Weatherford International PLC (WFRD) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 Weatherford International earnings conference call. My name is Katie. I will be your coordinator for today.

At this time, all participants will be in a listen-only mode. We will be conducting a question and answer session for today's call. (Operator Instructions).

I would like to now hand the call over to your host for today, Mr. Bernard Duroc-Danner, Chairman and CEO. Please proceed.

Good morning. Andy will start off with his prepared comments, and I will (technical difficulty) we will take Q&A as usual.

Good morning.

For the second quarter of 2010, our reported EPS number is $0.11 before excluded items. This is a $0.04 improvement over last quarter and better than our anticipated performance of flat quarter-on-quarter earnings. The reported number excludes the following items totaling $106 million after tax -- a non-cash charge of $82 million related to the revaluation of the TNK put and $24 million in severance costs related to the separation of four executives during the quarter, as well as restructuring initiatives, primarily in the Western hemisphere.

With respect to the TNK put, we amended it during Q2, extending the expiration date to December 1 and increasing the strike price by $1 to $19.50. These two changes increased the fair value of the put by approximately $20 million. The remaining amount of the charge reflects the $2.72 per share declined in our stock price during the quarter. Following the Q2 charge, the puts recorded as a $152 million liability on our balance sheet. To the extent that we settle the put and our share prices increase, the liability will be reduced, positively impacting the income statement. On the cash side, there will be no cash impact of the balance sheet with the put seller at or above the $19.50 strike price.

Of the four (inaudible) sequential step up, the field contributed $0.05 and below-the-line items took away $0.01. North America is to credit for $0.02 of the operational uptick while international markets added $0.03.

On a consolidated basis, revenue increased $100 million sequentially or 4%, and advanced $443 million or 22% compared to the same quarter last year. North America revenue climbed 3% sequentially. Stronger than expected performance in the US land market more than offset Canada's traditional seasonal decline, as well as one month of severely reduced activity in the Gulf of Mexico. Compared to last year's quarter, revenue is up $350 million or 61%.

The Canadian breakup season was more benign than the past few years, albeit heavy rains in parts of Alberta and Saskatchewan adversely impacted the quarter. Recall that Canada accounted for approximately 30% of our North American revenue in Q1. Moving into the second half of the year, we expect our Canadian operations to continue to benefit from a carve down of our internal cost structure as well as a seasonal rebound in activity levels.

Looking at the US market, unconventional gas, oil-directed drilling and liquid-rich plays continue to post strong growth. Operators are looking to lock up capacity on a number of products and services where utilization remains tight.

Eastern hemisphere revenue progressed $87 million sequentially or 9% compared to a 3% increase in rig count. Compared to Q2 '09, revenue expanded $149 million, or 16%. Russia, Iraq and China were the strongest incremental contributors.

By product line, top performers included artificial lift, drilling services, which is both directional drilling and under-balanced, stimulation and chemicals, well construction, and wireline.

In Latin America, revenue retreated 4% or $18 million on a sequential basis. It was down 12% or $55 million compared to Q2 '09. The sequential decline in revenue is the result of reduced project activity in Mexico. Healthy increases in Argentina, Brazil and Colombia help to offset the drop in Mexico.

Activity levels in Mexico were significantly reduced versus prior quarters. On average, we operated 10 strings versus 33 strings in the year-ago quarter. In Brazil, we continue to win new awards and tender activity remains robust. Columbia continues to ramp up. Ecopetrol recently announced plans to spend $80 billion by 2020 to boost annual oil production.

On the operating income side, consolidated EBIT for corporate and R&B was $308 million, up $43 million sequentially. Operating margins were 12.6%, a 130 basis point improvement over Q1. Compared to Q2 '09, consolidated EBIT before corporate and R&D is up $37 million or 14%. In North America, operating income of $129 million stepped up 15% sequentially. Margins climbed 140 basis points to end at 14%.

You will recall that North America ran at breakeven in the second quarter of '09. Increased onshore activity in the US, prior cost reduction efforts, improved fixed cost absorption, and a more favorable sales mix and pricing gains in select product lines drove the upturn. The Gulf's deepwater moratorium was most apparent in June, dragging down the region's operating income results by $9 million to $10 million for the month.

Eastern hemisphere operating income was up $20 million sequentially with margins up 80 basis points to 12.7%.

Performance of the two eastern regions diverged considerably. Europe/West Africa FSU logged a 400 basis point margin improvement with more robust activity and utilization seasonally. Middle East/Asia-Pac margins slid 170 basis points as a seasonal recovery in Asia Pacific could not offset the negative impact of higher mobilization costs and less favorable mix.

Latin America profitability increased $7 million and margins expanded 200 basis points to 9.3%. The reduction in Mexico pass-through revenue, as well as strong performances in Argentina, Brazil and Colombia, supported the margin expansion.

During Q2, we generated EBITDA of $470 million with D&A running at $258 million. Capital expenditures were $193 million for the quarter, net of $24 million of lost-in-hole revenue.

Free cash flow was $218 million. For the first half of the year, we are $55 million free cash flow positive. We achieved this level despite cash payments on interest and taxes exceeding book expense by approximately $85 million this quarter. Free cash flow was used to reduce debt balances by $218 million.

