Weatherford International PLC (WFRD) 2009 Q3 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the third-quarter 2009 Weatherford International earnings conference call. My name is Katina, and I will be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Please proceed.

Good morning, everyone. First, as usual, and Andy and I will read our prepared comments. Andy, you are first on.

For our third quarter of 2009, we report fully diluted earnings of $0.13 per share before excluded items. The two excluded items total $15 million after-tax or $0.02 per share. They were first $9 million in after-tax costs incurred in connection with our ongoing government investigations and second $7 million in after-tax charges for severance and facility closures.

In addition to falling short of our own expectations at the bottom line, this quarter was a messy one. The $0.13 number, which is up $0.03 sequentially, does not tell the whole story. The results include a $0.05 benefit due to a reduced tax rate for the year, 3.3%, which is partially offset by $0.02 of negative impact due principally to unusually FX book losses and settlement of a legal claim.

Within the quarter was a $27 million non-cash benefit due to the revaluation of contingent consideration from an acquisition under FASB 141R, Business Combinations. This is mostly offset by other adjustments going both ways.

At the field level, international results were down but were offset by the seasonal improvement in North America. Two-thirds of the international decline came from Latin America where a combination of poor weather and delays severely hampered our financial performance.

On a consolidated basis, sequential revenue increased $155 million or 8%. International revenue was up $106 million and accounted for 71% of our companywide revenue. The OFS acquisition contributed meaningfully to international growth, while a majority of improvement in North America came from Canada.

On a year-to-date basis, our international revenue is up 19% with Latin America up 78% on a 7% rig count decrease and Eastern Hemisphere up 2% on an 8% decrease in rig count. Consolidated EBIT before corporate and R&D declined $10 million sequentially with operating margins at 12.2%, down 140 basis points from Q2. North American margins were 5.4% compared to being at breakeven in Q2. International margins at 14.9% slid 420 basis points. Year-to-date international margins are 18.3%, down 560 basis points compared to the same period last year.

Financial performance within our four geographic regions was as follows. North America 29% of total revenue. Revenue increased $49 million or 9% sequentially. Canada was weaker than expected due to a combination of wet weather and subdued customer activity. EBIT was $33 million, up $34 million sequentially with incrementals of close to 70%. Through the third quarter, North America has sliced $500 million annualized from its cost structure. $160 million of which was fixed cost, representing a 14% improvement on our cost structure. Drilling Services, Wireline and Fishing and Re-entry were the strongest contributors to the sequential growth in top line.

Middle East, North Africa, Asia Pacific 28% of total revenue. Revenue increased $7 million or 1% sequentially against a 2% decrease in rig count. Strong performers were Saudi Arabia, Qatar, China, and Australia. Revenues up $59 million or 3% on a year-to-date basis. EBIT was $102 million, down $22 million sequentially, and margins were 17%, down 380 basis points. Delays in startups and deliveries, as well as lower pricing, hurt profitability, though not any more than expected. Drilling Services, Integrated Drilling and Artificial Lift were among the top performers.

Latin America at 24% of total revenue. Revenue was up $59 million or 13% sequentially, despite weather issues and reduced gas activity in Mexico. On average we operated 45 strings in Mexico, up from an average of 33 strings last quarter. Those rigs that were unaffected by weather ran more efficiently than in the prior quarter. As it pertains to weather, 14 of our strings operate in the Central and Northern part of the Chicontepec field, which is a flat terrain with minimal infrastructure and is prone to flooding. In this area of the field, we typically drill fewer wells per pad, and on balance the wells are shallower. This results in an increased number of rig moves as compared to other areas of the field.

In addition, we were able to perform far fewer completions than budgeted at the beginning of the quarter. This segment of Well Construction is particularly profitable for us as we perform all the services ourselves. Equally damaging to Q3 results was the impact of fixed costs incurred while waiting for the weather. Revenue in total was $637 million or 78% year-to-date '09 versus year-to-date '08. EBIT was $54 million, down $31 million sequentially with margins down 800 basis points. The efficiency issues noted above were the major contributor to the decline.

Also responsible were pricing declines of approximately 200 basis points, which was roughly as expected. Drilling tools, Artificial Lift and Wireline stood out as the top sequential performers.

Europe, West Africa, FSU. Revenue increased $39 million or 11% sequentially against a 3% decrease in rig count. The TNK acquisition made a substantial contribution, and we are pleased thus far with the Company's results and prospects. EBIT was $72 million, up $9 million sequentially. Margins were 17.8%, up 60 basis points. Integrated Drilling, Stimulation & Chemicals and Wireline were the strongest performers from a product line perspective.

Cash and capital. EBITDA. During the quarter we generated EBITDA of $406 million with D&A running at $238 million. Operating working capital defined as A/R plus inventory less A/P consumed $100 million of cash net of increases in working capital due to acquisitions and net of FX impacts. Interest and tax expense was $58 million for the quarter. Capital expenditures were $291 million for the quarter net of lost and whole revenue, bringing our year-to-date total to $1.2 billion. For the full year, we still anticipate CapEx of approximately $1.4 billion.

As it pertains to free cash flow, our goal has consistently been to generate $500 million of free cash flow in 2009 defined as EBITDA plus changes in operating working capital, plus CapEx, plus interest expense, and tax expense. Through the first nine months of 2009, free cash flow is defined above as a negative $150 million. Our goal for Q4 is to finish the year in positive free cash flow territory for the year. This will clearly be far short of our original expectations.

