Weatherford International PLC (WFRD) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Weatherford International earnings conference call. My name is Jeff, and I'll be your operator for today. At this time all participants are in a listen-only mode. Later we will facilitate a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Duroc-Danner, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you and good morning. Andy will read prepared comments, and I will do the same, and then we'll take Q&A as usual. Andy, please?

Good morning. For the third quarter of 2010, our reported EPS number is $0.18 before excluded items. This is a $0.07 improvement over the second quarter and tops our $0.16 guidance.

Our reported number excludes the following items, which together represent an after-tax gain of $12 million -- one, a non-cash benefit of $90 million related to the revaluation of the TNK put; a $54 million charge for revisions to our profitability estimates on our project management contracts in Mexico, where the client's budget constraints triggered an activity decline to near zero and an expected modification to future drilling plans. As a reminder, the only projects we account for on percentage of completion basis are in Mexico and one project in China. The Mexico projects cover approximately $2 billion of revenues over their lives.

The change brought about this quarter was in essence due to a change in public policy in Mexico with respect to expenditures.

Third, $14 million in severance and restructuring costs, $7 million of premiums paid in connection with the tender and repurchase of outstanding bonds through 2011 and $3 million of cost incurred in connection with our ongoing government investigations. This is about the same charge that we took in Q2 related to the investigations.

Following the Q3 gain on the TNK put, a $62 million liability remains on our balance sheet at September 30. A reconciliation of all these items can be found on our website at Weatherford.com.

On the EPS side, the field was responsible for the entire $0.07 sequential step-up. North America contributed $0.08, while international operations dropped by $0.01. On a consolidated basis, revenue increased $96 million sequentially, or 4%, and advanced $384 million, or 18% compared to the prior-year quarter. North America revenue climbed 19% sequentially. Strong performance in the US land market and the seasonal recovery in Canada drove the growth. Unconventional gas, oil-directed drilling and liquid-rich plays continued to ramp.

In the East revenue declined $8 million sequentially, or 1%. Compared to Q3 '09, revenue increased $95 million, or 9%. Strong incremental performances in the UK, Iraq, Kuwait were offset by declines in Norway and parts of sub-Sahara Africa. Artificial Lift and Drilling Services were the top performers on a product line basis.

Latin America revenue retreated 18% or $74 million on a sequential basis and 36% or $189 million compared to Q3 '09. The Mexico events punished revenue by $110 million sequentially, while the rest of the region grew revenue by approximately 15% over the prior period, largely on the back of Brazil and Colombia. Consolidated operating income before corporate and R&D was $372 million, up $64 million sequentially with operating margins at 14.7%. This is a 210-basis point improvement over Q2.

Compared to the same quarter of the prior year, consolidated EBIT before corporate and R&D was up $138 million or 59%. By region, in North America operating income of $202 million stepped up 56% sequentially and margins climbed 430 basis points to 18.3%. Incrementals were just north of 40%. Increased onshore activity in the US combined with Canada seasonal recovery allowed for improved fixed cost absorption and further pricing gains. In the East operating income was down $12 million sequentially with margins down 100 basis points to 11.7%.

Europe, West Africa, FSU operating income declined $2 million sequentially with margins relatively flat versus Q2. In Russia we booked a one-time $6 million negative adjustment after finalizing third-party asset valuations in connection with the TNK-BP acquisition. This is included in our recurring results.

Middle East/Asia-Pac operating income declined $10 million or 13% and margins slid 170 basis points as start-up costs burdened the expense line and operating delays told revenue growth. Latin America profitability increased $4 million and margins expanded 310 basis points to 12.4%, partly on the back of the decrease in revenue due to the project adjustments.

Cash and capital -- during Q3 we generated EBITDA of $545 million with D&A running at $269 million. CapEx was $243 million for the quarter net of $25 million of lost-in-whole revenue. Free cash flow was $85 million, defined as changes in net debt. This is after payment of approximately $25 million in bond issuance costs and tender premiums and despite cash interest and taxes exceeding book expense by approximately $72 million. Through the first nine months of the year we are $138 million free cash flow positive, which is a direct reduction of net debt. As of the quarter end, our ratio of net debt to net capitalization stood at 38.8% with total net debt at $6.3 billion. All free cash flow was applied to debt repayments.

We completed a $1.4 billion debt offering in the latter part of September and used the proceeds to pay down our short-term borrowings on our revolver and complete a $167 million tender of senior notes due in 2011. This week we expect to use the remaining proceeds to repurchase a combined $533 million face amount of two additional series of bonds.

On October 15 we closed on a new three-year, $1.75 billion revolving credit facility, which is of equal size to our prior facility. Assuming a September 30 close date on this facility, we ended the quarter with cash and amounts available under committed credit facilities of $2.7 billion.

Looking forward to Q4, we expect EPS performance of $0.23 with a $0.06 improvement from operations partially offset by a $0.01 increase in interest expense. Operational improvements should be fairly evenly split between North America and the international markets, both in terms of revenue and profitability.