As of quarter end, ratio of net debt to net capitalization stood at 39.8%, total debt at $6.4 billion. At June 30, we had cash and amounts available under committed credit facilities of $1.3 billion.

Looking forward to Q3, we expect EPS performance of $0.16. This includes a full-quarter impact for reduced activity in the Gulf of Mexico.

Q3 expectations by region are as follows. North America, we expect a $40 million further progression of revenue and an incremental $0.02 of earnings. The climb in revenue should be almost entirely on the back of Canada's seasonal recovery. We expect the benefits of volume and price improvements on US land to be almost entirely offset by a full quarter of reduced Gulf of Mexico activity.

In the East, we expect an improvement of $125 million of revenue, or 11% sequentially, and a $0.03 earnings improvement with steady sequential progress in each sub-region, both topline and margins.

In Latin America, again we expect a 5% decline in revenue with operating income flat compared to Q2. On average, Mexico activity will be down compared to Q2 averages while improvements throughout the remainder of the region will only partially offset this decline on the top line.

The following updates on non-operational items -- D&A $1.05 billion for the year; corporate expense, $180 million; R&D expense, $210 million; net interest expense, $380 million, other, $45 million; minority interest, $20 million; CapEx still stays at $1.1 billion; and tax rate of 19%.

I'll now hand the call over to Bernard.

Q2, as Andy said, ran at $0.11. (inaudible) already in the United States and Russia made the quarter. With [demand], the US was strong in both oil and unconventionals. Oil and unconventionals represent over 80% of our business. This is by legacy and by design.

Gulf of Mexico declines in June hurt operating income by $0.01.

Canada managed its seasonal breakout lows efficiently on the back of its lower cost structure. This matters. We have more Canadian exposure than our peers.

All of the Europe FSU SSA region progressed, but Russia was the shining star on all levels. The gains were primarily earned as a dividend of the organizational build-up we achieved in the strategic market, both through the TNK acquisition and internally.

There is room for further improvement. The margins, although stronger, remain subdued.

Sub-Sahara Africa, FSA, was also a good performer. SSA has consistently improved its performance from quarter to quarter, and this time runs the Eastern hemisphere's highest operating margins.

Latin America held its own with lower revenues but higher operating income. The dismantling of our large-scale Mexican operation is essentially complete. The margin erosion coming from Mexico should be over.

Aside from Venezuela, the rest of Latin America was a strong performer. Brazil, Colombia and Argentina carried the region. Middle East/Asia Pacific was a laggard, the growing topline, the marginally declining operating income. The region still suffers from a disproportionate amount of startup expenses.

We had much under-mobilization in the course of the quarter. The region will benefit from future volume absorption.

Now, margins rose 140 basis points, or 14%, even overcoming the Canadian breakup, which is, for us, highly unusual in the second quarter. The Canadian breakup always pushes second quarter second -- always pushes our second-quarter margins substantially down.

International margins rose from the Q1 trough by 130 basis points to just under 12%. This reflects a divergent trend. The European FSU SSA region surged almost 400 basis points, 12.4%, and Latin America rose 200 basis points to 9.3% in spite of large declines in Mexican activity. Bucking the trend, Middle East/Asia-Pacific declined 170 basis points to 13% even.

There was some pricing progression in the US market, about 10% on 40% of our business segments. There were no other pricing movements of significance elsewhere.

Now, margins are at 47% of their prior peak, 14% even versus just under 30%. International margins are at a near identical 46.8% of their prior peak, just under 12% versus 25.2%. Both [Nam] and international are exactly the same spread, circa 47% of peak between current margins and peak margins.

The quarter marked the first step towards stronger probability and returns. Operational performance was good and improving on all metrics. This was achieved across the board. It was also true in the various startups as well as in the one significant instance of curtailment, which is Mexico.

(inaudible) product summary line for the quarter in millions of dollars. The Canadian breakup skews the numbers, as is always the case in Q2. I'll go straight to the conclusion on that section, which is to say that, in spite of the Canadian breakup, most product lines progressed. Two notable exceptions were integrated drilling, which decline as a reflection of Mexico, and wireline because of its historical strong share of the Canadian market. Three of our top five largest product lines didn't exist at the Company five years ago.

Forward-looking views -- North America. In US land, activity is likely to flatten out. We don't expect the market to provide significant volume gains for H2 '10, but we don't expect any weakness either. There is likely to be substitution of conventional gas segments with other strengths in oil and shales, particularly the gas and condensate plays.

Some product lines will be better than others. Progression of the clients will not be linear across all product lines. We expect high performers to be artificial lift, stimulation, directional and completion.

Pricing trends will be selectively constructive. This makes for a good market where share positioning and operating efficiency will yield a better probability of returns than market forces alone. North America was positioned just right for evolving market trends.

The Gulf of Mexico shut down (inaudible) of profitabilities to the tune of about $0.01 a month, or $0.03 a quarter. People and equipment will not be -- will be reassigned to other North American international markets. We do not plan any layoffs. We will maintain our infrastructure.

We believe that even once the offshore ban is lifted, we will see subdued offshore drilling activity in the US. Conversely, onshore activity in the US and around the globe will benefit. At the margin, focus and attention will move onshore.