As of quarter-end our ratio of net debt to net capitalization stood at 40.4% with total net debt at $6.6 billion. Cash balances totaled $307 million at quarter end.

In terms of guidance, I have the following updates for you for 2009 non-operational items -- corporate expense $167 million, R&D expense $195 million, net interest expense $370 million, and tax rate full-year effective rate of 3.4%. You should expect average share count to be 748 million during Q4 with the increase attributable to a full quarter weighting of our TNK acquisition, as well as the effect of other acquisitions completed in the third quarter.

I will now hand the call over to Bernard.

Thank you, Andy. Q3 had four moving parts. One, North America started its healing process drilling essentially by recovery in Canada. Although levels of activity in Canada were by any standards very poor in Q3, there is still the improvement over Q2. The US is marginally up with flat margins. The full impact of cost cuts offset one for one the remaining effects of pricing declines.

Average pricing was down 100 basis points in Q3 versus Q2. We continued and we continue to take costs out of the US. We did so throughout the quarter.

Two, Eastern Hemisphere did not do as well as we expected. Average pricing was down 400 basis points, but that is close to what we had anticipated. The volume wasn't. Volume is where we failed. We experienced delays in contract startups and product delivery. As a result, top line did not grow. In fact, it marginally declined adjusting for the acquired revenues of TNK and OFS. The absorption effect we expected, let alone the incremental margins associated with the revenues, were not there to offset pricing declines.

Latin America, three, had also a disappointing quarter centered around Mexico. Pemex lowered activity on and around gas in both Burgos and (inaudible). We have significant operations in both. Chicontepec was negatively impacted by weather in the Northern and Central zones, while completion lagged drilling by a third. Completion is the most profitable step of the well.

The other Latin American operations showed topline growth but were impacted in full by pricing. We had lower profitability. Average pricing for the region was down 200 basis points, which again is close to what we had anticipated.

Adjusting for the items discussed by Andy operationally we round the quarter flattish with Q2. Flattish quarter was less than we expected, making Q3 a very disappointing performance.

We are more constructive on the prognosis and five quarters ahead through 2010. Pricing is not deteriorating whether in North America or in international markets. We have seen no contractual instances of further decline in pricing. We have had late in the quarter instances of pricing increases. Modest in scope and scale, but pricing increases nonetheless.

Second, as the forward geographical review will summarize, we are comfortable with our topline guidance at 2010.

Lastly, although a few weeks late, a number of integrated project mobilizations were successfully completed by quarter-end in China, Ethiopia and Algeria amongst others. The operating productivity exhibited by early drilling results was good. Additional mobilization work is still underway in several countries. When oil is running, we will have approximately 80 strings worldwide in integrated projects.

Product lines, I will now take you through the detail of the 10 products and service lines. I will just take you straight to the conclusion, which is that Integrated Drilling, Drilling Services and Wireline were in absolute and relative terms the strongest product lines. They are likely to remain the highest performers of Artificial Lift as a close runner.

Acquisitions, in addition to TNK-BP and OFS business, we completed three acquisitions for $170 million. They were primarily product line extensions and one technology.

Forward geographical review. We are solidly constructive internationally for 2010. We feel this way even more so than in the last conference call. The pullback in the international markets during the first half of the year was quick and complete. This puts us in a relatively healthy spots, and pricing moves appear to be behind us. All-in-all we believe international markets will show volume increases '09 on 2010 of circa 10%.

There is a difference in prognosis for Eastern Hemisphere and Latin America. Eastern Hemisphere is likely to be in the 10% to 15% range. Latin America will be closer to 5% to 10%.

There will be a further differences by region and subregion, but the trend overall will be as indicated. We do not believe this is an aggressive or conservative view. We think this is a balanced and reasonable assessment based on everything we know.

In this environment we expect Weatherford to grow at about three times the underlying market rate or about 30% '09 on 2010. To be completely clear, Weatherford expects to grow its international segment '09 on 2010 by 30% or more.

Within the Eastern Hemisphere, we expect Russia and the Middle East to outshine the other markets.

Within Latin America we expect Pemex's budget to be down in 2010, but more than made up by Brazil, Colombia and Peru with Venezuela a possible upside market. Weatherford will show strong growth 2009 on 2010 in Mexico on the back of our existing ATG contract and contracts -- sorry -- and the most recently planned activity levels in Chicontepec. We should run Mexico at about $2 billion next year give or take.

From 2011 thereon, it will be a process of maturing and optimizing an operation whose scale will be stable. We see risk on our 2010 prognosis for Mexico coming out of the gas segment, not the oil segment.

We are also constructive on North America, more so than we were last quarter. We believe North American markets will show volume increases 2009 on 2010, and the second half of 2010 in particular will be markedly stronger. This is true both in Canada and in the US.

Capital resources and overall direction. Should our assessment be correct, Weatherford International top line would grow 2009 on 2010 by circa $2 billion. As a matter of policy, Weatherford keeps its debt to capitalization ratio between 30% and 40%. We do not like to stretch below or above that range.

