Weatherford International PLC (WFRD) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Weatherford International earnings conference call. My name is Gina and I will be your coordinator for today. At this time all participants are in-listen only mode. We will conduct a question-and-answer session towards the end of today's conference (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. Duroc-Danner, Chairman and Chief Executive Officer. Please proceed.

Thank you. Good morning. And will read his comments, and then I will read mine, then we'll take questions as usual. Andy?

Good morning. For the first quarter of 2010, we report adjusted earnings per share of $0.06. The adjusted number excludes the following items totaling $81 million after-tax -- a non-cash charge of $40 million as a result of the Venezuelan Bolivar devaluation. This came in below the $50 million estimate we communicated on the Q4 call. A $38 million non-cash charge related to the curtailment of our supplemental executive retirement plan. This was frozen on March 31, 2010. $6 million in severance and facility closure costs, primarily in the Western Hemisphere; a $5 million benefit related to the reversal of prior cost accruals for our exit from sanctioned countries and, finally, $2 million of government investigation costs.

Compared to our Q4 performance, earnings per share increase $0.04 net. The field contributed $0.05 of improvement with a $0.09 uptick in North America, partially offset by a $0.04 decline internationally; $0.02 each from the Eastern Hemisphere and Latin America. The sequential operating improvement would have been greater but for, one, an $8 million non-cash charge related to the TNK put and, two, a one-time $7 million adjustment to Borets equity in earnings. This stemmed primarily from asset write-downs at their operating company. Both items handicap results in Europe, West Africa, FSU.

Below the line items took away $0.01 of EPS sequentially with all items other than tax flat quarter on quarter. The effective rate for the quarter was 19.3%. On a consolidated basis revenue declined to $88 million sequentially, or 4%. In North America revenue climbed 21%. The $154 million improvement was split fairly evenly between both the United States and Canada.

In the east revenue fell 5% or $52 million. The drop was equal in both markets and was worse than the 3% to 4% seasonal decline we typically see during Q1. Exceptionally cold weather in Europe and China as well as politically induced delays in Algeria were the primary culprits.

Latin America revenue retreated 31% or $190 million on the back of reduced project activity in Mexico and continued deterioration in the Venezuelan market. Venezuela ran at roughly 40% of its Q4 '08 peak. Consolidated EBIT before corporate and R&D was $257 million, up $41 million sequentially. Operating margins were 11%, a 210-basis-point improvement over Q4.

In North America margins climbed almost 700 basis points to 12.6% with a $71 million improvement in profitability. Prior cost reduction efforts, improved fixed cost absorption and a more favorable sales mix drove the upturn. In the east, operating income dropped to $12 million. Margins slid 60 basis points. Europe, West Africa, FSU produced the entire decline as the TNK put and Borets write-off stung our profitability by $15 million. Latin American profitability retreated $18 million and margins fell 70 basis points. Profit improvements throughout the region were unable to offset the loss of revenue and associated profit from the reduced scale of project work in Mexico as well as deterioration of the Venezuelan market.

A few comments on cash flow performance and capital structure. During Q1 we generated EBITDA of $410 million. G&A ran at $249 million. Capital expenditures were $209 million for the quarter net of $22 million of lost in-whole revenue. At the request of some investors we have included both a balance sheet and a net debt roll-forward in our earnings release. Net debt increased to $165 million during the quarter. This most accurately represents our net cash flow including net cash flows from acquisitions and dispositions and differences between cash payments and current-period expense for interest and taxes.

Cash payments on interest and taxes exceeded book expense by approximately $150 million this quarter. At quarter end our ratio of net debt to net capitalization stood at 40.4% with total net debt at $6.6 billion, up from $6.5 billion at the end of Q4.

Looking forward to Q2, we expect a flat EPS performance compared to our reported Q1 number, $0.06. Our current expectations by region are as follows -- North America, a $40 million decline in revenue and a net $0.05 decline in earnings with a seasonal decline in Canada partially offset by modest top-line growth in the US and further margin improvement.

In the East, a $100 million improvement in revenue and $0.04 of EPS improvement due to improved the activity on the back of more clement weather. The improvement should be fairly evenly spread between our two geographic units in the East.

Latin America, we expect a 5% to 10% decline in revenue and a $0.01 improvement in earnings. Wells drilled in the ATG field will be down sequentially and will be partially offset by a ramp in other activity throughout the region.

I have the following updates for you for 2010 non-operational items -- D&A, $1.05 billion; corporate expense, $185 million; R&D expense, $210 million; net interest expense remains estimated at $380 million; other expense, $40 million; minority expense, $25 million; capital expenditures remain at $1.1 billion and the tax rate should come in between 19% and 20%, consistent with this quarter. I'll now hand the call over to Bernard.

Thank you, Andy. Follows my comments on Q1 and forward comments.