I have the following nonoperational item updates for you for 2010 -- D&A, $1.05 billion; corporate expense, $175 million; R&D expense, $212 million; net interest expense, $400 million; other expense, $47 million; minority interest expense, $17 million; capital expenditures, between $1.0 billion and $1.1 billion; and a tax rate of 18% to 19%.

I will now hand the call over to Bernard.

Thank you. I'll follow his comments on Q3. Q3 ran at $0.18. North America made the quarter. Both the US and Canada were very strong, driven by oil and shales. Oil unconventionals represent 80% of our North American business. This is by legacy and by design.

Latin America ex-Mexico was also strong with continued sequential growth, both revenue and margins. Brazil and Colombia throughout the year, not only this quarter, but throughout the year, delivered exemplary performance. Russia was strong in both revenues and margin growth. Russia managed a strong performance sequentially in spite of a one-time $6 million depreciation catch-up. We finalized third-party valuations of acquired TNK assets in the quarter. The $6 million just brought us up to date for one year's worth of higher asset valuation.

The North Sea was flat, with the UK offsetting weakness in Norway, nothing meaningful other than the ebb and flow of quarterly deliveries. The quarter had also some headwinds. Mexico was devastated by the market's abrupt curtailment of expenditures in all reservoirs, except in the South, Villahermosa and offshore. To put matters in perspective, we ran, in total, 50 strings, 5-0 strings, fully integrated in Q4 '09. We are now down to three strings country-wide, specifically in the Villahermosa in the South.

As a result of this obvious client constraint and what can be best described as a change in public policy, we had to severely adjust the assessment of all ongoing project profitability. Having now lived with severe volatility in this market, we believe we took a conservative view of future activity and profitability.

Sub-Saharan Africa declined volume and margin on mix. MENAA -- Middle East, North Africa and Asia-Pacific -- had flat revenues, but with eroding and margins, due primarily to start-up expenses and operating delays incurred in a number of places. Many of them you are familiar with -- Algeria, Bangladesh, Iraq, Kuwait, Libya, Oman and Turkmenistan, to name the most important. The region suffers from a disproportionate amount of start-up expenses and likely will continue to absorb these costs through the first half of next year.

The (technical difficulty) sum of all this resulted in an overall 200 basis point rise in margins. North American margins rose 430 basis points to 18.3%. International margins were essentially flat; they rose 10 basis points, essentially flat at 11.9%. But this reflects a divergent trend. Latin America rose 210 basis points to 12.4% in spite of a severe drop in Mexican activity, reflecting the strong (inaudible) performance of the other Latin American markets. Europe, Russia and sub-Sahara Africa were flat, bucking the trend. For reasons I mentioned before, MENAA, Asia-Pacific declined 170 basis points to 11.3%.

Clearly, international margins are lagging the recovery, the progress made by North America, which is typical at this early stage of the cycle. The international markets are slow to recover, and when they do, margins lag the absorption and start-up of mobilization expenditures. That is actually typically how it operates.

As a point of reference, the prior operating income high in North America was just under 30%, 29.8%, while the international peak was 25.2%.

Follows the product line summary for the quarter in millions of dollars. I'll try to give these numbers as clearly as I can. Drilling services for the quarter, $429 million; Artificial Lift systems, $422 million; Well Construction, $373 million; Chemical and Stimulation, $334 million; Integrated Drilling, $230 million; Drilling Tools, $201 million; Completion System, $187 million; Wireline, $155 million; Re-entry Fishing, $149 million; and Pipeline, $55 million.

Forward views -- North America -- in US, land activity is likely to flatten out. We don't expect the market to provide significant volume gains in '11, but we don't expect any weakness, either, overall. There is likely to be substitution of conventional gas segments and further strengths in oil and shales, particularly the gas and condensate plays. Some product lines will do better than others. Progression or decline will not be linear across all product lines. We expect high-performance in our case to be Artificial Lift, Stimulation, Directional and Completion. Pricing trends will be selectively constructive. This makes for good markets where share positioning and operating efficiency will yield a better probability of returns than market forces alone.

I think, in North America, we are positioned just right for changing market trends. I will remind the audience that our largest product line in North America is Artificial Lift. Artificial Lift, which is a pure play on oil, represents 25% of North American revenues.

On the other side of the coin, our entire stimulation product line and a large segment of directionals and completions are positioned essentially on shales. We believe that, even though the offshore ban is lifted, we will see subdued offshore drilling activity in the US through the near-term. Canada has a distinct outlook insofar as the oils, heavy oil, that is. The segment is a far greater percentage of the overall market at this point, and heavy oil activity has been suppressed over the past few years. There is some catch-up activity to be expected in Canada. We anticipate Canada as a whole to be particularly well-behaved. The volumes will strengthen into '11 and even more so in '12. Canadian shale plays will be very important, but not until 2012. There's infrastructure buildup that is needed to turn the Canadian market into essentially an oil play since -- until then.