Canada (inaudible) outlook insofar as the oil, heavy oil value segment, is a far greater percentage of the overall market. Heavy oil activity has been suppressed over the past few years. There is catch-up opportunity on the way. Expect Canada as a whole to be particularly well behaved, volumes will strengthen in (technical difficulty) '10. Canadian Shale plays will be very important not until late '11 and '12 because infrastructure built up that is needed to turn the Canadian market to essentially an oil play (inaudible).

International -- Mexico is settling down after months of great turbulence. The budgetary constraints have brought a (inaudible) Chicontepec, Tampico, and Veracruz regions to a near halt. The southern and offshore plays, (inaudible), Cantarell, and KMZ are sustained. With one-half of the drilling market gone, we've scaled down our operation to a modest fraction of its prior peak. We are proceeding with the (inaudible) reassignment of equipment and people to other markets of Latin America, North America and to some extent Eastern hemisphere.

Completion and production related activities are continuing while our drilling operation in the South is outscaled.

For the second half of the year, we expect out of Mexico lower revenues but higher margins making that country's overall impact in the second half benign or settled. The outlook for '11, though, is likely to be constructive as some recovery occurs.

\Brazil, Colombia, Ecuador, Argentina and Peru should have robust growth in the second half of the year and '11, with Brazil and Colombia topping the list. We expect both Brazil and Colombia to lead '10 and '11 growth in Latin America with strong performance, Brazil being the clear leader and a contender company-wide for growth leadership.

Adding the pieces together suggest for Latin America a near flat topline in second half of the year with good margin recovery throughout the year. The outlook for '11, both market and our own performance, suggests an acceleration next year.

For the Eastern hemisphere, year-to-date the Eastern hemisphere topline growth was 11.4%, '09 on '10, likely a best-in-class performance. Despite this, we are behind where we would've expected to be for the first half of the year. This reflects a combination of weather, idiosyncratic country events and the general pace and intensity of our class modulation of activity.

Notwithstanding the relatively slow start, our Eastern hemisphere prognosis is strong for the second half of '10 and should progressively accelerate in '11.

Our final growth rates of '10 will depend on the efficacy mobilization and the timing of client startups. Regardless, we'd expect it to remain the industry's best in class and at steadily improving margins.

We also expect, by Q4, the Eastern hemisphere to represent about 50% of Weatherford for the first time in our history. This [mark-up] progress for our secular Eastern hemisphere shift is not just a byproduct of our likely 2010 performance, but a combination of six years of focused efforts to develop our international business.

As a reminder, for the five years '04 through '08, we grew the Eastern hemisphere at a compound rate of 28% per annum. In the very strained environment to 2009, we did not shrink in the Eastern hemisphere, posting a nominal 1% growth.

For the second half of 2010, Russia and the Middle East would have the strongest performance. Within Russia, part of the progression will be market-driven with the beginning of the recovery in market activity in the second half of this year. Selected (inaudible) countries should also show strength. Sub-Sahara Africa should see most of its growth in the land market where traditional strengths lie. Middle East second half will grow primarily in Algeria, Oman, Qatar, Kuwait and Iraq. Asia-Pacific should grow strongest in China and Australia.

Margin improvements in Eastern hemisphere are expected to be driven by fixed-cost absorption throughout the second half of the year.

(inaudible) synthesis, on the balance sheet, there are no changes to our CapEx plans for the balance of the year. The emphasis on more efficient use of capital, whether working capital or CapEx, will continue with the same drive.

We are laying out early plans for 2011 capital commitments and associated growth. As Andy mentioned, we expect Q3 to be just about (inaudible) core estimates or circa $0.16. But that's including the Gulf of Mexico curtailment. In other words, we would suggest slightly above our existing estimates, irrespective of the erosion of circa $0.03 in Gulf of Mexico related losses in Q3.

Lastly and as expected, the Company will operate in 2010 with positive free cash flow, excluding one-time capital outlays, be they acquisition or legal settlements.

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

(Operator Instructions). Ole Slorer, Morgan Stanley.

Thank you very much. Congratulations, Bernard. You exceeded expectations and you generated free cash flow in the same quarter.

I think it's about time, don't you think?

Yes, very much welcome. Andy, could you give us a little bit of a guidance for development in net debt for the rest of the year? Do you think you will continue to generate free cash flow here?

We do. So without trying to be coy with everybody, I tried this year just to promise you that free cash flow we expect for the year to be positive. We are positive 55 as measured by a reduction of net debt through the first half of the year. Just let's leave it as we expect to improve upon that throughout the remainder of the year.

Bernard, if I understood you correctly, pricing at this point, this is in North America [phenomenally] in a handful of stimulation related product lines. But international margins, how much higher can they go from here before you get the help of pricing?

First, on [Nam], it's stimulation as in stimulation directional and completion, you're absolutely right, so (inaudible) lift. On the international side, we've -- at the end when you account for all these pricing reductions that we experience, it's a solidly double-digit number. So, we lost anywhere, depending on the market and product line, anywhere from 10% to 20%. And so if you take 15% as a midpoint -- and it is a simple vacation -- one would argue that -- one would try to get that back. As to when, I don't know.

My question was rather while you are operating in an environment of let's say more limited pricing power, how much more efficient can you make your infrastructure, or how much higher can you make your (multiple speakers)?