Adjusting for the $0.02 penalty from TNK's put and Borets asset write-offs, we view operational performance as $0.08 this quarter. Neither of these items is reflected of or relevant to Weatherford operations. Government-imposed delays in Algeria, Venezuela's devaluation and extraordinary January-February arctic temperatures from Russia through China had a severe impact on the international segment.

North America made the quarter. North America revenues outperformed Q1 '09 levels by 6%. North American margins surged 690 basis points with 46% incrementals, reflecting a substantially lower cost base and absorption effects. There was almost no material change in pricing that affected the quarter. Profitability surged on volume and operating efficiencies alone.

North America EBIT margins are far from their prior peak at 12.6% versus 29.8%, or just about 30% in Q1 '07. This is materially less than half of where we were. We have room to grow.

The International segment was weak across the board. Part of it was seasonal, part of it was weather, part of it was idiosyncratic to particular countries and, lastly, part of it was continued progression of mobilization efforts. Within the weather-related category, Russia was very affected, as was Asia. Russia's western Siberia fields experienced long operations shutdowns with temperatures touching minus 40 degrees centigrade. China and Australia were also very weak, also for climatic regions. By way of an example, Bohai Bay was near frozen for two months of the quarter, an extraordinary event.

Concurrently, Australia experienced severe flooding in eastern Australia throughout the quarter, curtailing operations. Australia is 25% of our Asian revenues and with heavy concentration in the eastern reservoirs. China and Australia combined are almost half of the region. That would be Asian region. They matter a great deal. Asia's margin and revenues were, as a result, very weak and deteriorated versus Q4, while the FSU could not improve on the very low levels of Q4 in spite of a recovery in March. Asian margins were the weakest on record.

The European segment held its own, with UK and Norway essentially flat despite the seasonality. Russia was a primary factor behind the region's weak performance. MENAA, revenues were flattish while profitability rose from Q4 to Q1 in spite of a continued specific-country weakness, such as India. The inching up of a few markets made the difference. By the end of the quarter and into April a number of operations were started up, meaning mobilization finished. Oman Amal startup was completed in late April, Ethiopia operations were running, Algerian [fire] string mobilization was restarted this weekend, and we are on track to have nine strings operating in Iraq by the end of Q2.

Latin America decremental is reflecting the scaling down of ATG 1 and 2. The other negative factor was Venezuela, the combined effect of a lower operating level and the translation of the reduced Venezuela activity and devalued Bolivars.

The international EBIT margins were near identical to Q4 at 10% even. We believe this is a trough. Asia, Russia and Latin America are likely to recover in the next few quarters, while MENAA, Europe and sub-Sahara Africa have already begun to turn. The ensuing quarters will show gradual recovery in international profitability.

The prior high point in EBIT margins was 25.2% in Q4 of '07 -- roughly similar weather, Eastern Hemisphere or Latin America. It may be only coincidence, but both North America and international EBIT margins are at about 41% of their prior high.

I will skip the section on the product lines with all the numbers, which are going to be available, anyway, as far as my prepared comments, and move on with the text.

We expect Drilling Services to lead Weatherford's product lines in size. Drilling Services regroups directional and managed-pressure drilling, about half and half. Managed-pressure drilling, or MPD is showing very stout growth rates and growing backlog of client interest.

We seldom discuss our stimulation product line. As a reminder, we have 450,000 horsepower deployed in the US, and 150,000 horsepower in the international markets, for a total of about 600,000 horsepower fleet. The entire product line was built organically.

Related to stimulation, part of the completion product line, our zonal isolation swellable completion technology, newly introduced, has done remarkably well in the marketplace and suggests a very strong outlook.

Lastly, artificial lifts should do very well in '10 and '11 on the back of an essentially oils-driven market.

Forward views, North America -- I'll ignore the seasonality of Canada's Q2 breakup, which brings that marketing to a grinding halt. Comments will cover the balance of '10. In general, for North America, activity volume will flatten out from Q2 thereon. The market will not provide further volume gain for H2 2010 and '11. There is likely to be substitution of possible decline in the gas segment with further strengths in the oil and oil recondensate segments. Some product lines will be better than others into H2 '10 and '11. Progression or declines will not be linear across all product lines.

Expect obvious high performance to be Artificial Lift and directional. Stimulation will stabilize but not rise much further. Overall pricing trends will be constructive, but don't expect recovery of anywhere close what was given up in '09. This makes for a decent market where operating efficiency will yield a better probability of returns than market forces.

Canada has a distinct outlook. Insofar as the oil -- heavy oil, that is -- segment is a far greater percentage of the overall market. Expect Canada as a whole to be well-behaved. Adjusting for seasonality, expect volume and pricing trends strengthening into '11, irrespective of a flattish gas segment. Remember, Canada has come out of a '07-'09 deep recession, a much longer and deeper pullback than US experienced. The Canadian three-year recession initially centered around a frozen heavy oil industry where all development projects were tabled. The Canadian market has much catching up to do.