International -- overall, our assessment of the international outlook for '11 is constructive. It will be increasingly strong as '11 progresses. This will lead from '12 thereon to periods reminiscent of '06-'07. I realize the intangible progression initially is a slow and laborious process, and yet it requires patience.

In Latin America the prognosis for '11 is good. In Mexico we are proceeding still with the early reassignment of equipment and people throughout the markets of Latin America, North America and to some extent Eastern Hemisphere. At this point, for Mexico we are left for the balance of the year with offshore operations, production-related activities and our drilling operation in the South. As the year winds down we will start more offshore contracts and gradually, from January thereon we will reboot operations in Burgos, Poza Rica and Veracruz.

Brazil, Colombia, Argentina and Peru should have robust growth in '11, with Brazil and Colombia topping the list. We expect both Brazil and Colombia to lead '11 growth in Latin America. It will be one of the highest performers in the Company. Adding the pieces together suggests Latin America should have a strong year in '11 with essentially the Latin American market continuing to do well and Mexico healing.

The Eastern Hemisphere is just beginning its recovery process. Russia should have a good outlook in '11, both volume and price. Activity gains may be as much sidetracking and production-related as development drilling.

In Middle East, North Africa, Asia-Pacific we have contractual commitments in hand and have initiated start-ups as per my prior comments in a number of countries -- Algeria, Bangladesh, Iraq, Kuwait, Libya, Oman and Turkmenistan. We most likely have more to come. We expect bidding and contractual commitments to accelerate in the quarters ahead. This implies a solid improvement in '11, but a more -- a quantum surge in '12. There are early signs of client commitments emerging also in East Africa, Asia and the North Sea. True, there are a number of other Eastern Hemisphere markets that haven't initiated plans or commitments for an increased activity yet. There are, though, no markets showing weakness. Eastern Hemisphere countries are either on the move, albeit with the usual initial slow rate of progression, or holding steady.

Our final growth rate for '11 will depend on the efficacy of mobilization and the timing of client start-ups. Regardless, we would expect it to remain the industry's best in class and at steadily improving margins. Margin improvements in Eastern Hemisphere are expected to be driven by fixed cost absorptions and the gradual conversion of start-up costs into operating business.

[Final] (inaudible) is very, very short, the emphasis on more efficient use of capital, whether working capital or CapEx will continue with the same drive. As per the press release, our first assessment of '11 is on and around $1.30, 3-0, reflecting roughly a 20% top-line growth and 35% incremental year on year.

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

(Operator instructions) Jim Crandell, Barclays Capital.

Bernard, first question is about Iraq, sort of a three-part question. When do you think we will get to phase two in Iraq, which has a more rapid ramp-up? What sort of a ramp-up will we see? And lastly, what in this phase do you think will be the most important determinants of who gets the business? Will it be who won phase one, or will pricing be the key differentiator? Or, will there be so much business if this all works that it really doesn't matter; it will test the capabilities of the whole industry?

I think -- well, first of all, I think in a way there will not be a phase two. There will be a -- it's a continuous function as opposed to a discrete function. There will be a series of contracts tendered and issued and a series of other businesses that don't get the same limelight as the drilling tenders that will be issued continuously by the 10 different consortiums. It will be uninterrupted, and so you have to presume that the rate of operating increase and the rate of business development is going to be a continuous process. That's one.

Two, as to the rate, the rate at which it will be given out is limited by the process itself because it's a cumbersome process for the consortiums, for the clients. And then the rate of ramp-up itself also is limited by the operating difficulties and ramping up in Iraq.

Let me be a bit more substantive, because I've told you things that are generic so far. As to the answer to your third question, the basis of competition, best I can tell, in Iraq over, say, the next two years -- in my judgment it's always pricing, of course. But it will also be quality, meaning the efficacy, the ability to drill faster, the ability to provide intervention that's more effective as measured by nonproductive time. That will be as much of a criteria for competitive advantage as pricing.

I would also say that, absent issues of security, I think the quantity of work to be done is such that the notion of competitive intensity is probably not as troublesome in that market as it might be in other markets, meaning there is enough for everyone to feel that they have more than they can handle.

When do you think, Bernard, that the larger fields like Rumaila and West Qurna and Zubair and Majnoon could get up to 10 rigs or more apiece in those fields? Is that a 2012 event, in your opinion?

Well, let's take Rumaila, to begin with. Rumaila, we have already, ourselves, three strings. We're likely to have a fourth string commissioned there. Within Schlumberger and our Chinese peers, we probably, by the time they gear up to the level they are going to, which is, if I remember correctly, three and three, unless I'm mistaken, three and three, and now something like four, I think you end up at 10 already in Rumaila sometime, I'd say, in the early months of next year. Remember, we are at three already at Rumaila ourselves, and it is possible that we may have to put up the fourth one. So you would be at 10 already in Rumaila, just as a point of fact.