It's just absorption. It's just absorption really; it's absorption. With absorption, you have a -- I think, for the next 30% of volume increase coming out of international infrastructure, the incrementals, once everything is started up, should be very good simply because our fixed-cost structure -- and we know this -- is larger than the present volume would require. It will not be larger if you add 30% volume on it.

Okay, so you should get the usual incrementals.

That's correct.

Could you talk a little bit about your bidding now? Are there any areas around the world where you are (inaudible) seeing that you're able to raise prices let's say on projects that might start later this year or 2011?

I think it's too early to tell, but if I was to guess, I would say that, with the exception of Asia-Pacific, it's pretty much in most of the Eastern hemisphere where there appears to be some opportunity to be a bit less restrictive on pricing.

Then finally, Bernard, the Board of Directors issued a press release just recently or an 8-K where you made certain changes, so I wonder whether you could talk a little bit about that and whether this is expansion of the Board, whether you are trying to change the profile of the Board or the rationale for including this recipe for almost (multiple speakers)?

It's not my decision, but I'm happy to comment on it. We've added in three directors. We haven't added anyone since 2004. The three directors are -- the first gentleman is a former secretary of energy. The second gentleman, in no particular order, is a former governor of the central bank of Mexico. The third gentleman is a former representative of the United Kingdom as the United Nations ambassador. So that's what we did.

Now, why now? Simply because we hadn't done it in quite some time, and the Company, since 2004, has just about tripled in size and also increased in breadth and so forth. So it requires a larger (inaudible). That's really all we try to do. As to the background, as you can tell, it's diverse but it covers a lot of markets we operate in, and diverse also experience.

Thank you very much, and look forward to the next couple of quarters.

(Operator Instructions). Jim Crandell.

Bernard, this morning, there was a news article on the tape about Pemex presenting a 2011 budget with Finance Ministry, which was up 54%. I guess what's your reaction to this? To the extent that they get that back magnitude of the budget increase, where do you think it will be focused? Lastly, does it matter to Weatherford where it would be focused? Will you do about as well if it's at (inaudible), Cantarell, Chico or [Vergossa], or wherever it is?

I think, on the second question, the answer is yes. We have, at this point, market share and infrastructure in all reservoirs. I went through my notes probably more extensively description of the plays in the various reservoirs, whether it's Bogart (inaudible) Cantarell or KMZ because we are present in all and we have the same infrastructure and pretty much the same market share.

So number one, it doesn't -- whatever the client wants is the answer on that, we will be present.

Second, I wouldn't necessarily take the percentage requested and sort of bake it in models and things like that because those are a political process and it is really a balance between what Pemex thinks it can legitimately demand and what the political constituency will give them. But I do think -- and on that one, it is what it is -- I think the direction is positive for 2011 and thereon. After some trials and tribulations in '09 and in '10, the fact that it is a positive direction is happy.

A question about another Latin American country -- Bernard, you are running up 40% or better in Brazil this year from last year. To what extent are your gains in Brazil coming from new contracts? Is it general activity? Is it in part the introduction of new technology? To the extent that it's contracts and new technology, could you elaborate on that a bit?

It is not market. Market in Brazil will come in a powerful way, but it will come in some time. I'm talking, referring to (inaudible) plays.

But in our particular case, it is more the syndrome of us being more present in that market and introducing product lines and service lines that didn't exist in the past, and doing a decent job of business development there. So it is more us finding our place in that market, where it ought to be, given our capabilities and our technology, whereas we didn't have it before than anything else -- not dissimilar to the process we go through in the Eastern hemisphere. So that's essentially it. It's categorized our progression. You're correct, Brazil will be up roughly 40% this year or something like that, maybe a bit more.

It is a reflection also on a forward basis of professional contracts. We have approximately -- I lose count (inaudible) approximately $1.4 billion, $1.5 billion in new contracts. It's not all in one year, so let's be very careful here. My count is not correct, so it's an approximation. So it carries let's call it $1.4 billion, 1.5 billion; it carries over about four years. So you have something like that, the $3 billion to $5 billion, so take $4 billion. You've got an idea of the scale. It is a multitude of products and service lines. I would not want to go through a litany on the phone right now. Besides, I would be wrong because I would forget. But the magnitude is what matters.

Bernard, could you talk to your latest assessment or your latest estimate of the timing of awards to oil service companies by the majors in Iraq?

I'd hoped you wouldn't ask. Well, first of all, very much like we expected, it will be lumpy and it will be slow. There will probably be two or three sort of IOC awards this year would be my guess. It's a good guess, don't take it (inaudible).

Now, what you don't see are smaller, less dramatic refinements that were not called for drilling, but rather production or work-over activity that will not make quite as big of a splash. I would tell you again, on that market, it is a market that is obviously very important, no question. There are security issues which are highlighted by an uncertain political process.

Also, it is a market in which our peers will also be present and do very well. It's not a sort of -- it is not one where we will seek to do more than having our share, and you try to operate well and keep the clients we have there happy. So I'd (inaudible) the same way from the very beginning; I won't change. Again, I think three awards between now and year-end would be today, the way it looks, it could be more, or depending on the political process, it could be less. So Jim, it's hard to be quantitative about this. What you have to focus on is that, directionally, it's a very important market, assuming there is some measure of reasonable political process and (multiple speakers).