Latin America is a mixed picture. After a period of some confusion, the forward picture in Mexico is now clear. Activity in the north, Burgos; South, Villahermosa, Veracruz and offshore Cantarell and KMZ, will either be sustained or rise appreciably. Chicontepec, on the other hand, will decline in '10. As a single impact for Weatherford, the ATG 1 and 2 contract will not be renewed after completion. Activity in that reservoir will center around ATG 4 and the incentive field development contract.

Venezuela has a poor prognosis in '10 and beyond. Given the inelasticity of imports in the Venezuelan economy, the devaluation of the Bolivar suggests an inflationary cycle which implies further devaluation to come. On this basis, further capital commitments to that market are difficult. We don't expect much out of Venezuela.

On the other hand, Brazil, Colombia, Ecuador, Argentina and Peru should have robust growth, '09 on '10, with Brazil and Colombia topping the list. We expect both Brazil and Colombia to lead '10 and '11 growth in Latin America with excellent performance, Brazil being the clear leader and a contender company-wide for growth leadership.

Adding the pieces together, this suggests for Latin America a declining top line, '09 on '10, but with sequential margin recoveries throughout the year.

The Eastern Hemisphere is and remains solid at 30% year on year growth, essentially weighed to the second half of the year. All segments have contributed to this objective. There are no changes to our prognosis for the Eastern Hemisphere. By Q4 the Eastern Hemisphere represents over 50%, over half of Weatherford.

A number of our traditional core markets should drive higher activity -- Algeria, Libya, Kuwait, Oman, Russia, Iraq, China, Australia, to single out a few -- should show the most growth. Those markets that have been weak and/or frozen, like Algeria, Libya and Russia, will have the strongest second-half '10 and '11 differential performance.

To summarize, we are very focused on growth into '11, but also efficient use of capital. Progress on the latter should yield significant incremental resources to fuel our growth. As Andy mentioned, we expect Q2 to be roughly flat with Q1.

Lastly, the Company will operate in 2010 with positive free cash flow, excluding, of course, one-time capital outlays, be they acquisitions or potential legal settlements.

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

(Operator instructions) Jim Crandell, Barclays.

Bernard, I know you've had, in Brazil, some $1 billion or so in new contract awards over the last six months. Can you give some color on these and explain the role that maybe some of your new technology introductions are playing in these contract wins?

It's actually probably more over the past three months than six months, and the total amount of the contracts is probably closer to $1.2 billion. But you are very close to right.

It covers, best I can recall, six product lines, products and service lines. I think the new technology would, I think, qualify in the case of really one. The other ones would be existing technology. The one that is the new technology is contracts flowing around MPD, which is managed-pressure drilling. The rest would be existing technology. That doesn't mean it is lower technology; it just means that the breakthroughs that Petrobras expects its vendors to provide have not been brought on the market yet. It's something that will be brought on the market in the next two, three years, partly out of R&D being done in Brazil right now.

Okay. Bernard, most people look at your Company now geographically, and rightly so. But you've invested a huge amount in R&D and technology development, and I think a lot of these tools and services should be at a stage where they are coming to the market here over 2010 and 2011. Do you expect a real boost from new tools and services as a result of new technology, going forward over the next year or two?

We wouldn't be doing it, otherwise. Yes, we do. And actually, more than into '11; I think this is into -- oh, it's probably -- the cycle is a five-year cycle of introduction of the technology and returns on it.

Okay. Are all the areas, Bernard, that were affected by either weather or political instability in the quarter coming back? And I think I know that all the weather-related areas are coming back. But areas like Algeria, which has been affected, which is, I think, a pretty significant country for you -- are they now showing signs of coming back as well?

I think, obviously, all weather issues are finished. The politically impacted countries would probably fall into two categories, best I can recall. One would be Venezuela, the other would be Algeria. Venezuela, it is what it is, and we've described our perception of the economic outlook for that market. Algeria -- best I can tell, the crisis, which was a domestic crisis, has now been managed in whatever manner pleases the Algerian government. And so I think the normal order of business is back. So the answer is yes.

And yes, it is an important part of our business in the Middle East.

I believe your position on Iraq has been that it's unlikely we'll see any major oil company awards until the new government is straightened out. What are you looking for now in terms of awards, and do you think that these will begin to occur this quarter, third quarter? And do you think that most of the projects that have been approved will at least be awarded over the course of this year?

Lots of questions. First of all, I don't know. So the second is, if I had to guess, I would say first of all it's terribly important that a new government be formed by the end of the second quarter. It's important in that country. I'm not saying anything that I think the Iraqis would not agree with. Instability in terms of uncertainty is never desirable. So it's very important the government be formed by the end of the second quarter.

I don't think that major commitments are likely to be made. Of course, I don't know; I could be surprised. I don't think any contractual commitments of any magnitude are likely to be made until a new government is formed. If I'm wrong, it would be at the margin.