Zubair and Majnoon and West Qurna are the two -- West Qurna and Garraf and all these fields -- Jim, I think you have to probably look at the end of next year for these fields to have significant operations, really turning with some degree of efficacy, although the client is in a hurry. I don't know if one would say that all of them would be at 10 strings; I don't think so. So I think, then, you probably have to look into [2000] and the following -- 2012 -- got to get my years right -- for those various fields to be able to reach that level. And this is very imprecise because, again, it depends on the ability for the country to digest that much activity increase. It also depends on security situation.

Ole Slorer, Morgan Stanley.

Andy, I wonder whether you could walk us through in a little more detail your assumptions when it comes to the earnings forecast you made for the fourth quarter and the full year next year.

I think, Ole, so in terms of the incremental improvement of $0.05, again, I think $0.06 will come out of operations, looking into Q4. Again, I think, both on revenue and operating income, that should be fairly evenly split between North America and international. Now, that was our expectation going from Q2 to Q3, but what we ended up with was an outweighted performance in North America and a weaker international performance than we had anticipated.

So I've not specifically and decidedly not tried to split that for you in one area versus the other. As you look forward into '11 from '10, and realizing, in essence, how strong North America was right now, that obviously has an up impact on North America's prognosis. We don't expect any particular weakness. Yes, we may see rig count down, but in terms of the spending intensity we could see that fully picked up and make up for a lower rig count, possibly, in North America next year, with good incrementals, again, on absorption and pricing gains. We seem to be doing very well on that, on the back of the cost structure adjustments we made over the last 18 months.

And then internationally, it really -- I think you can get at it in a number of different ways, although -- and it's depending on your view. Our particular view is that the international business looks like something on the order of 20% top-line growth with north of 30% incrementals, in '11.

I'll add a couple of things, Ole, from a -- one is on North America. As much as the quarter was very good in North America, we still only are at 18% margins on the operating income level. And the reason I mentioned the prior peak is that historically -- historically, for what it's worth -- history may or may not repeat itself. But historically, our prior peak was 30% or 29.8% in North America at the EBIT line. And normally, in all cycles, at least for as long as the Company has been around, we find a way to cross the prior high. Will we this year? I don't know. But that's -- so, in other words, we have a ways to go from 18% to 30%, just to go back to where we were. That's number one.

Number two, we are a little bit of a different engine than our peers, insofar as -- I mentioned Artificial Lift at 25% of what we do in North America. It really is. I think we're the only ones like that. It never used to be a great advantage in the past. It was okay. I think, in a world of oil market being more resilient than the gas market, perhaps, particularly dry gas, our engine works, obviously, with shales and all of the product lines that carry it. But also, it works on and around the oil segment. $1 out of $4 is Artificial Lift.

On the international side, without a doubt, we were disappointed -- I was disappointed with how much cost we took in MENAAP. We are missing a big chunk of income there, period. Why? Because a lot of the moving parts that we are trying to bring to the client on the field was harder than I anticipated, it was slower than I anticipated and it cost more than I anticipated or we anticipated. So without a doubt, we got hit there. And maybe that doesn't go on forever. And so therein lies some measure of expectation for us to be able to turn that.

And probably the only other comment I would make, and not to belabor that point, but in a world where we are forced to take some nonrecurrent charges, Russia was hit by what is $6 million of depreciation run-up which is not going to reoccur, simply because it was sanctioning the higher depreciation, reflecting the higher value of the assets we bought from TNK a year later. So put all of that together, and a slow progression of the international markets, and it allows us to be constructive on how we are likely to do 2011.

You mentioned a reference point to 2006-2007 time period. I didn't quite catch it; could you just remind us what exactly did you say?

Yes. The problem is that I could only read (laughter) supposed to be able to share them ahead of time. What I was trying to say is that -- and maybe it will happen, maybe it won't. When I look at where things are sort of -- how our clients are behaving, how [our] business is being bid out, how things are started up and so forth, the general tone of the market and our client psychology and their needs, needs to arrest decline rates, their needs to create more capacity; I look at the rate of the business and what we are doing in -- now and in 2011, sort of my -- what 2012 reminds me of is something like 2005 or maybe early 2006. So the rate of growth -- 12%, 13%, 14% is what I'm suggesting. And I was not a -- this is just a thought -- reminds me a lot of what I experienced in '05, '06, '07 on the international side.

In other words, 2012, as I see it, I see it lined up not only for us, for our peers, too, presumably, looks to me reminiscent of the international progression, international growth of (inaudible) and '05, '06, '07. That's all.

Okay, well thank you very much for clarifying that.

Bill Herbert, Simmons & Co.

So, not to belabor the point, but here goes. Getting a little bit more -- your least favorite word, Bernard -- granular with regard to the roadmap on international, it sounds like to me, listening to your comments, that the main drivers for the year-over-year improvement, '11 versus '10, are going to be Latin America and Russia and MENAAP, going to kick in big-time in 2012, we hope. So focusing on Latin America and Russia, Andy, I think you said that Mexico revenues were down like $100 million quarter on quarter?