Bernard, my final question, could you -- you highlighted Russia as being an area of strength. To what extent in Russia is the reason for your improvement that you're now being able to push tools and services through your infrastructure that you acquired with TNK, and to what extent is it a result of you expanding your customer base beyond TNK in Russia?

I think the score -- the financial scorecard in Russia has obviously now become good. But I think operationally it's mixed. I think the integration has gone well. It's been hard work, but it's gone well, and it never finished but it's about as finished as I would've hoped it would be at this time. So it's gone very well.

I think we have not progressed very well in terms of selling more parts and services at TNK, maybe take some more time. On the other hand, we've done rather well and better that I would have expected at selling parts and services different, so a basket, to other clients. I can't really point to a reason why except the fact that we've become, with our infrastructure, very legitimate as a service provider in Russia. We were sort of less legitimate (inaudible) in our infrastructure. So we have progressed very well with three clients that I can think of. And that is what is driving in many respects the performance, together with the integration.

Okay that's it for me. Thank you.

(Operator Instructions). Kurt Hallead, RBC Capital Markets.

Good morning. So, Bernard, I was wondering. When you look at the progression in Latin America, and you delineated where your opportunities do lie, I was just curious with some of the changes that you've made in Mexico in redeploying equipment and reducing cost. What was the impact on the second-quarter numbers from those costs? Can you refresh my memory as to how much of those costs in total were incurred in the first quarter versus the second quarter?

Well, I would be very reluctant to give you that actual number. I think (inaudible) be even more reluctant than I will be. But I would say this -- we've had a very hard time in Q1 and in Q2 on and around Mexico. You think for a second that we had 50 strings running in Q4 in Mexico. In Q2, we are running 10 strings. Now, I think 10 is a smaller number than 50. Having been in the business quite some time, going from 50 to 10 -- and strings, to be clear to the audience, strings would be a rig with the entire suite of well construction, products and service lines, all the way down to completion and stimulation, let alone artificial lift. So it is a rather massive exercise. So it has been no fun in Q1 (inaudible). Can you put no fun in your model? No. But that's all I'm going to give you on that. But the no fun is an indication that it was difficult. It was more difficult for us than any of our peers obviously, because we are the ones with the largest infrastructure and the largest market share in Mexico. Now, it's no one's fault; these things happen. But it's no fun.

Now, also I wanted to get a general sense from you. Clearly one of the positive elements, as it relates to the Weatherford story, has been the growth in the Eastern hemisphere, especially the entrepreneurial element of it. The drawback on that is there's been some critique relating to free cash flow generation which I think you've already addressed. So on a go-forward balance -- on a go-forward basis, two things -- I notice no specific reference to that 30% kind of target on the Eastern Hemisphere of growth, if you could give us an update on that.

Then secondly, what's the strategy and tactics going forward? Do you think you could strike a result balance between growth and profitability and free cash flow generation?

That's what we are trying to do. We certainly are not trying to do away with entrepreneurial drive and growth culture, no. Why would we want to do that? No.

What we are trying to do, and maybe we will be successful, is to strike -- you chose the right word, " balance", between a more intelligent use of capital as opposed overly aggressive use of capital and successful growth. Successful growth doesn't really mean doing it with (inaudible) of capital. It also means good operating performance, as in service quality which, if you are overly aggressive, not only do you tend to use capital maybe inefficiently, but at the same time you may have service quality problems, which in turn are very expensive to fix and don't do you any justice with the client. So we're trying to find that balance between not only efficient use of capital but also service quality.

Do not read into that any weakness in our growth culture and so forth and so on, not at all. We are just reasoning very much like owners who look at what we do well. We do growth well. Not everyone does everything well, and we don't do everything well. We do growth well. We're trying to do intelligent growth well. That's it.

I don't know out the 30% number. If I had to guess, I'd say we're closer to 20% than 30% simply because the first half was low. I don't know. Whatever we don't do in the second half of '10 will be pushed over into '11, so that's how it's going on. So I don't really know. So it's very hard to give you metrics when I don't know. If I give you a metric, before I was wrong insofar as first half was lower.

Great, that's it. Thanks.

Bill Herbert, Simmons & Co.

Good morning. Back to Mexico and in addition with respect to the outlook for next year and how you respond to it, you've gone from 50 strings to 10, yet you've maintained your infrastructure.

The first question on Mexico, how easy and how quickly can you rig back up? Along those lines, you've gone from 50 to 10 rigs. How may stack rigs do you have in-country and are you going to keep those there?

I think the last question, the answer is obviously too many (inaudible) very quickly. But I think a fair estimate would be a little over 20%. As I said, it's no fun to your colleague just a minute ago. That's that part of the question.

An indication of 2011 activity will be helpful in knowing how we allocate things, although we will be, again, careful.

What was the first half of the question?

How quickly can you rig back up? You've slashed your cost structure significantly. I assume your employee base has been reallocated or cut as well. Yes.

Yes, yes, yes. We still have (inaudible) -- we still have a sizable business in Mexico. What is painful for Weatherford has been where we were and where we had to be. But today, we have a sizable market in Mexico, and a sizable organization in Mexico.

