go from a 5% kind of year on year to a double-digit in second-half project awards, otherwise some things you might be able to help us with?

I think TNK will add, what, 100, maybe a little bit more than $100 million worth of top line between now and the balance of the year. We should have about, I don't know, four months or so of that business, maybe a bit more. It would be $125 million -- I mean I don't exactly know.

You know, it is a little bit the same exercise than in 2010 with more granularity, which is that you got a number of different service businesses that are starting up. You have got increases in volumes of service business that are already ongoing. You have got deliveries of products. And you have got a number of different forecasts. And I don't know whether we will be double-digits or not so sure. We may be a bit better than just 10%, maybe a bit less; I don't know. But it seems like the double-digits is about right for the EH, but it is not one big project that sort of saves the day. It is a multitude of little businesses that are either catching up or delivering or ramping up or starting up. It is a lot of little streams. It is not a big river.

Now for 2010 you have got a number of big rivers that are making the numbers bigger. But between now and year-end, no, it is not a small (inaudible). I could not begin to give you the details.

Now in your commentary you referenced integrated drilling and integrated project management. Can you help us understand the difference between the two?

Well, you have got at one end of the spectrum what one of our peers described as bundled approaches, which is when you have separate contracts with a client but they are on the same field. And the client fully expects to have you coordinate and harmonize the different parts and services when you execute. That would be the case in Russia.

At the other end of the spectrum, you have got contracts that cover operations for an entire phase of the field development, in some cases up to 20 years or 25 years. And you have got contract terms that defines for chunks of five years, and those chunks of five years cover every single aspect of what is being done. And you are responsible fully as if you were the E&P company, except you have no reservoir risk. For all of the operations, that would be as a counter -- as the opposite spectrum that would be the case in Oman. Semantically really the latter should be called integrated project management, and the former, I don't know, you can call it anything you want to. But it is the same sort of rationale except contractually it is a little bit different.

What you see reported on integrated drilling as a product line in terms of the revenue number really encompasses rigs, well sites, supervisors, coordination, revenues associated with those items. Whereas when we talk about IPM, which is not a product line in terms of what we separate out, that has to do with the type of contract that is underplaced, and the revenue from each of the various products and services is allocated to each of those products and services as they are performed on a project. Does that help?

Yes, appreciate it. Thanks. That's it for me.

Mike Urban, Deutsche Bank.

I wanted to come back to Russia a little bit. You had talked about the strategy there a little bit at the time of the acquisition. I was just wondering if you can expand upon that. What is with the -- as you close the acquisition, what are you going to be trying to do there? What is the scope of opportunities in Russia with the new platform?

The first thing we are ready to do is we are going to try to integrate the organizations together. Have people work to get moved together at the overhead level and then how both organizations work and also learn how both operations -- where they are operating and how they work in various locations. So you have got integrations that goes on -- actually it has already gone on at an arm's length basis, but now as soon as we close, it will go on as one organization.

In terms of the market and how you try to harvest it, well, you will remember the various engines we intend to use. One is one that we don't drive; it drives us, which is the level of market activity. The level of market activity in Russia should be volume wise a little better the second half of the year in 2010, if only because it was really so bad in Q4, Q1 and Q2.

Two, we intend to use the tremendous infrastructure and footprint of TNK OFS in order to try to sell some of the parts and services, drilling parts and services, that relate to the various fields that the rigs work on. Not in an integrated manner. That to me is way premature. But simply concurrently with drilling activity with the rig -- with a rig business selling directional, selling Well Construction and so forth, not even in a bundled way, simply as a pull-through of the rigs acting as a distribution system. That is the second important engine.

The third one is that the operation of TNK has for all its life only worked with TNK. It started working for some other clients late in the process the past two years but never represented more than 5% to 10% of their business.

So the idea is to be able to take the TNK operation and make it into a service provider for Rosneft and Surgutneftegaz and Gazpromneft and so forth and so on.

Why would we be successful doing it? It's a very fine operation in terms of drilling efficacy. I don't think there is a better one in Russia. And they also have a lot of equipment, which I think could be the product on the market, which has not been the product on the market.

Now the flip of it is it is hard to have people who never have to sell for a living to learn how to sell. Because when you only have one client, you don't really have to sell. You just have to coordinate with that client. So you have got -- there is obviously a lot of work to do.

But those are the engines that will provide a return on our investment and on our time where we are acutely aware of it and so is the organization. I think you have to give it two or three quarters to start seeing how well it is doing. At a minimum, though, the operation will be carried by the Russian market, by simple fact that it's a very, very good drilling operation. So without us doing very much of anything, it should earn a living.

The question is, can we do more than earn a living? Can we really provide an outsized return for it, and that implies pull-through on the one hand and, second, gaining share with the other clients outside of TNK.

So maybe it sounds like by maybe the middle of next year it would be reasonable to have this thing integrated, start to be able to pull through some services and expand the customer base?

Very much so. Very much so. That is exactly our timing actually. Very much so.

Geoff Kieburtz, Weeden.

Coming back on a couple of topics that have been touched on. Focusing just on the US, what do you see going on in terms of pricing trends today? I mean were you seeing pricing eroding in in the US through the quarter, or has that stabilized?

I think it has stabilized at least in our case. It really has.

And that's pretty much across all your product lines?

Pretty much. Yes, there are a few exceptions here and there, but I think statistically for your purposes I don't see any other -- any further erosion from where we were in Q3.