$110 million, yes.

Okay, so whatever the current run rate is in Mexico would be, I guess, around $100 million or less in the third quarter. And yet, Barnard talked about the fact that we are at two or three rigs today versus 50 in Q4 of last year, and yet we are going to be ramping up on Poza Rica, Veracruz and Burgos, I think, and re-booting, if you will, in the first quarter.

So what does that drive in terms of the improvement in Mexico from where we are today? And then, moreover, we had commendable growth in Brazil and Colombia and other Andean countries, if you will, and that sort of bucket representing a much more substantial piece of your business today. Do we witness the same level of growth in '11 that we'd witness in 2010? And if so, why?

Yes, so first, on Mexico, as Bernard mentioned, that we are down to three rigs, and all three of those rigs were running just in the project in the South, in Villahermosa. And so the re-boot -- so you understand, we look for almost nothing between now and the end of the year. And expectations are that we would think we would run something like four rigs only in Chicontepec during -- on average -- during 2011.

In the North, that project calls for six rigs. That contract actually, this quarter, was extended and expanded. And so think about those rigs, and we think that that will be up to -- begin rebooting in the early part of next year, and then keep the three rigs running. Perhaps they'll add some, but we haven't factored that in, and don't count on that at all.

So we are talking like, what, like 13 to 15 rigs on a steady-state basis?

I think it does, and it's fair.

I think you want to add also to that a variety of other production-related business, and you want to add to that two more offshore contracts that we signed up -- not to make Mexico a bed of roses. Hardly. As for the comments we've made, we are -- we understand the -- we have lived the high volatility of that market -- I mean painfully. So we're clear on it.

But we have started our first offshore contract now, which is -- I forget the size of the contract, but I will -- from memory, it's about $100 million in a couple of years, if I remember correctly. But anyway -- and we are starting two other offshore contracts also. And so the prognosis of Mexico is good, but it almost has to be good because there's nothing left. (Multiple speakers) so when you lead from a basis that is so low, unless you leave the market, which we decidedly will not do -- it's a very important market, even if it's one that has had some major hiccups. But, unless you leave the market, which some of our peers will but we will not, I think the market can only get better. The question is the rate at which it gets better, and we are cautious on it. But it is constructive.

So we were generating $450 million a quarter, Q4 last year, at peak. We are less than 100 a day. Do we get back to something approaching $200 million a quarter for 2011?

We would, perhaps, at the end of the year.

Yes.

But I don't -- Bill, as I look at Latin America being about a $2 billion region next year, which should kind of square you in at, maybe you're around $1.6 billion this year or something like that. Mexico is not more than $600 million or $700 million of that.

And then walk us through the roadmap for Russia here. We are ramping on TNK but I assume we are underemployed with regard to the utilization of your assets. You will get some more pull-through on that front, plus activity, so that generates some nice growth. How much, do we think? And what kind of specific discussions are you having with E&P companies in Russia so we can get a framework for what '11 looks like?

It's not anything across the board; we're going to increase drilling activity by X amount. Russia will have a movement like that probably in 2012 and '13. 2011, for us, is more volume in sidetracking. It's more volume in intervention. There is more volume in development drilling and some exploration drilling, particularly in eastern Siberia. But it's all of the above; it's a medley of all of the above.

Think of it as a market where, towards the end of 2010, Russia is roughly $1 billion for us at this point. Think of it in terms of a volume ramp-up somewhere between 20% to 30% in 2011, a combination of all the things I described. I will say that much of the growth, if not all the growth, is not with our original core client, TNK; it's through the variety of other clients in that market, which is healthy, healthy for both, really. They are diversifying, we are diversifying. So it is well-balanced.

And you're absolutely right that, in terms of equipment and infrastructure and the like, we are long. And so, therefore, on the one hand, the CapEx intensity; on the other, the absorptions, should be good.

(multiple speakers) and just to be clear, year end 2010 will be at an annualized run rate of $1 billion in revenues. And by year end 2011 --

[Currently], yes.

And by year end '11, $1.2 billion to like $1.3 billion?

I think that's fair.

Okay, thanks guys.

Marshall Adkins, Raymond James.

Let's shift gears over back to North America. You've hashed out the international side pretty well. Obviously, Artificial Lift is a big component of what you're doing. It's somewhat you need to you all versus your peers. Fill us in on what's happening there in terms of pricing. And are we seeing delays in orders for equipment due to the fact that so many of these wells are so prolific in the oily shale plays?

I think, on the pricing side, there is good recovery in pricing. It's gradual, Marshall. There is some buildup of backlog on and around the larger sized equipment for more fluid movement, without a doubt. So that will translate in some delays.

Okay. What about other areas of North America where there may be bottlenecks in addition to Artificial Lift? And, are you adding pressure pumping capacity to take advantage of the strong market there?