I'd love to give you the employee count. As of today, I don't have it. But -- and I could give that you off-line, I don't number. I should remember, but like right now, I don't remember. We've been moving just about every single month. Though we have a sizable infrastructure, a sizable organization scaling back up, I think a couple of things. I think, first of all, a few things. I think, first of all, let's make sure that we have an increase in expenditure. I realize this is -- you move directionally, so it appears that therefore it will happen. But let's make sure from our standpoint that there is going to be indeed that the political constituency in that country will allow the budgetary expenditures to go up, because we don't know yet.

We watch this very carefully. So before it even hits the wire and everything else, we will know that the budgetary expenditures will go up by some number. We will not know the exact number; we will have a sense. At that point in time, we will probably make whatever prudent moves are called for to expand the organization or to prepare the expansion of an organization or make some pool of people available and so forth.

So the answer to your question is I don't know. It depends on the scale, Bill. But what I will say is that, as you would expect for people that have been gone -- that have scaled up dramatically and scaled back down dramatically -- because remember we went from 0 to 50, we were not 50 for the past 10 years. We have probably gained a certain muscular flexibility in terms of handling volatility in that market.

Now, as far as our thinking about your question, I don't know. It depends on the rate, let's see if it happens, all that kind of good stuff. But if anyone can do it with some measure of flexibility, it's probably us.

With respect to business model, in some corners people are inferring that Pemex is moving away from IPM. Is it as important to have the rig infrastructure there?

No, couldn't care less. Really, I'm not -- let's be clear. I think the process of using rigs as conveyance, together with parts and services associated with it, is, in our minds, a legitimate model to lower the cost structure to exploit oil and gas. It is one of our trademarks. However, if (inaudible) doesn't want to use it, it's no religious issue for us. We will reassign the equipment or -- the wonderful things about rigs also as equipment is that it can be traded away also. It's not -- it's a question of whether you need them or not for the purpose of exploiting that combination model and lowering the cost structure. If it's not popular, don't do it. No worries at all.

Now you made the comment towards the tail end of your summary comments with regard to laying out early plans for '11 capital spending. Do you hazard a guess as to what capital spending is going to be for next year?

Look, I'll give you a number, but (inaudible) is going to change. Right now, it looks more like $1.5 billion. But Bill, actually in three months, I may have a different -- I will probably have a different number. But it's rather elaborate as a process. Without being overly bureaucratic, we look really at every slice of what's out there and do the best we can to see what is necessary. We also have a pool of equipment that -- within the Company which is not being utilized, and that also takes priority. So all of these things are factored in. So that's today sort of the guess, but please -- it's early.

Got it. Final one from me -- back to international incremental margins, you made the comment that, with further volume gains, you benefit from absorption, and thus we revert back to normal international incrementals. So I'm trying to define "normal". Historically during the expansionary phase of the international cycle, you've generated incremental margins of call it 25% to 35%. Is that what you describe as normal, and that's what you're expecting and targeting going forward?

I think for now that's fine, Bill.

Thanks very much.

Jeff Tillery, Tudor, Pickering, Holt.

Good morning. Andy, with the revolver coming due the spring of next year, could you just update us on your thoughts with regards to that and kind of timing on getting that re-upped as well as size and pricing?

Yes. Well, I won't give you the latter two things. Let's wait until we actually pull the trigger and go market a deal. But it's expiring in May, as you point out, and so I think that, from a timing perspective, we don't want to be cute about things. Corporate spreads have been coming in here recently with the improved credit environment. There've been some things that have hit the sector, obviously Gulf of Mexico and whatnot that are not too popular. And maybe the recent progress in resolving the spill issue maybe will bring spreads tighter. But again, without being too cute, I think that it's safe for you to assume that probably before the end of the year we will take care of that short-term piece of our financing. That may be just through renewing a deal that is at the same size; it may be a larger facility, or it may include a piece of fixed-rate longer-term debt. But you understand as well as I do all of the variables that are there, so you will have good news on it and -- I think before the end of the year.

Great. My second question, just on one product line -- chemicals and stimulation showed pretty tremendous growth, over 50% sequentially. I'm thinking that couldn't have all been US. Was there help from Russia in that as well? I'm just trying to understand some (multiple speakers).

There is a significant -- there is a significant component, which is international. The fleet in the United States boasts between 400,000 to 500,000 horsepower. That's one thing. The fleet internationally boasts between 100,000 and 200,000 horsepower. And it is growing international. Indeed, Russia is one of the plays; we're not the only one. So you spot (inaudible). In that number, product lines, you do have a significant component, which is not stimulation also. But otherwise your question is right on point.

Okay, so significant help international this quarter in that business line?

Yes.

Thank you guys.

(Operator Instructions). Dan Boyd, Goldman Sachs.

Bernard, I was looking at the Middle East/Asia-Pac margins. That's the only area that was a little bit weaker than I think we expected. Presumably, there's a lot of start-up costs in Iraq for that. Can you give us an update of where are you in that process in Iraq?

It's not Iraq only. You've got about six or seven other countries, make that seven. So the mobilization, it's not only strings also; it's a broad range of parts and services that are moving around. You have a cutoff dates in quarters. Either you're lucky or you're not. So you had a little bit of everything this quarter, which (inaudible) a lot of mobilization of start-up expenses and you had also I think situations where you have parts and services that are where you have a fair amount of cost expense and no revenues. And it is what it is; it happens. Which suggests that the numbers that are put forth by Andy, that about I think the $0.03 or so that will be added coming out of Eastern Hemisphere in Q3 are reasonable.