And do we anticipate other awards -- [all awards or] contracts to be made in the balance of the year? No; there are just too many. In other words, there is just too much development to be done in that country, too many players, too many reservoirs have been looked at for development purposes. I can't imagine that everything will be awarded to everyone. I'm not talking about Weatherford in particular. Between now and the end of the year, I think it's just too much. But I think some will be (inaudible) [there] for sure and will be, I think, in a widely distributed sort of way. I've never been one to think in any way or form that Iraq would be the market of one service company or anything else like that; that's just operationally absurd.

Bernard, do you think that MOC and SOC will grow their programs from these levels over the course of the year?

You mean the ones that they run independently?

Yes, the ones that you are doing in the South.

You know, we've just barely started them, so I think that's probably a question you should ask me in Q1 of 2011, probably, more so than now. Bear in mind that, with the operational target, or having nine strings running by July 1, we take these things casually because we say, well, that's our objective and we try like hell to make it happen. But it's a tall order on the ground and I don't think anyone else has done it quite. And we will be at nine strings by July 1. That means we'll have more than 1000 people working for us. We already have near 1000 people working for us already in Iraq. So that is already quite an achievement.

And having these nine strings run well is another achievement where it's not simple. So what I'm trying to say is that -- not that concerned about the scope and scale of activity for those nine strings. I think, if we do a good, efficient job of running them -- which is, again, not easy in a brand-new, new infrastructure market like Iraq -- I don't think you have to -- I don't believe -- I do not worry too much about those strings continuing to find utilization in all the reservoirs that need to be drilled, whether SOC, MOC or anyone else, for that matter. I think our focus is strictly operational.

So -- and then the rest of the market expansion will more than take care of incremental capacity that needs to come to that market. But, again, nine strings is not a small number. That's a big number. So getting it done and getting it done properly is already something that, should we do it, I think you will see it through our numbers in Q3 and in Q4, obviously. That's quite a jump already. And that's the one we should focus on.

Ole Slorer, Morgan Stanley.

Bernard, not a good quarter, but hopefully this marks a trough?

I think the prior quarter was a trough, Ole.

That's actually a good point; they're both a trough. You are right.

I'm not terribly -- I mean, from one trough to the next, maybe. But please, go on with your question.

Middle East, though, was a positive surprise, given what we knew about Algeria and India. Could you give us a little bit more color on the rebound in the Middle East and how sustainable you think this is? Are there any more costs to come relative to ramps? Or is this sort of a sign that the Oman and Iraq and India and Algeria and some of these headwinds are now kind of turning into slight tailwinds?

I think that's it. You just answered your own question, Ole; that's basically it. There's nothing dramatic I can point to. You had a few markets that really pulled back that started inching up -- inching, not surging, inching up. We have some positive trends in a lot of different areas, but they're marginal, but they do add up. The weight of startups -- it was still heavy in Q1, but it tailed off towards the end of the quarter. Some projects basically were turned off in Ethiopia. Oman went, impacted the four quarters. It's only got turned on about a week or 10 days ago, and Iraq continued for the whole duration of the quarter and will continue also in Q2. But the intensity of the startups within the quarter is beginning to tail off.

The only market, really, markets that were disappointing as in declining Q4 and Q1 were really India and Algeria, for entirely different reasons. In the case of India you have essentially at the end of -- out of the six major clients in India, you have the end of drilling programs that got curtailed in Q1, of four of the six clients. And then the monsoons are coming now, so nothing's going to happen until Q4. But they will kick back up again. And these things happen; there's nothing extraordinary about it.

Algeria was different. Algeria was much closer to what one would describe as force majeure, because the events were rather dramatic. But they are behind us now. So -- however those two markets, the other ones, from -- Libya didn't move, Egypt moved, had some signs of life. Saudi moved, had some signs of life, for example. These markets, just that makes a difference. We do have a very large infrastructure in those markets. We are under absorbed. I think people who understand the Company know this. It was a calculated bet not to dismantle or weaken in any way or form our international infrastructure.

As a consequence, a little volume goes a long way. It's a little bit what you saw in North America, for different reasons. But international -- we are hopeful that with the absorption benefits that we seem to have with a little volume, when a little volume becomes a bit more than a little volume, then it will make a big difference. That's all that took place in MENAA -- a little volume, not much.

Looking at Iraq, there's a big debate on the level of profitability there with its 14.7% margins in the Middle East/MENAA region. Would you say that Iraq was pulling margins up or down for the region as a whole?

Oh, down, for sure, down for sure. It's in startup mode. It's really premature, Ole. I don't know who passed the judgment on this, but I would say that if we were passing judgment on margins in Iraq a year from today, it would be too early. Why? Because you've got to let at least a couple years of operations to know the sorts of profitability a place is going to have. Pricing tends to be quite stout in Iraq, and it should be. What we don't know is the cost of running things, given the lack of infrastructure, etc., and the difficulty of running things. That we don't know, don't know as well as we should.

So I think the judgment of this being dismissive or overly giddy about Iraq, in both cases, is wrong. You've just got to let it play out. There's no other way. I know the Street does not like that, but it is what it is. You've got to let it play out. We are very careful in the commitments that we take. Obviously, we try to push price as high as we can, so we are very careful to take on what we think we can do.