Average pricing will be lower in Q3 in the US, but up a little bit in pricing and volume up a little bit in Canada. So from a revenue perspective, I would expect something flattish with that. I don't think any uptake on the volume side in the United States, but there are other points of view that could be just as good as that one. So I think US revenue probably down a touch, and Canada just recovering, going from 90 rigs to 200 and change.

Yes, okay. And you mentioned that you see other opportunities for fixed cost reduction in North America. Could you just remind us -- well, a couple of things -- what are you sizing your infrastructure in North America to address in terms of activity? Because you talked about permanent reductions here. So I am assuming that you are talking about having a pretty long term view as to what kind of level of activity you are prepared to address.

When you look at the size of our operation in the United States, you have to ask yourself, do I need this amount of infrastructure to serve the market as it was in 2008? Meaning can you organize your infrastructure in a manner where you can reasonably without being overly simplistic harvest the volume that you may get back one day just as efficiently but without carrying as large of a fixed cost structure as we presently are.

So the exercise really is one of productivity, which is trying to organize what we are carrying in terms of support costs and physical infrastructure but organize it in such a manner that you can still harvest the market as it was in '07, '08, but not have to have the number of facilities and the number of support functions and the differentiation of one support function to the other that you have had historically.

The notion that you have to be very, very large in organization and be everywhere or else you cannot harvest an upside in the market I think is a notion that should be challenged, certainly in our case. So I think there are -- it is not easy. You have to be careful how you make your decisions, but it is -- I think it is incumbent upon us to look very hard at other ways in which we can pull some fixed costs out of the organization permanently and without abandoning the upside in the North American market. North America being a very high beta market, it will have some upside eventually, and so you want to harvest it.

So you had said a couple of times in the past that you were sizing the North American fixed cost base to be I think profitable at an 800 rig count, but you don't see that as being inconsistent with being able to service like kind of activities?

Yes, that is precisely what we are trying to do. It is not easy. It is not a one quarter process. It is not linear and so forth and so on. You don't model it that easily. That is exactly what we are trying to do.

Right. And then on the international pricing, I guess I missed the first question. I think you addressed it, but with the rolling over of pricing and the signing of new contracts, I'm not quite clear why you don't see some sort of slide in the average pricing outside North America at least for another several quarters.

We have -- by our analysis -- this is the first question I answered -- by our analysis we have already either renegotiated contracts, had new contracts, or some contracts have mechanical clauses that have already been -- all three categories have already been done. You may have in Q3 for the full three months of particular pricing declines. That is sort of the debate of whether it is a flat or whether 100 basis point decline in margins in Q3, and you got the issue of mix and the end of startup costs.

But you have about 30% or a third of our business internationally the best we can tell that has not been repriced materially, but those particular contracts do not come for renewal for quite some time. And, let's say, some time in 2010, at which point the market environment may or may not be conducive to price reductions then. So we are pretty much done on the other 2/3 to 70% of our existing business internationally on pricing negotiations.

By way of example, look at the Chicontepec contract. There is not any pricing negotiation that can be done there. You set until these contracts run their term.

And then just as an example so that you understand, that falls in the 30% to a third of our business which is not going to be impacted, and it may be at low prices to begin with. But they are not going to be impacted. And the rest is pretty much done. Whether mechanically it could depress margins in Q3, some more simply because you got three months as opposed to one month or two months of pricing, yes, that is debatable. But in so far as we are concerned, there is no other -- we don't see any further deterioration in pricing in our P&L internationally. With the exception of Q3, possibly the mathematic -- the arithmetic average of existing pricing declines.

And one quick question on the TNK acquisition. Not to hang you up on an off-the-cuff comment, but $100 million of revenue at TNK for the last four months of this year would I think kind of back into a 50% lower revenue base than what they had in 2008 if I remember correctly. Is that kind of the ballpark?

They were running on their estimated running in 2009 at $450 million of revenue for the whole year. So you take four months, that is a third. $450 million divided by a third is more than 100. It is, you know, $150 million roughly. $125 million, $150 million roughly. Four months.

Okay. So that is still a good estimate for 2009?

Yes, I think for modeling purposes it is about as good as you can get.

Okay. And your outlook for that business, just the straight TNK what you're buying in 2010?

Well, I think we have not changed at all what we thought originally, which is the business itself -- well, it will be anywhere from 650 to a higher number. That is I don't want to tell you any more than that.

Thanks very much.

You are welcome. I think one last question maybe and then we are done, operator. If there is one last question.

Dan Boyd, Goldman Sachs.

A question I guess for Andy on Canada. You mention that you had expectations for 200 and change in terms of number of rigs the next quarter. Is that enough for you to break even there?

Yes.

So that if things are flat in North America as your expectation, we should see margins of 4.5% next quarter would be your expectations?

I think that is a fair estimate. It might be a little bit better than that but let's see.

Okay. Great. And then on Latin America, I think we have talked before that it would be at a $2 billion annual run rate just from Mexico by the fourth quarter. That is $500 million. Can you give us an update there? And then with Brazil also seemingly ramping up, we should be north of $600 million in the fourth quarter in Latin America?

Yes, I think we will comfortably be north of $600 million in Q4 out of Latin America, and I think that $2 billion is still a good run rate for coming out of Mexico leading into 2010.

Nothing has changed in Latin America in terms of how we look at it.

And then margins from here and Latin America, with that type of ramp up in revenue, Venezuela not being much of an impact, we should see improvements in margins in Latin America?

Yes, taking out any kind of sequential impact for any further deterioration in other markets, margins should be steady here and then improving through the course of the year.

At this time I would like to turn the call back over to Mr. Duroc-Danner for closing remarks.

No closing remarks. Thank you very much for your time, and we will take questions off-line. Thank you.

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