Presumably, those startup costs mean increased visibility on revenue growth?

That's correct.

Can you help us put a magnitude around what you're investing in or the startup costs today, how quickly that starts to translate into revenue, when we could expect to see that?

Of course I can, but I would rather not on a conference call. [What] I think is probably better handled off-line are discussions of models with Andy. He is quite prepared for that.

Okay, I'll be ready for those then. Thanks a lot.

Brad Handler, Credit Suisse.

Let's see, a couple of unrelated questions. First, I guess, coming back to Iraq, I think you had mentioned going into 2010 that there was -- I think it was $300 million or $350 million of revenues that were contracted. I guess I'm just curious. Are the revenues tracking consistent with that expectation thus far this year?

Yes, well, they certainly -- well, they are, Brad, yes. Certainly in the second half of the year, Iraq will be running at or higher rate than that.

Okay, thanks. Then the unrelated follow-up is -- I guess I am noticing, thanks to the cash flow information you are providing, about $80 million in divestitures of business year-to-date. Maybe you could talk to us please a little bit about kind of some of where -- what businesses you are divesting, how that -- if there is some (multiple speakers) --?

It's equipment. You heard my comment to one of your peers about (inaudible) play, people don't want IPM, and so on and so on. Remember, one of the comments I made is that we are not wedded in any way or form to pieces of equipment. One of the things about some of them is they are highly tradable. I think what you're referring to -- I'm turning to Andy -- is probably equipment, miscellaneous equipment [in] the market. Isn't it, Andy?

Yes.

So some of that stuff you'll see, Brad, in all markets going on with us. Not necessarily at a loss or a gain, more that we don't need the equipment. It's more cash than anything else.

Makes sense. Might we expect to see that to continue to see that?

(multiple speakers)

Oh, yes. Sometimes we may stop; sometimes we may have more of it. It really doesn't have anything to do with overall corporate decisions. It's far more to do with the logic of the individual market and the pull equipment. More and more, we look carefully at the pull equipment we have. Pull equipment is nothing more than capital. It's capital in steel form, same thing. So we look at it and with that look, (inaudible) trying to be a little more efficient as to the use of capital without losing our aggressive nature, perhaps, but be more efficient. That is all it is.

Fair enough. Thanks very much.

Mike Urban, Deutsche Bank.

Thanks, good morning. So you did a great job in moving forward on Russia and the integration, getting some volume through there. You did express -- I guess I don't know if disappointment is the right word -- but in the margin I guess you could do better there. Is that simply a function of continuing to ramp up the volume? Is that doing a better job, as you suggested earlier, of pulling through more customers or a little bit --?

Yes, everything you've said. There's also the -- what we very seldom mention, which is that when the economy went into a tailspin a little over a year ago, pricing really crashed in Russia, pricing. So you have a pricing issue of great magnitude in that market. Now, will it come back? That is debatable. In the meantime, you may get good, good, good margin improvements the old-fashioned way of simply with absorption, which is what we intend to see happening. Pricing is sort of the other factor. Again, pricing was hit hard in Russia a year, year and a half ago.

Got you. Shifting gears a little bit, sub-Sahara Africa was something that you mentioned for the first time in quite a while, maybe the first time that I can remember at all. It's been a relatively small business for you in the past. Is that something that is going to be more of a focus for you or we should expect to hear more from that going forward?

We've opened our -- we run regions really in regions. We don't run them from any corporate center, be it Geneva, London, Dubai or Houston and so forth, or Rio de Janeiro. We run them locally. We've opened our headquarters in Johannesburg about a bit less than a year ago with a big emphasis on that market. It's paying dividends. This is much of a land play for us as it is an offshore play. We have both. It is a market that doesn't move quickly, but is a market where margins of exploitation are good from (inaudible) standpoint. Now, that got our attention. You're absolutely right, Michael; you're very observant that we traditionally have focused a lot on North Africa and the Middle East, not on (inaudible) Africa, sub-Sahara Africa. We are focusing on it now.

That's all for me. Thank you.

Robin Shoemaker, Citigroup.

Thank you. Bernard, I just wanted to ask you about going back to North America. I guess you inferred that about 60% of your business did not benefit from price increases, the 40% that did. So is that true across all basins? Are you finding that your North American product and service lines are differentially priced according to basin? Is there any prospect for that 60% that has not achieved price increases to get those under the scenario you envision for the second half of the year?

First, well done for paying attention to comments and the notes. First of all, remember I was reporting events that took place essentially in Q2 and at different times in Q2. In Q2, you had breakup in Canada. So right there, you're good not going to get pricing increases during breakup. That doesn't mean you can't get them after breakup. Right? So that's fair. So the first comment is a look-back comment, so essentially now you have moved away from Nam, essentially the Canadian play, at least for Q2. Remember, this is, again, not perspective comments; they are retrospective comments. That's number one.

So within -- so it's a percentage of that to begin with. So now you're dropping from 100% to a percentage, whatever was the US, net of Canada as a percentage of Nam in Q2.

Second, within the US, you have early starters. I think the markets that are benefiting, they're obvious. It's oil and shales.