I wouldn't say, Marshall, at this point in time, that the word bottlenecks is -- on Artificial Lift, is right yet, but ask me the question in a couple of quarters and see how we answer it. We are adding pressure pumping capacity. We are adding it with only one client application and only one, which is our take-or-pay contracts in liquid-rich plays. Think Eagle Ford or Granite Wash or related, okay? And so every instance where I think we can add capacity where the contracts appear to be -- for the first time in my 25 years in the industry, really take-or-pay contracts, because I've never really seen any that are real take-or-pay contracts -- and maybe I never was lucky enough to have any. But if we can be sure they are real take-or-pay contracts and the economics are healthy, yes, we will commit capital for that.

Incidentally, the take-or-pay contracts, probably the full range of product lines involved in shale development -- that would be, as you would expect, in addition to stimulation, directional and zonal isolation, completion tools and the like. So we are adding capacity to that. And to the best of my recollection, we have three take-or-pay contracts to date, and I believe that all of them are in the Eagle Ford. It may go up by a bit more -- depending, again, on whether the contractual side is reasonable. We will not do anything else on that. We'll actually try to put as much of our fleet on take-or-pay as we can, the existing fleet.

And ballpark -- can you tell us how much horsepower are you adding on those contracts?

It's about 50,000 apiece, so it's -- 3 times 5 is 150.

Wow, okay. On a basis -- 600 -- is that roughly correct?

No, the basis was 500, so think more in terms of 650 -- (inaudible).

Okay.

(inaudible), to be clear.

Angie Sedita, UBS.

First, on Mexico, just to get a little clarity there on the $54 million charge, is that primarily associated with the ending of ATG 1 and 2 early in the third quarter? And then, is ATG 4 still moving forward, I assume?

Angie, I don't have (inaudible) in front of me, but I'll just give you a personal view. The whole business of that billion dollar contract has been a crushing ulcer for us. Do appreciate that that operation, which was built up to 42 strings, was running extraordinarily well, very efficient. And Q4 of last year, which wasn't that long ago, we were drilling those wells at very low cost, and no one ever thought possible. And that project, incidentally, just on the economics of the wells and the embedded pricing of the contracts, was going to be a very good project.

You know what happened in Mexico. The best way we chose to describe it is we talk about a change in public policy. If you have a better way of expressing it, by all means, but it is what it is. I have never seen a situation where an entire -- more than one reservoir, it's not only Chicontepec, Burgos and everything about it, the (inaudible) falls in the same category -- did not go down, they were basically shut down. There's no more expenditures in those reservoirs.

As a consequence, a very large project, which was in sort of -- not finished; I mean you had a number of things that, wells had to be drilled and also production-related activity in effect was canceled. And so we were left with whatever the number is, of costs basically that had normally to be normally distributed over the life of the project, as it had been, and all of a sudden there are no more projects. So there you are.

And that doesn't account for the disbanding of the operation and the enormous operating difficulty we have to face and everything else. This is not meant by way of a complaint. This is meant to say that this is not an act of financial sort of -- what's the term? -- financial flexibility that we wanted to extend ourselves. This is essentially the rigors of accounting, on the one hand. On the other hand, what is an extraordinary event of public policy, which has been an operating -- for lack of a better term, an operating nightmare for us, but one that I think we have pretty much managed to the best of our ability. And also, to remind the audience what I said before, Mexico is not a market at all that we are turning our back on. Quite the contrary, but we are scaling it down very substantially. And we understand the volatility of the market also and will not forget.

Yes, and Angie, the one thing to add there is, yes, ATG 4 continues on. There are 400 wells left to drill there. And so, given the change in what we expect, taking down estimates on activity and modifying what we believe the exact well mix will be, whether these will be peak wells or shallow or less expensive wells, caused remarking, if you will, of our anticipated future profit on that project.

So yes, it does proceed. It stays intact. I mentioned that we expect to do something like four rigs of activity, on average, in that project next year, which we think is very reasonable, given the surrounding circumstances, with a lower level of profitability than we had expected. If things end up being better than that, activity picks up and things are done more quickly or our well mix is more favorable, then profit estimates go up. But at this point we've marked it to what we believe is reasonable.

To summarize, operationally we did very well. We found ourselves, in this instance, a victim of a political shift. It is what it is. You can rest assured, Angie, that the positions that we take on and around profitability in Mexico are conservative. And if [we just look at our] (inaudible), of course they are.

Okay, fine, that's helpful. And then, as a follow-up, certainly some sense of guidance for 2011, what do you think could be some risks to that guidance, and then even what could be upside to those numbers?

Obviously, the list on the risk side will be longer than the list on the upside. But more seriously, I think the risk -- well, you know what it is. It is in North America that -- because we remain -- you know, it's important, North America, for us. We have a change in the market tone in North America, and I mean a double-barrel change, not just gas, but oil also. And I think that -- and with respect to the international market, it is really an operating efficacy issue; that's all it is. Client delays and things like that will always occur, but they don't go on forever. And so at the end of the day, you are left with operating efficacy, focus on quality. That, our success there or absence of success there, will be where we'll make $1.30 something that we deliver or something that we can improve upon, or, on the contrary, something we come short of. So, North America and operating efficacy.