The capital intensity of EBITDA revenues has been about $0.90 of CapEx and $0.30 of working capital. Relating this comment to our forward cash flows, the financing of 2010 growth plans is nearly fully expensed on the CapEx side. Meaning we have the equipment supply in place for most of the expansion underway. The working capital will be the item to finance out of internally generated cash. Capital investments of $1.4 billion in 2009 will likely remain flat in 2010 if and only if the expected growth rates going into 2011 remain the same.

In closing, two comments to summarize our thoughts on the quarter. From a financial standpoint, this was not a good quarter and it was messy. From an operational point of view, this quarter was productive. North America restructuring proved to be effective, fast and well. We completed shedding one-third of our workforce and closed down 34 facilities.

On the international side, volume was lacking and weather did not help. But we executed well on those things that were under our control. For example, Russian integration of OFS is progressing well and quickly in all respects. Middle East and Asia Pacific's six integrated projects had excellent early drilling results as new productivity gains declined.

Where weather was not an issue, wells drilled in Chicontepec came in at markedly lower costs throughout the quarter, which means again improved profitability for the client and us.

Lastly, we had very successful first deployments and accomplishments this quarter for a broad range of technologies, primarily formation, valuation, RSS and Managed Pressure Drilling and well records, new product lines and expendables, completion, drilling wood casing, etc. Overall market is a good execution in spite of disappointing results.

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

(Operator Instructions). Jim Crandell, Barclays.

It seems that many of the items that adversely affected the third quarter such as the rains at Chicontepec, the gas drilling at Veracruz and Burgos. The operating issues in Nigeria, start-up costs in Iraq and the delayed startups in ITMs should be rectified by the fourth quarter or at least significantly improved in the fourth quarter. Is that correct?

Yes, I think so. Yes.

Across the board?

Yes. When one has a bad quarter, I think it is best to just go out and put out a good quarter afterwards. And I think that answers all the questions. But, as a point of logic, yes, you are absolutely correct.

Okay. Can you talk, Bernard, at how you think the Chicontepec outlook has changed in the past three months in the aggregate, what the emphasis by Pemex on increasing production will mean to Weatherford, the potential for incentive contracts, and lastly, that if Pemex reduces its budget in 2010 where this could be felt?

Many of these questions are best answered by Pemex. But if you look at Chicontepec, what you have is a very large heavy oil reservoir, which is in the early stages of its development. Heavy oil has a long learning curve before you find the optimal way to drill and produce the reservoir. And I think both Pemex and its vendors, its service companies are going through this learning curve.

And at some point, the drilling and completion and production path will mature, and it will be essentially an exercise in increasing efficiency and productivity. All of this to say that I think Pemex is looking for the right level of activity on Chicontepec, whether it is at the present level, whether it is at the lower level or at the higher level and also what are the most -- optimum zones that one ought to go after because there are numerous zones in Chicontepec and are also resolving some of the issues that they may have with either completion techniques or topside problems.

So all of this is being looked at and worked on. This is normal. This is normal. When you have a reservoir of this size with multiple zones and one that has not been developed until now, you would expect all of the things I just described, and this is happening right now.

So what does it mean for 2010 for us? Well, there are two aspects while working Chicontepec. On the one hand, we are actually getting contracts that are multiyear contracts, and they will go on. They are called ATG 1, ATG 2, and ATG 4.

On the other hand, there are supplementary work that will pick up when some of those contracts have completed such as ATG 1 and ATG 2, and the supplementary work is a function of the budgets. When you add all the pieces together, which we do and then we wait for Pemex to indicate what they would select for 2010 on budgetary levels, it strikes us that on and around Chicontepec we should be in the range of both revenues and activity, which is actually rather tight. In other words, rather narrow. And we have a good idea of what it is. And then when you add the other work we do in Mexico, because we don't only do Chicontepec. We work in the North. We work in the South. We work offshore. We work all over the country. When you add all the pieces together, it ends up being -- it strikes us an operating level, which is close to circa $2 billion, which is the number I suggested give or take. And that is about as reasonable an indication as we can give you.

And Bernard, do you still have a similar estimate for margins coming out of Mexico and Latin America as a whole next year, and does that take into account the potential for rains in the summertime which can impact results?

I think when you are in a project for a bit longer than what we have been, you get better assessing where our margins are going to be. And so the first is I think on a forward-looking basis, we are likely to give you, I think, more accurate estimates. And if we failed in doing so, it is a great degree also the teething problems when you are in a large project. Again, we are not in that project for just a short term. We are in that project for the very long term.

So the first answer is to say that we are likely to be more accurate in our margin estimates on Chicontepec.

What was your question? What will it be in the 2010, was that your question?

Yes, sure.

There are so many different tranches of work that -- let's just say at what do you think, Andy, at the EBITDA line?

I think just for all of Latin America, Jim, I would expect based on our assumptions today that we should be up between 250 to 350 basis points on the margin side full-year 2010 on full-year '09.

Okay.

That is Latin America as a whole.

Yes.

Okay. And then one final question if I could. Many of your competitors seem to be throwing a lot of caution into their statements in Iraq. But I don't know, sources indicate to me there could be a big contract award coming up in Iraq before year-end and possibly some others after that. Any comments?

I think Iraq is going to be a very large market, and my peers will not disagree with that. How large is hard to tell now, but very large nonetheless. I think everyone will agree with this.