Now, one of the comments that I made is that 80% of our market exposure now, that number is probably going to go up simply because the Gulf of Mexico is coming down. But 80% of what we do in the United States honest-to-goodness is oil and shales. It's just the degree legacy, your oil side, but its purpose though is in the shale side, which is one of the things we did about a year, year and a half ago, systematically moving those markets.

(inaudible) these also were less present in conventional gas market. So I think the oil and the shale-related plays are the ones that are going to be the most generous. Within that category, the ones that are going to be the most generous, in our judgment, are the shale plays that have gas and associated liquids. Now, you can figure out which ones they are; I don't need to tell you on the conference call. But when you have a play with shale gas and a nice volume of liquids, at the end of the day, the net back off on the gas price is extraordinarily low. So the economics of the reservoir allow the clients to be perhaps a little bit more generous.

Okay, got it. Just let me ask you one other question then related to the deepwater market and the disruption we've had there, which you've commented on in terms of your earnings impact. But in terms of the longer-term outlook for deepwater and its importance to Weatherford, are you -- do you -- have you taken a more cautious view on that whether in anticipation of regulatory changes or shifts in the mix of operators in deepwater? How important is deepwater to Weatherford five years from now versus today?

It will be less important. I think it's inescapable that sort of tell you what we think. We could be wrong of course. The following will happen -- the weight regulations means that's coming, understandably, in the United States and by osmosis some of the other markets, [completely] in the United States. The deepwater market in the United States is particularly important at this size. It means essentially that the time to get the projects done will be longer and the cost to do things will be greater. It also means that fewer people can play in that market.

You understand all of this simply because the liabilities are now essentially open-ended. So very few people can afford to play in that market. So now you have fewer people. So think the process of selling the properties and that sort of thing, which will take place, because some players simply can't stay in that market. So much longer, more expensive.

By (inaudible) of osmosis, it means that some of the plays abroad will be impacted to a lesser degree than they will be. So our view is that, all things being equal, that's an important -- all things being equal is the important statement. Deepwater as a percentage of the oilfield service market will go down, not only now because we've got an extra moratorium, which is extreme, but on a secular basis will go down. That therefore the onshore land plays where the -- which means both the land plays where there is potential, now you think now where they are, and also the land plays and the unconventionals -- and unconventional is not only shale; this is heavy oil; this is [CBM], are going to have more impact. That's our view.

(technical difficulty) disappear, not at all. But typically on a relative basis, they become less important. Without an exception, I think things like Brazil will happen pretty much the way you expect it to happen because I think, first of all, the reservoir in Brazil will be -- I don't want to get into the discussion (inaudible) on the phone here, but -- are going to be I think more manageable in terms of deepwater drilling efficacy, but also because I think Petrobras has been very, very much ahead of the curve in terms of processes and manners in which they organize their work. I'll leave it at that. So that will happen pretty much where you expected.

But everywhere else I believe, we believe, that all things being equal, things will take longer. In the end, that will represent a smaller percentage of their (inaudible) I fully understand the concept that in so working in deepwater, there'll be higher requirements of equipment and everything else, yes yes yes. But over the long run, still it will represent a small perception of the pie. It will not be sort of the important market it was going to be the way we envisioned it. And that is a change. So that's what we believe, at least.

Okay, interesting. Thanks for sharing. That's all for me.

To the moderator, I'm told one last question if we can please.

Geoff Kieburtz, Weeden.

Thanks very much. Good morning. One question, Bernard, but it's a conceptual one. When you were early talking about more intelligent use of capital, I may or may not have gotten it right. But it seemed like you were reflecting, if you will, some learning that has gone on at Weatherford over the last several years. I wondered if you could elaborate a little bit more on what lessons have you learned, what was -- how important was the experience in Mexico to those lessons? How is Weatherford managing its business differently as a consequence of those lessons? What do you think we will be able to see in regards to how Weatherford is managing the business differently?

I will not make it into a long answer. This is probably better answered off-line because it is (inaudible) policy (inaudible) a few things. First, Mexico was not really that germane in terms of our learning a lesson on the capital side. Mexico was enormously germane when it came to learning lessons on the operating side. Even though it was very rough ride given the ups and downs of what our clients could do in Mexico, and it was a rough ride also I think on Wall Street, we learned a lot operationally.

I am personally very proud of the work that our Mexican operation did drilling -- I'm talking about drilling efficacy, and lowering the cost curve for Pemex as quickly as we did it. So (inaudible) the drilling economics towards the end of the process were remarkable, concerning our views as to what could be achieved. So it was more of an operating I think lesson, Mexico, than a capital one.

I think the capital one, Geoff -- and you've known us for a long time -- is not a recent thing. Having been a company that has grown further and faster and some of the kinder comments, used to call us transformational. Well, the dark side of transformational is that you are immature and you don't use things quite as efficiently as your more mature peers. Certainly, we never really focused hard enough on using capital more efficiently. So I think probably it was time and sort of we were sort of mid-course in our adolescence, as we were, as an organization, it was time for us to learn a little bit better how to use capital. They are sort of reasonably easy wins, and not because we were sort of lax or a little bit uncaring before, but simply because I think, with the years and realizing where we did well, where we didn't do so well, we began to understand ourselves better. That's all it is. So it's not really Mexico or Russia or Middle East, no, no. It's just the passing of time.

Great. Thank you very much.

Thank you, and I thank you to everyone, and I think will conclude the call here.

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.