And that, as that as it is, is not an easy thing, but no more. And so we'll see where the margins are at the end of the day. But it's too early.

The reason we ask is, you put up to 1000 people now, you've gotten up to eight basis. This is clearly making -- a judgment, a bet which is very different to what at least two of your key competitors are doing, and just trying to get some confidence that you still feel that the judgment of this is correct about the biggest cost of it is behind you.

For the first step of our development in Iraq, yes, it is. Now, there will be many, many different steps, depending on where activity goes. You do have 10 large commitments from 10 different consortiums to work on 10 chunks of reservoirs. If you add the numbers, it's almost unthinkable. So there will be different phases of development in Iraq. Our first phase is pretty much over in terms of the commitments in capital and operating costs and so forth and so on.

You will see it still in Q2, but it's pretty much over. And then there will be a pause as we learn how to operate these things and presumably start getting some form of harvest. There will be other phases because that market will scale up.

Again, I find it -- and I would urge the audience to think about it in those terms. I find it astounding that one would pass judgment on profitability of a market that one doesn't know anything about yet. Pricing -- I will tell you again, product line by product line, service line by service line, is very stout. So that can't be the reason. It can only be a judgment on operating costs, operating difficulties, which I would certainly respect. But practice makes perfect. And with practice comes a true knowledge of what is the operating economics there. We don't have any doubts that the commitments that we made will be financially rewarding in Iraq. What we don't know is by how much. And we are cautious about it.

So, in other words, for the region as a whole, basically we'll just have Algeria starting up now, India no longer a headwind, Oman kicking in. We should continue to see the Middle East lead the margins within the --

(multiple speakers) yes, yes, most definitely, Ole. Certainly in Q2 and even more so in Q3 and Q4. Or, put another way, we would be painfully disappointed if that wasn't the case, and they would be, too. So certainly in Q2 and even more so in Q3 and Q4, yes.

So, that's good to hear. Turning to Russia, you made a very, very substantial bet on Russia nine months ago. Can you give us an update on how you view that investment?

Russia has been a hard market. We closed the acquisition, I think, on August 1, if I remember correctly, and the market between August 1 to date has just barely started to show signs of recovery. The integration has gone well operationally. The organizational melding of the two cultures has gone well. The market needs now to give us a little bit of a push. It is an oil-driven market in our case, more so than gas. Why? Because our clients are essentially oil producers. Gazprom is not a significant client, insofar as they do much of what they need themselves.

So it is an oil-driven market. If oil is sustained at the levels it's at, Russia will respond. Russia responds late; they will respond. So we're anticipating a strong second half of the year but, even more so, a strong 2011. I think you should then, I think, judge the value of the move we made in light of the results that a little bit of a healing in the market will provide.

Angie Sedita, UBS.

First, on Iraq, I would assume it's fair to -- you are, obviously, in the process of starting up as equipment moves on with the July 1 startup date. Is it fair to assume that it would take two, three, even maybe four quarters -- well, let's say three quarters -- before you move beyond that startup phase to ongoing operations and you have better clarity on the margins?

Yes. We will be turning the equipment on in around July 1, mind you. But the answer is yes; otherwise, you're absolutely right.

On Russia, Ole's comments there or question about the activity -- what are your thoughts as far as activity or spending increases in 2011? I know at one point you were somewhat optimistic for a nice ramp up into '11. Are you still anticipating the same?

Yes, I am. I probably have a bit more empirical basis for it, albeit I do understand the (inaudible) [empirical basis] in Russia is debatable.

Finally, on Mexico, just some updates, an update on the lab there, what you are seeing. What do would you think the likely outcome could be, or do you have any insights there at this point?

Well, there are two different things. One is you have service companies such as ourselves and also our peers being given a small chunk of the reservoir to try and drill and complete with a bit more freedom in how we use our products and technology. That's a good thing, but it's -- and so that one is starting up as we speak. It's not that large, for any one of us, but it's good. We welcome it.

Now, the other one is entirely different, which is the incentive contracts that have been proposed to the E&P sector. That one -- really, you have to wait until about October or November until agreements are signed, if any, and we would welcome that insofar as it is a very large reservoir. We are referring to Chicontepec. There will be the same ones offshore also, incidentally. This is a very large reservoir. There is more to do there than I think one company can possibly handle. I'm referring to one E&P company. And so, as allowed by Mexican law, the presence of foreign operators, there's service contracts and not different than the ones that you have, for example, in Iraq, but they are service contracts. And if some foreign operators, be they from the United States, Canada or Latin America, would come over and take a chunk of that reservoir, it would be a wonderful thing for the reservoir, for the country and for the service companies like ourselves.

I will point out to you that there is already that sort of thing existing, and it is one of our clients. The best I can recall, Petrobras is operating already on that basis up in the north, in Burgos, and we are actually running the string for them very successfully. And so we really welcome that.