The only difference in views, if we have any, is on the timing of it. I think it is difficult to get things done in Iraq. It is a country that has gone through a turbulent past, to put it mildly. So things take time. Decisions take time, and logistics take time.

On the other hand, the market is likely to be large enough that even the early tranches of their market will be very sizable for the service companies that are involved in it. I think all the service companies will be involved in Iraq because of the size of the market. Some are there but early than others.

So I would say that for Weatherford we are in full agreement that it is a very large market. I think we said it I think as early as anyone else. We believe, though, that service companies can have material levels of business above and beyond what is known today in Iraq in 2010. We do and, of course, even more so in 2011.

Now what do you know about our level of business in Iraq in 2010. Well, it is contractually known that we were likely to run Iraq around $300 million to $400 million in 2010. Why? Because we will have about five strings turning in Iraq and the South on integrated projects. But it is known. And two in Rumaila and two in Buzurgan in the Mesan area. So the point for us is that we suspect that service companies and particularly us are likely to do more than that in 2010 in terms of exclusive business.

But in many respects, the most important point is not that. The most important point is that that particular market is a very large market in the making, which is I think a point that is not controversial with anyone.

And Bernard, are we likely to see activity in projects move forward that are not going through the actual bidding process, not things like Rumaila, but sort of awards that go around the bidding process and are just directly awarded by the government to oil companies and those actually proceed earlier than maybe the very large projects that are being bid on or progressing?

Yes.

Ole Slorer, Morgan Stanley.

Andy, I wonder whether you could also help us a little bit with how to think about the 2010 in terms of some non-operational items that you highlighted, the corporate expenses, R&D, CapEx, tax rate. Could you go through those four and just give us some kind of guidance?

Yes, I could. If you start at the top on R&D between 200 and 220. Let me give you some ranges because things are not finalized yet.

On the corporate side, $165 million. Interest expense should be flat to down at about $370 million, and on the tax side right now -- again, against the backdrop of how much we expect to grow internationally and what we should earn on that, including where we would earn it, as well as a modest recovery in North America -- I still use for our planning purposes a tax rate of 18%.

Okay. And on the CapEx?

CapEx you can bracket it between replacement CapEx of 500 and the top end of $1.4 billion. As Bernard said in his notes, the $1.4 billion is if and only if we see 2011 having a similar type of growth prospects compared to what we see for 2010.

And I perceive there is no reason why that should not be the case, right?

Not that we know of today.

30% international growth. Clearly you have not lost your mojo, so to speak, despite this quarter. Can you give us a little bit of a feel for how confident you think about this? I think up in Mexico and Pemex down clearly you have signed contracts. So there is a lot of writing also on Iraq and Russia. Can you give us a little bit of a feel for how confident you are feeling about such a bold statement?

I'm not sure about my mojo, but let's hope you are right. It is not as bold and as aggressive as it sounds at all. In fact, when I wrote it, I thought I would be asked that question (inaudible) particularly in light of the fact we have what can be best described as a disappointing quarter. So why not be more subdued?

We are not being subdued, we are not being aggressive, we are not being conservative. It is truly the way we see it. And it is mathematically sort of more straightforward than it appears. We are talking about, what, you said $2 billion coming out of international markets. Well, just do the math on just a few things that you know.

We just finished saying that with your predecessor that we had -- we were mobilizing and actually mobilized already on half of it -- $400 million of work in 2010 in Iraq. Okay. The Iraqi revenues in 2009 are far more modest than that. So you have an easy delta there.

Mexico and so forth and so on, just look at the year 2009, where does it add up? Well, $1 billion, $1.2 billion, something like that. Now we know it today.

But just -- what we believe will be the level of activity, and we do expect the budgets of Pemex to come down in 2010. But we expect for us the top line to be about $2 billion, and it is simply a function of the contracts and a slice of the budget to be spent in Chicontepec and not the dominant price at all.

And so when you are going from $1.2 billion to about $2 billion for Mexico, you pick up $800 million, plus, Iraq, call it a delta of $300 million, but $1.1 billion.

And then all the -- none of this is terribly new or I would even say exhilarating. And then you have the simple fact that we did acquire TNK, and at a minimum the sort of simple fact of a full year of TNK in 2010 will meet at a minimum $300 million more. I don't want to take you and the audience through too much math here, but if you start adding the pieces, you find that, my goodness, you are going to be at 800 plus 300 plus 200, you are at $1.3 billion, $1.4 billion already. So I've got to find $600 million elsewhere of international growth. I have far more than that that has been mobilized that is being mobilized right now coming out of what markets. Well, North Africa, other Middle East, Asia and also in Latin America. So no, I don't think it is a bold statement at all. And now some measure of hedging for precisely the kinds of events that sometimes we don't hedge for, meaning the range, and I use the range as a euphemism. We have -- we put in some cautionary cushion, if you will, for things that could happen in this market or that market or this contract or that contract where we don't perform quite as well and things of that nature.

So it is arithmetic. It is in our minds barring a catastrophe, it's a safe assumption.