Okay, great. And then upside -- 2011?

I'm sorry, you broke up for a second.

And then where could you see potential upside to 2011? What markets, if any, could you see better-than-expected results (multiple speakers)?

You see (multiple speakers) market, Angie, we tend to push the P&L benefit of a lot of the operations we are starting up now and in the quarters ahead, into 2012, on the basis that even after, again, they started up, say, in March, April, May, June, July and so forth, there are teething problems and whatnot. We are taking a [cautious year]. And then they'd start to really deliver and blossom and so forth, by the end of '11 and we can see it in '12. Okay? So this is sort of the view we take.

Clearly, if our operations deliver what is the various contracts' P&L earlier, don't have to wait for that long teething period, then you will see some upside immediately. Because I would also add that the pricing on the various contracts and start-ups and everything else we've got is a pricing which is already markedly above where pricing has been in the international markets. In other words, the economics of the various contracts -- and they are different, of course, the economics of the various contracts -- once things are operating, from everything we know, should be good.

Jim Crandell, Barclays Capital.

Bernard, your last comment that you made to me on Iraq was that quality would be the most important. Do you think that your four- to five-year lead time in that country gives you a significant lead in the eyes of customers in that regard, and is that a sustainable advantage?

To the extent that we've made mistakes already, and therefore we learn how to correct them, yes. To the extent our peers learn how to operate there without making the mistakes that we made, no. The question is, will our peers learn how to operate there without tripping along the way? I don't know. But we have drilled, to date, anywhere between 15 to 20 wells, I can't remember, and I think we have intervened in hundreds of wells in Iraq. And we have close to 1000 people working in Iraq. And so, along the way, we've learned a lot.

And a question -- you reeled off some countries in which we're starting up operations here in the next quarter or so, including Turkmenistan, Kuwait, Libya, Pakistan, Oman, Algeria -- I think I got most of them. Two questions, Bernard -- number one is, what do you attribute the fact that you're winning a lot of these contracts with? Is it mostly relationships with the NOC's of these countries? Is it your capabilities in IPM, products? What is it that's winning all these contracts for you?

That's an interesting question. I would say that our peers are winning a lot of the contracts too. Certainly, if you look at the rate of press releases, they are. So that would be one thing. I think each situation is a little bit different. Places like Algeria, for example, all of our peers have had contracts. We had the largest one, with five strings. But they've had four, three and two, if I remember correctly. In places like Oman, it's heavy oil. Heavy oil is our specialty. So we -- I'm sorry to say that, but the much-maligned project in Chicontepec was heavy oil, too. What we are doing in Colombia is heavy oil, also, etc. What we will be doing in Kuwait is heavy oil. So there is a very big heavy oil component to what we do.

To the extent heavy oil is having a rise in relevance, then we benefit from it. And it has to do with operating skills we have on and around heavy oil and the product lines we have and the project management we have, on and around heavy oil.

With respect to things like Bangladesh and Libya and Uganda and places like that, I really can't tell you why, except that I'm sure that my peers have similar projects elsewhere, and maybe they will mention it in their good time. So I wouldn't want to say anymore in terms of how we differentiate ourselves competitively, for a lot of reasons. One of them is to keep peace.

And how many of the -- what, roughly, percentage of these jobs are IPM?

All of them are.

All of them are?

That's not true; I beg your pardon. Kuwait is not, my apologies. But Algeria, Oman, Turkmenistan, Libya, Bangladesh and Uganda -- no, I'm wrong on another count. Libya and Kuwait are not. They are -- Kuwait is not, period; and Libya is semi. But the others -- Turkmenistan, Bangladesh, Uganda, Oman and Algeria -- really are. I will say also that just about everything we do in the south of Iraq is IPM -- not in the north. In the north it's bundled, but in the south it's IPM.

Okay, my last question, Bernard, does your strategy for 2011 include plans to expand Borets out of Russia, and does it include plans to try to implement the strategy of pulling through your downhole tools and services into the TNK-BP acquisition that you made?

Well, the latter we've done with some success with other clients than TNK. We've done it with some success with the likes of Rosneft and Lukoil and Gazprom (inaudible) and so forth, and we are very grateful for that. We have not been very successful in doing it with TNK, as I think I've shared with some of you. And maybe we ought to work harder on it. On the other hand, some things take longer than others. We are very grateful already for the spreading of our wings in the rest of the Russian market, so I will take that as a victory.

With respect to Borets, now, Borets is run separately from us and very well-run. Borets is focusing on some selected international markets. Weatherford will provide all the help that it can, but at the end of the day I think Borets will earn its international victories on its own, and I expect a few to come across our desk, probably in areas of Latin America would be my first bet.

Borets is how big in revenues on a run rate basis now?