So to summarize, the latter service companies are -- our peers -- it's starting up now. It's a good thing. It's small. We welcome it. But the real incentive contracts of our operators is going to take the balance of the year to sign up, and we hope many people sign up.

Bill Herbert, Simmons & Co.

In regard to your prophecy of 30% growth for Eastern Hemisphere, we are in about a $1 billion run rate per quarter in Q1. And I guess, in order to hit the 30% target, it would have to be up about $400 million per quarter, at least, Q3 and Q4.

Rank for me, at least by major market, the biggest contributors to that growth from Q1 into Q3 into Q4. And it doesn't have to be 10 countries, but the top three or four.

The easiest way I can put it to you is like this. Some of it we can take no credit for. The simple math of the Russian operations at TNK, one full year at Weatherford, '10 versus '09 or '09 versus '10, basically represents about $300 million. It may be a bit more.

Although that's probably reflected in Q1; right? So what I'm really talking about is Q3 and Q4 versus the first quarter at about $1 billion. So presumably, you've got a full quarter of TNK right now. Yes, you've had some weather issues (multiple speakers).

I'm immensely surprised, Bill. So yes, point taken, but it was immensely surprised (multiple speakers) you've got some of that.

The second thing you have is just the mere arithmetic of what is being started up in the proud country of Iraq, is somewhere like an incremental $300 million to $400 million.

Right, and what about Algeria and Libya at all, which were essentially stagnating in Q1?

Well, I don't want to get too granular here, to use one word that I think is popular in your tribe, but -- simply for competitive reasons. But you have -- I'll just say this. We're back to starting up now five strings in Algeria, as we speak (multiple speakers). These are big numbers. And so I'll just stop here because then I get into -- then you have ramp-ups going on in China. And I'll just stop here.

Keep going.

No, no, no. But what I mean by that is I think the risk that you run on that number, and I don't blame you for asking that, is that simply is that we hit an operating snag.

No, I hear you, but I just wanted to get a sense as to -- those are big numbers, and I wanted to get a bridge there, which you have --

Andy would like to say something.

Bill, don't forget that coming in we just finished talking about the weather issues, the political issues and everything else as well as your normal seasonal decline from Q4 to Q1. So you are starting at what I'll just call a suppressed number.

So, second line of inquiry here, Andy, we've got about $1.1 billion in capital spending budgeted for 2010. I think $500 million of that is maintenance; correct?

Correct.

So $600 million of growth CapEx. Can you parse that for us by geo-market, where that $600 million is going?

International.

Got that, but I mean, where?

I think, Bill, I don't want to be specific with respect to countries or product lines. I don't think that behooves us.

Is over 50% of that Iraq?

No, absolutely not.

That is spent already.

Oh, that's spent already?

Pretty much, yes.

Iraq is -- my goodness, the equipment is on the ground in different parts of Iraq, or on the way to Iraq or on the ground. If we are going to start turning by July 1 -- Bill, we spent the money about nine months ago or 12 months ago.

Okay, good. And then last question for me -- what do you think, at least at this stage, recognizing that it's early days, is going to be -- the thing is, because your prepared commentary seemed to accentuate the blossoming of what you have done in 2011, for the most part, with a gradual uplift and maybe something more than that in the second half of 2010.

So with -- referring to 2011 hitting your objectives and targets, what would be the required growth CapEx from this point forward to meet those?

The CapEx in 2010 won't be any different than what we've said it would be.

No, I hear that, but beyond the $600 million that you're going to spend in growth CapEx.

It depends how we can see 2012. There is really a long lead time, which was one of our problems in 2009 until very recently. The 2008 commitments were really very large for us and they were aborted after (multiple speakers). And there's no point in revisiting that. But there is a long lead time on these things.

No, I understand, but I guess part of the thesis here is that you guys were coming into the Lehman implosion, if you were, you were the most operationally geared for growth on multiple fronts. You are effectively overinvested, if you will, with regard to the current climate and probably for the ensuing several quarters. And I'm just curious as to how much running room you have with regard to attaining growth.

Everything you said is absolutely correct, and the reason we are not immediately saying, well, in 2011 we would like to just spend XYZ, is because we don't know the growth rate in 2012. But what we do know, and this is what I want to confirm, is that there is a percentage of the growth capital required in '11 through '12 which is already spent, if you will.

You still have some -- we still have some slack capacity, let's put it to you this way. It's not in all product lines, it's not at all technologies. But we have enough of it that whatever growth capital we'll have to spend in CapEx in 2011 to fuel 2012 will be less than the growth it will deliver, considerably less. I just don't know what that number is. So you are correct. And I really want to confirm what you just said as being very accurate. I just can't give you numbers because I don't know.

I understand, thank you very much.

Jeff Tillery, Tudor Pickering Holt & Company.

I just wanted to see if you guys could give us an update on the FCPA and Department of Justice investigations, just any update you can give, kind of status, time lines, along those lines.