That is very good, Bernard. On the margin side, the risk side, if you look at things that are outside of your own control such as where exactly Pemex decides to spend their money at the end of the day, we all know it has to be in Mexico somewhere and gas is at more risk than oil. I think everybody agrees with that. If you look at the delta, potential delta there and you look at uncertainty around Iraq or what is going on in Russia, where do you see the biggest risks to those projections from an execution margin standpoint if you look at things that are outside your control? And if you look at, let's say, the upside potential, where do you sense that the margins could surprise the mostly upside if things plan out the way we all think $80 oil plus and a GDP that is not rolling over?

The risks are that at the operating level we miscalibrate our costs, or we are a slower than expected, but not the sense of one quarter where things took a few more weeks than they should have. I'm talking about just in general. It is an operating risk that one runs always, particularly if one does an expansion underway. It is generic. I am not alluding to a particular problem at all. It is a generic comment, which I think you would expect me to have. I just demonstrated in the quarter that there was some risk associated with performance coming out of operations. So an operating risk would be the way I would calibrate the margin risk. I don't think it is anything else.

Some of the revenue -- much of the revenue growth beyond Mexico, much of the other revenue growth have actually very decent margins associated with them.

Okay. On the upside, the upside is so much more fun. North Africa, which has been slower to rise and in some cases did some backtracks, think Libya, think Egypt. Algeria is growing, but the rate at which it is growing has been also slower. Well, this is because of the [comps] actually. North Africa and then within the Middle East itself, the Persian Gulf you have materially more upside than what is thought of.

It is also something that is often reflected upon, but the Middle East in general has seen over the past three quarters a softening of drilling activity sometimes picked up by the statistics, sometimes not where rigs are being stacked or on hot idle. So that reverses itself, and that provides material upside.

I think the speed at which things will get done in some of the young markets, Iraq, also will go up with the price of oil going up as the sort of the -- what is not being capitalized upon will tend to focus everyone's minds. So I think the Middle East in general is upside.

The other upside, you know where it is. What is the large market that is terribly sensitive to the price of oil? Which one is it? It is a rhetorical question. It is Russia, of course.

Russia is terribly sensitive to the price of oil. You can almost spot it on the ruble/dollar exchange rate. So I mean it is measurable. And I think they respond very quickly to an increment of $10 or $20 in the price of oil, very quickly. Understanding also that the level of taxation would also change as the government would try to claw back some of the things we gave away. But still very sensitive to the price of oil.

And thirdly, I think the third market, which is very, very sensitive to the price of oil and responds accordingly, is Latin America. So no surprises here. Middle East, Russia, more so than the Caspian, which is much slower to move, Middle East, Russia and, of course, Latin America, which really they are, by and large, oil markets.

Dan Boyd, Goldman Sachs.

Bernard, you gave a lot of great detail on the outlook as we looked at 2010. But can you help us with the progression in the fourth quarter, maybe particularly on the Middle East and Africa where you did experience some delays in the third quarter? Where are you today in terms of recovering from those factors?

We should have better volume than in Q4. It is as simple as that. So I would rather just have it go through the numbers rather than just be out there promising more sunshine. But we should have more volume throughout the Eastern Hemisphere in our numbers in Q4.

I guess I'm just trying to understand better that are you mobilized now in the areas --?

Yes, yes, we are. We are. I mean we are, we are. I mentioned three, which is Algeria, China and Ethiopia. You can throw in Iraq also. And when it comes to Russia, we moved very quickly on the integrations, and that is actually a successful operating execution.

And when are we fully integrated with TNK, it sounds -- no, it is true. We are very fully integrated now between our regional operations in TNK. It was not easy, and it was not without casualties but we are. So we are very, very well positioned to also do well there. And the contracting information and contracting successes we have had are real and they are early.

So, on the one hand, we have been mobilized where we were trying to mobilize. Number two, where we had a significant change in our business mix, which is Russia, we are integrated -- I can say this, and it is an honest statement -- and position to really try to harvest.

And then, of course, product sales we have -- as silly as it sounds, we have a number of product sales in Q3 that just did not make it in the quarter. I mean you will say, well, it does not happen every quarter? No, it does not. Why did it happen in Q3? I don't know. I can -- it just did. And that also gets flowing into Q4.

So nothing dramatic now. But I would feel better if we were in January talking about it, and then no one will ask me that question because presumably the volume will be there.

Okay. And then you also mentioned that you are starting to see signs of price increases not widespread but --

Oh, it is high -- when I addressed these notes and I read what I draft, I don't edit as much as I probably should. It is true we saw pricing increases. It was in North America. And I think I would not draw any conclusions from it; it just happened to be true. We see no more instances of pricing weaknesses now for pretty much the quarter.

The pricing declines in Q3 were nothing more than the mathematical flowing through of the quarter, pricing decisions being made in Q1 and Q2. This we had anticipated. This was not a surprise. But we see no further pricing declines in any markets, even instances that would be sort of -- you always have the (inaudible), none of that. I cannot report to you any instances of pricing increases in the international markets. I cannot think of a single one. The ones that crossed my desk were small ones in North America. I don't think they are in material in any way or form. They have symbolic value. I wouldn't conclude from it that there is a rush to the pricing curve in North America or anywhere else right now. It is a stable environment right now.

Okay. But we should be able to expect margins up in North America next quarter? Is that correct?

Yes, that is correct. Not because of what I just said; just because I think there is no more pricing decline, a little bit of volume, and we continue to take costs out, so, yes.

Bill Herbert, Simmons & Co.

Andy, Bernard, probably more of an Andy question here. But how should we think about not necessarily what margins are going to be and what they clearly were in the third quarter for Latin America and MENA. But really when you sift through the stuff that would against you discount sort of perfection going forward, what are normalized margins, if you will, for Latin America? You have been running high teens. Going forward, just on a normalized basis, what should we expect?

I think you should expect them to be up in Q4 (multiple speakers) performance.

Okay and help us with up in terms of magnitude. Do we get back to the second quarter, or do we -- are we somewhere in between?

I think you are in between.

Okay. So we are talking call it what, 14%, 15% margins?

I don't want to pin down a number for you, Bill, but I think a progression. And I think next year it will be up, our expectation is between 250 and 350 basis points for full-year 2010 and full-year '09.

All right. So let's assume that 15.5% for 2009, 250 basis points above that, so call it 18% margins, something like that?

Yes.

Okay. And how about MENA?

MENA is going to progress I think quite well this coming quarter in Q4 and also next year. In fact, I would probably put it at the top of the list for incremental margins for 2010 on 2009.

Okay. And when you mean that we are sort of gone to progress from the third to the fourth quarter, are we back to the second-quarter margins of about 21% or somewhere in between?

No, in between.

Okay, got it. And then for next year, again, I missed the number. You said up 250 basis points for Latin America, MENA at the top of the class. What should we expect from MENA in terms of rate of improvement for next year?

What I would like to leave it as is just more than that. I'm not trying to be cagey on it --

Fine. Sure. Now walk me through the drivers of the margin improvement in 2010 for both Latin America and for MENA. What happens? Is it pretty much execution and absorption, or is there some pricing thrown in there as well?

It is absorption -- I will let Andy answer it, but it is absorption. It is also a little bit of a different service product mix in terms of volume, and Andy will pick up from there.

You said it perfectly.

Okay, got it. And then Andy, the discussion on the balance sheet here for a second and capital spending, bridge for us, if you will, the balance sheet debt to cap around 40%, the free cash flow generation, coupled with the growth aspirations and the investment required to get there for 2010. How do we do that plausibly?

In 2010 free cash flow, is that what you are looking for?

Yes, well, how do you navigate the sort of balancing act, if you will, between the balance sheet, the cash flow generation coupled with the growth aspirations and the investment requirement to get there?

Yes, it is important to remember is you are going solve for this on your own. I can tell you from our point of view given what we expect, the level we expect to perform at next year, we are free cash flow positive.

Take into account as well that $1.4 billion number of CapEx, $900 million of it is discretionary, and it is based upon our view and as our view develops and what 2011 is likely to look like.

Now we always have a choice in terms of do we want to maximize cash flow and mortgage growth, that is one thing. Clearly that is not our philosophy. That is not the way we are built -- we are a growth company -- and where we believe we can earn acceptable returns over the long term and what we're building this place for, we go ahead and make the investment. So we do not follow free cash flow generation as an absolute moral objective --

Right. And not inferring that you did and then thus the stipulation on my part, the balancing act.

Sure. And it is. I think it is a very appropriate way to cast it. It is a balancing act.

Right. And with regard to the growth CapEx for next year, where do you think that goes? Which markets?

Clearly not North America.

Predominantly -- I would say the growth allocation is likely to be 75% East, 25% Latin America.

Okay. And East is --?

(multiple speakers) -- South America nada.

Got it, and East is where? I mean I would imagine Iraq gets some of that, but where else?

Well, I have not factored unnecessarily aggressive numbers on Iraq at all. I think it is not Africa. I think it is Oman. I think it is Kuwait. I think it is Iraq to a degree. I think it is India. I think it is China. I think it is Australia. So I mean it is much more diverse than what it appears to be, and, of course, Algeria I don't know if I mentioned it or not. These sorts of things and it is far more diverse than people realize.

But the thing that I think that also you please remember is that by year-end we will have, by and large, the entire equipment, if you will, aside of the growth already commissioned, built and everything else. And what I tried to summarize in my notes, however, poorly is that really the cost of the growth of 2010 is going to be essentially working capital as best I can see it. Put another way, if we decide to go on a diet in 2010 and just have sustaining CapEx, which is rather extreme, we would deliver the growth in 2010 regardless. But, on the other hand, we would handicap 2011, which is -- so, therefore, decisions being made in 2010, in fact, 2011, not 2010.

Right, which I think is the right call because I mean clearly 2011 you are going to have a considerably tighter oil market than you have in 2010, and thus, the spending should be more vigorous. Okay. Thanks very much, guys.

Mike Urban, Deutsche Bank.

On the Russian market, obviously you said the integration is going quite well and you have begun to get some contracts under your belt. Are those primarily in the existing business lines that you are acquired, or are you beginning to book some pull-through type opportunities, and if not, when should that become a more meaningful part of the mix, or when do you anticipate it becoming more meaningful?

It is very early, Michael, so I cannot make too many dramatic statements. Actually two things, though, that are encouraging.

On the one hand, I have seen a roster of clients, which are much broader than just TNK, and that is very, very, very encouraging. On the other hand, I have seen informal, informal, not contractually formal, but informal bids and also contracts in other parts and service lines.