I think that we have done such immensely comprehensive disclosures, at this time I would probably rest on the disclosures.

Fair answer. For the Eastern Hemisphere the second-quarter guidance implies somewhere between 35% and 40% incremental margins. Is that how you think about the incrementals as we go over the next couple of quarters with a lot of the capital and infrastructure already in place? Is that the type of incrementals you think you can generate?

Let's take it quarter by quarter. I don't want to start going out further throughout the year. As Bernard mentioned, just fixed cost absorption is a significant driver for us on the incremental margin side. On the North America side, it's not too clear about what you might be able to squeeze out in pricing. There could be some modest pricing improvements as we move through the year.

On the international side it's really volume based. It is not price based at all.

Just one last question on Latin America. Does the second quarter -- is that burdened by demo costs and whatnot on the rigs as ATG 1 and 2 wind down? And if so, I just wanted to get a feel for order of magnitude on that.

Yes. That is a number that we don't know yet because our obligations really depend upon how successful the vendors are as well as we are in placing those rigs with other work. There have been quite a number of local companies who have won contracts that I don't think have yet fulfilled their equipment requirements for the project. And so we'll report on that next quarter, once it's become clear to us.

And in terms of what you talked about from a guidance standpoint, did you assume some in regards to demo costs in there? Just trying to see how much.

Yes, I did.

Dan Boyd, Goldman Sachs.

Andy, I'd like to just follow up on that last question and talk in terms of incremental margins. I assume, given the growth you expect in the Eastern Hemisphere, the majority of the margin expansion is going to come from that region. We just saw a 46% incremental margin with no pricing in North America. In terms of a range of incremental margins, should we expect them to be in the high 30s, with that type of growth, just from the fixed cost absorption?

On the international side, so taking into account both Latin America and then also looking towards the East and looking at it on a sequential basis, not full year on full year, you should see anything -- let's put it between 25% and 40% sequentially, incremental margins.

Okay, that's helpful.

It's likely to be stouter in the East, sequentially, than in Latin America, as the Mexican contract gets worked out. But in general, that's absolutely right.

And then also, you mentioned all the new technologies that you are rolling out. It looks like you are gaining some traction in Brazil. Are you finding customers reaching out to you more frequently, given all the consolidation in the market, where they want to support another competitor?

I'd like to say yes, but that would be an overstatement. So the answer is, not materially. However, what I have noticed is that I'm asked the question on consolidation more often. I was never asked the question before. It is a topical issue that comes up with our clients either in light talk or in more serious talk. So I think it's on a number of operators' minds, but I cannot say that it has allowed us a particular edge in the marketplace, no; not materially.

I just wanted a clarification on the guidance that was given. With Eastern Hemisphere, you expect a $0.04 EPS improvement sequentially. Does that include the reversal of the charges you took on TNK and on Borets, or does it not?

No.

Okay, so we should think about this from -- if we wanted to go operationally, we should start with the $0.08 and then --

Correct.

-- move forward with the as opposed to -- okay. Thanks a lot.

Mike Urban, Deutsche Bank.

In Mexico, I was wondering if you could detail any efforts you've undertaken to adjust your cost structure, given that the first two ATG projects are running down. Is there some level of infrastructure or supply chain or whatever that you're maintaining there in anticipation of additional work, or is that more of a next-year event, so you need to scale down in the meantime?

Michael, to give you a sense of perspective, the answer to all of the above is yes. To give you a sense of perspective, Michael, is that, at its peak, our operation was flirting with 50 strings. More recently, in the low 40s -- I think, 42-43 strings. And we are taking it down as we speak. It's pretty much done all the way down country wide to 17 strings, give and take. And that's the sort of give and take; it will move around. But not quite 20 strings, in other words.

That's quite a drop. And that's pretty much done. So clearly, all that stuff got done with a lot of operating pain and consequences and so forth. I would also add that when it was running, and this is maybe academic for the street, but it isn't academic for me -- when it was running, it was a very fine operation. And it ran extraordinarily well. Some of the last wells we drilled -- and I'm talking not just one well, but the 10s and 20s and 30s of wells that we drilled, we drilled extraordinarily fast at very, very low costs.

So we've definitely, in our minds, proven are sustainably that the cost curve can be pushed down further, much further, on that reservoir. Be that as it may, the budgetary issues of our clients are what they are. Money is not available, so things have to be scaled down for the time being. And so yes, we have taken down the cost structure in Mexico. We have a very large infrastructure that we left in Mexico, for good reason. It remains, post the completion of ATG 1 and 2, which will be completed whenever it is completed, we will be left with a very large market in Mexico. Do not read into all of this the fact that we went from an enormous amount to nothing, not at all. We are left with a very large market in Mexico. Mexico will remain the largest play, at least for the time being, in Latin America. Maybe at some point, one day, Brazil can catch up, but not yet, not today.