To what extent bids are being impacted, the organization of TNK/OFS, which is really the one running the region now, has been -- is to be credited for it, or is it just coincidence? I don't know yet. But in both instances, the roster of clients and the breadth of the products and service lines has seen contractual success. Probably more than I would have expected at this stage, very early.

Great. And then shifting over to North America, obviously we have spent most of the time on international, which is clearly the focus for you guys. But I wanted to understand your philosophy going forward in North America. I mean we can certainly get an idea of where you are headed given that you're not going to put any growth CapEx in there. But is this a market that you just manage, or are there plays where you do have opportunities to grow? I mean you have obviously a lot of growth in the shales. There is heavy oil. Is that a net zero where you are continuing to contract in certain areas and investing in others, just one of the basically --?

Michael, we have access equipment still in North America. The ability to move equipment from North America to the international markets is real in certain classes of products; it is not in others. So we have access capacity using your language, excess capacity in North America.

So the comment there would be no growth CapEx in North America is not so much one that implies a pejorative view of North America. Not at all. It is simply realizing the fact that you are running at a level of capacity. I could not calibrate it because it is easier when you are a rig company. But when you have almost 100 different products and service lines in North America, which we do, the details you just cannot do it.

But I know you have excess capacity. You can operate at a level of volume substantially higher than where you are today with the level of equipment. Yet there is not a lot I can do about it other than continue to try to bleed the equipment surplus in the international markets. But then again, it has its limits for all sorts of reasons.

So with that in mind, it should not surprise you that we put -- placed the emphasis on growth CapEx purely in international markets. Do not conclude that somehow we don't like North American markets or it is just worth less. Not at all, not in the least.

I mean at least you've just mentioned two of the three areas of focus -- unconventionals, shale gas -- unconventionals mean CBM and heavy oil -- shale gas is not unconventional, but it is in a category of its own -- and, of course, deep water. And so no, no, these are areas of focus and they should be. With the available capacity that we have and others and those two items, it is true we continue to try to be more efficient in North America, but it should not be viewed as a retrenchment. It should be viewed as an attempt to be more productive. Productivity does not imply shrinking. It just implies doing things better.

Brad Handler, Credit Suisse.

Could you please, I guess Andy, just take us through the cash flow comments a little bit, your comments on where you have come through the nine months? What were the areas of disappointment in cash flow generation?

Two areas -- well, three. First of all, I will start with the starting number EBITDA. It is lower than what we would have anticipated at the beginning of the year clearly. So we see here it was a disappointing quarter. So that is point number one.

Point number two on receivables, given what happened from a financial point of view to the markets and that our customers felt I would say more severely than we would have anticipated, clients especially in the international arena have been slower to pay than we originally expected.

Now, the working capital program that we implemented about nine months ago in North America is right now being rolled out to the international markets. Given the different texture of each of those markets and the different idiosyncrasies, not each one of those markets can be handled in the same way from a collections point of view. They all require a little bit different touch.

But right now there is a dozen countries we have started with which represent the biggest portion of our international receivables, and we will see what progress we make there. That is happening now as opposed to having happened 12 months ago. I wish it had happened 12 months ago. We probably would have done better on the receivables side if we had done that.

The other disappointing area was on the inventory side. Now inventory was a lower priority for us than other areas. We do have an initiative that is bolstered by outside help. That is designed to improve our performance on the inventory side of things both in terms of direct procurement, as well as manufacturing, and you'll hear more about that as we progress through 2010. But I don't really want to touch upon it now.

Suffice it to say that the inventory performance was not as good as expected.

Okay. So if we take some of what you're describing as initiatives, I guess presumably that is giving you confidence. I just want to make sure I got the math right. If you are spending -- this year's CapEx for next year's growth is about $0.70 on the $1.00. So basically to stay within your cash flow, you are talking about working capital being in the order of $0.30, right?

Yes. And that is actually, Brad, the number that I was using in my comments on a forward-looking basis.

Right. And so maybe, I guess, a calibration for us, how important are these receivable programs and I guess this better management of inventory, how important is that in terms of achieving the $0.30? How would you risk that for us?

I put the $0.30 as very achievable. If we are not under that, I will be disappointed. That is I would say a more conservative number than what our goal is, meaning we don't want to disappoint you on that number, not twice in a row.

Put another way, the numbers that we have used are designed to be reasonable because we don't want to disappoint you in general across-the-board.

That is good. Okay. I guess I got that. By the way, the program should I think of that as a piece of software or pieces of software? Or is it --?

No, it has to do with starting the process that we use from invoicing. Just think of it as credit and collections. But basically from procuring all the way through paying and then on the side of invoicing and collecting. So it is a re-definition of a process, a re-training of folks, and a different type of process around it to focus on it and push performance.

It is as humble as modifying the paper flow, which sounds terribly, terribly simple, but it is not when you operate in 100 countries with a greater number of clients than that and each and every one of them has different invoicing techniques and everything else.

Okay. How many companies -- turn to a different topic, please -- on the acquisition front, so you think we became aware of one specific company earlier in the quarter. It looks like you bought a couple of others using shares. Can you just sort of round out how many companies and how many shares were used to buy those?

There is actually a count. I don't have it, but it is pretty easy because it was a price of the market, say, give and take $20.

We bought three different entities other than OFS in the quarter. It was unusually active in that regard. And very often we don't like to disclose what we buy for competitive reasons. I would rather do it one-on-one, if you don't mind. And we probably should not be paranoid about these things, but we are a little bit.

I will tell you two of the three are nothing more than product line extensions. So we are getting better in the product and service lines that we feel are necessary. Not just in order to put a check mark in a box. That is of no value. But because we are adding in terms of skills, we believe, one, we need to -- will make us more profitable and we can make it also more profitable. And then I think again Andy or I can give that to you off-line. The third one is the technology.

Yes, it was $170 million of consideration for the other three.

Those three put together. And the first two, which were the two product lines, were the bulk of the $170 million. The technology was something like 10 as I recall. So you have got two different companies up to $160 million. Yes, we did use stock for the simple reason that we will not go above 40 debt to cap. We will not go below 30 debt to cap. That is correct.

Okay. Presumably the 2010 guidance is not at all based on additional acquisitions?

No, nothing to do with it.

Correct.

And we did -- Brad, we may not do any more. We may do a number of them. It really depends. It really depends. It is not a -- you cannot program that, you cannot plan that, and you should not.

And the 748 million share count, presumably that is for now then good for 2010?

That is correct.

That would be fully rightful?

That is correct.

One last question, operator, if we can, please.

Geoff Kieburtz, Weeden.

Just to follow up on Brad's question in regards to free cash flow, I do understand your comment versus the beginning of the year. But you did reiterate the $500 million target in last quarter's call. It seems like a fairly large miss. It sounds, if I understand your comments correctly, you expect to come in slightly positive for the year. Relative to what you were thinking three months ago, can you give us any more clarity on those three pieces -- inventory, receivables and EBITDA? Where is the bulk of the $500 million missing?

A good chunk of it is out of the EBITDA, and a good chunk of it is out of receivables. Receivables balances, again, we consumed $100 million of cash on the operating working capital side. I expected that to be flipped around and to generate easily 200 in Q3. And there are pieces of -- there tend to be concentrations of receivables. Some of it has to do with clients that -- newer clients that we are doing large volumes of work for that we have not quite perfected the back office function of getting those bills tendered in on time and everything else and in the proper format. But again, we will see how we end up at the end of the year and then let's take a final scorecard of where we are versus the $500 million.

Okay. And then the bulk of the remaining $300 million is EBITDA?

Well, part of it is EBITDA and part of it is payables in terms of payment terms too soon. Inventory levels that I would have liked to have seen crawled down, typically seasonally Q3 inventories are always up. We were trying to fight that trend, and we did not fight it as successfully as I thought we would.

And then the EBITDA miss, it sounds like from your comments that -- well, let me ask you -- what if you break down the EBITDA miss relative to three months ago's expectations, is it primarily what has happened in Latin America?

No. It is Latin America -- it is both Latin America and the Eastern Hemisphere. And I would summarize it with just one word in the Eastern Hemisphere, volume. Volume, you did not have enough volume. You were supposed to have that volume, you have that volume. Volume was margin being missed on the volume and absorption. We did not miss the pricing at all. It came in very much where we thought it would come in, meaning the tail end of the pricing moves of earlier in the year. But what was missing was volume. And then, of course, on the Latin American side, you have got the Mexican situation that I think Andy described rather well. That is it. But volume is the key word for us to summarize it for Q3.

Yes, if you think of it on a year-to-date basis from 300 to 350 off of what I would have liked to have seen, which meant I would have been positive 200 at this point, and then we would be talking about whether I'm going to make it. So that 300 to 350 I will -- I guess we can walk through the separate pieces from where it is. But I would put 100 of it year-to-date in the EBITDA column.

And if I understood all of your comments earlier, Mexico, as well as the Eastern Hemisphere, it is volume missed, but because of timing issues not because of --?

There are two things. Yes, it's not because of cancellations or anything else like that. Not at all. You have to distinguish the service and the product. The service we were simply late in starting up competing mobilization, not only of integrated projects, but a number of other service contracts.

And why is that? Well, myriads of reasons. So many of them that at the end you conclude, well, perhaps we were too aggressive in our expectations.

On the product side, we also had a number of product deliveries that simply did not make it in the quarter. Put another way the revenues could not be recognized.

And why is that? I have no explanation. It just is. It happens.

So I think on the service side one could be critical and say that, well, you should have planned a few more weeks to get it done. And I would say point taken. On the product side, I don't know what to say because I just don't know. It happened.

Do you have a pretty good visibility on product sales looking how far? One quarter ahead or more than that?

No, typically two quarters, sometimes three. Two and a half.

And that looks okay right now or much better? I mean what slipped out is --

It looks progressively better. The volumes look progressively measurably better as you map it out two and a half quarters. You could talk about backlog in our case for some products and service lines, product lines in particular, but we are large enough and it is so diversified that we are not a backlog company. But we can measure what is measurable, and it looks progressively better, yes.

And last question if I could, will you quantify the contribution from TNK-BP in the quarter?

We ran about what $30 million, $35 million a month for those first two months, is it around that? I cannot remember.

Yes. That low double-digit margins.

Low double-digit margins.

So that particular region actually declined in revenues quarter to quarter, which is highly unusual.

I think we have exceeded our time. So thank you very much, and we will take calls off line. Operator, you can discontinue the call. Thank you.

Thank you, sir. And, ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.