So it remains a very large operation. So the scale-down that has been done is not completed. It will be done also in the second quarter, but a lot has been done already, since [we are not]. We've dropped essentially more than 20 strings already. That's done and it's continuing, but do not presume we're going to dismantle anything or anything else like that, not at all, because the size of the market by any measure will remain very large in Mexico. It's just not as large as it used to be.

Right, so pulling out some variable costs, a decent amount of fixed costs remain. So, like a lot of other markets here, you will be a little underabsorbed but hopefully, as they return and ramp up the spending again, that should (as multiple speakers) --

I think that's a fair comment, Michael, but we are very careful about how we calibrate that. That's a fair comment.

It's a fair comment. And, Michael, a lot of equipment that is obviously very mobile equipment is getting pushed to different countries both within that region and outside that region, to reduce that D&A burden. But on the infrastructure, I'll call it, no changes are being made to take down any kind of infrastructure there.

To add a typical example to what Andy is saying, this is a very modest scale operation compared to what Mexico was, but much of the demobilized equipment out of Chicontepec is moved to different markets. For example, we are starting up a three-string integrated operation in Colombia. That's essentially Mexican equipment. This is simple. Now, three is not 30; it's not the same scale. But these sorts of things are happening and we'd expect them to happen.

Okay, makes sense. And then moving back to Russia, you talked about the integration, obviously the weather issues. But some of the softer issues and some of the goals you've had there in terms of pulling through additional services, gaining additional customers -- any progress to report on that front?

I think probably the one that's easier to measure for you is whether we get any traction with other clients than TNK. And I think there are two that we are getting traction with -- modest, maybe, but encouraging traction. And one is Rosneft and the other one is Lukoil. And then in both cases are both drilling and completion and stimulation, and it's really on the back of the capabilities of the operation we have and the infrastructure we have. It's a beginning, so the answer is yes, there is progression there.

In Russia, like much of the eastern hemisphere, things take time. But I think we are pretty much, in terms of penetration of the market, where we hoped we would be.

Okay, that's all for me, thank you.

I think we are -- we have just been told, we should take one last question and then cut off the conference call.

Robin Shoemaker, Citi.

Bernard, I wanted to ask you a little bit more about North America. It looks like, if you adjust for the fourth quarter one-time charges you had for inventory and so forth, that your incremental margins were about 36% sequentially. I wonder if that's sustainable. We have heard about rising costs from your suppliers that would impact North American incremental margins potentially. And if you could discuss where you've had the most success in raising prices in North America, in terms of product line, and least success?

Actually, Robin, we really haven't had much price increases at all, at least in Q1. So that's -- to no discernible extent of where the margin improvements are pricing at. That doesn't mean we won't get some, it doesn't mean that we aren't getting some right now. But in Q1 that was not an issue, not discernable. That's one.

With activity rising, costs rise, absolutely correct. So you can expect pressure from that side. On the other hand, North America differently from the international business we have, we took the costs down rather dramatically in 2009. And we took it down both variable and fixed cost. For the variables we had -- obviously, they climbed back up again. And that's one issue. But the fixed costs we really took down really quite hard.

Our prognosis in North America is different than international. We don't see a long-term secular growth in North America. Maybe we're right, maybe we're wrong. We see long-term secular growth in the eastern hemisphere and Latin America. So our approach is now completely different. It's really a tale of two cities -- international, we kept the infrastructure and the cost structure intact; and therefore, we have a heavy, heavy underabsorption situation there. North America is quite the reverse.

The question you want to ask is, if activity keeps on ramping up -- we don't believe it will, but if it does then we'll have a fixed cost problem insofar as we may outgrow our existing fixed cost structure. But we don't expect that to happen.

You mentioned stimulation services in North America and in this quarter. Is it true also that you haven't had pricing improvement there? And what about further investment, organic growth of that business?

On the latter, I don't think you'll see much of anything for us. Our peers may want to invest some more. That's their decision. You have some pricing improvement stimulation. You have to, because the pricing was so distressed. So you have some. How far will it go? I don't know, but you have some. You have pricing improvements here and there, in different parts in the service lines.

And you continue to have some in both the US and Canada. You just didn't have that much of anything going on in Q1. But in Q2, Q3, Q4 you will have the benefit of some. We don't expect too much, but we'll see. We'll take as much as we can.

Do you see any signs already of weakening or trailing off of activity in the North American what you call dry gas basins, which would be most impacted by the lower gas price?

Not yet. But if you read the comments I prepared, we view it as, I say, well, this is sort of obvious. Gas wells that come in with a loss of condensate are just wonderful businesses to keep running. Some of the shales have a low cost structure -- not all the shales. And oil is oil.

That market will continue to do well and displace the other markets, which is the dry gas market, with more traditional cost structure. So that's -- I think the prognosis for that sort of behavior -- you probably know it as well as any other service companies you will talk to.

Right, thank you Bernard.

You're welcome.

This concludes the call. Thank you very much.

Ladies and gentlemen, thanks for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.