Can't tell you that. Not as large as I would like it to be, but bigger than it used to be.

Mike Urban, Deutsche Bank.

You've given us a lot of detail on your plans in the near-term and for next year in Mexico. To the extent that they do decide to ramp up and spend some more money, what is your ability to respond to that in a relatively timely fashion? And then, probably more importantly, given that you've talked about some of the lessons you've learned there, would the approach be any different there, or is there anything you can do to better protect yourself on the margin side?

First of all, our ability to respond is, sadly, very good. I say sadly, very good, because it reflects how large of an infrastructure we had in that place. So we have kept a lot of equipment. Our best assessment of what will be required probably a bit more than what will be required, and then the rest is being deployed. So the ability to respond has been kept, so that will be good. I don't view that as a great victory; it's just simply, I'd say, the bright side of the moon.

They will ramp up, ramp up, incidentally. The notion of having a little over one half of their reservoirs shutdown is not a particularly desirable thing at any level of the national political constituency. What happened is that they were not allowed to spend their budget in order to catch up the prior budget overexpenditures of years past. Why now? Why the way that it was done the way it was done? I cannot comment on it. It's a political decision. I don't think that is one where the intent is to sustain it. Furthermore, they will have caught up with their budgetary overexpenditures by the end of this year, anyway.

So they will ramp up. To what degree? I think we're being cautious on it, but it will ramp up from the north Burgos, all the way down to Tampico and Veracruz. Okay?

Lessons learned -- you know, from an operating standpoint, I will tell this until I'm long retired. From an operating standpoint I'm very proud of what we've done in those markets because we operated extremely well. In difficult conditions, but ramping up 50 strings in a short period of time, running them as well as we did -- I'm extremely proud of it, so we learned a lot from an operating standpoint.

Our problem did not come from operations. Our problem did not come, either, from financial calibration because the cost curve on what we did went down dramatically and the profit curve went up. Our problem, perhaps, was not understanding fully the political complexity of the country we were in. And I think -- I'm not sure that there's a lesson that we can capitalize any way or form, except just know in our hearts that, perhaps, from a communication standpoint, particularly with Wall Street, we ought to be far more careful now on what we expect after a market which may be as politically, at times, volatile as that market is. So it is more of a communication issue, at the end of the day, Michael, than it is either an operating issue or a sort of financial recording issue, where I think in both cases things would -- I'm very proud of what we did, and things were done impeccably.

Put another way, we probably were too proud of what we did when we did it; and secondly, we were very unlucky. It is what it is.

And I guess, similar question, but different dynamic, I suppose, in Venezuela. That's been a bit of just a slow grind down, seems to be bottoming out, some signs of progress there both politically and in terms of payments. What do you see in that market (multiple speakers)?

We took Venezuela down to a level we felt was reasonable and responsible. Venezuela runs at about $200 million for us, give or take, and I think at that level we would run the business with as much of -- using local currency and local cost structure -- as we possibly can. We keep our infrastructure together, and we wait for a turn in what will be, at some point in time, a very important market. Don't try to increase our exposure. We don't -- we'll not decrease our exposure, either. At the level I just gave you, it's a modest percentage for Weatherford. It's about -- $200 million is about 2% of what we do. And so that's probably where you should expect it for us.

The margins are reasonable. But really, the key is to try to limit, as much as you can, your exposure to future devaluations, which are, given how the economy is and does, there's always a possibility, which is what we try, we strive to do. And I think our peers do the same.

Kurt Hallead, RBC Capital Markets.

And, operator, this will be our last question, because I just noticed we've passed the hour. Please, Kurt.

I'm just wondering, in the context of the spirit of the last question as well, I think there had been some relatively recent changes from an operating standpoint that you had there internally. Just wanted to try to gauge here, as we move forward into this next round of growth opportunity for you, how much of these changes internally do you think place you in an exceptional position to execute versus maybe what you had to deal with as you were expanding rapidly into Russia, for example, and Mexico and so on? And what kind of systems -- I know this is all boring stuff for you, Bernard, but what kind of systems do you have in place now to ensure that your expectations are being met?

Well, you never have the right systems (inaudible) the expectation is never met. I think almost that it's always come short of what you expect, and it should. But the changes you are referring to are about one year old. I liked them very much. The changes essentially is running the Company with what amounts to two chief operating officers, one in the east and one in the west. I've never believed in one company-wide; that's just our point of view. I think both hemispheres are quite different. It's only because of distance and time zones, and also culture. So with two hemispheres, from an operating standpoint, I find that the progress on the operating side and what I'm after, which is really quality -- you've heard me use that word often, quality -- operating efficacy, productivity, low and nonproductive time -- that's where our focus, our attention -- it certainly is where mine is.

Growth remains our objective, but the method by which we reach it is actually operating quality. So the hemispheric structure has been very effective. I also want to pay homage to the two leaders on the product line side -- in simple terms, the one drilling, the other one in production -- with a clear-cut focus on the strategy, the quality of the people we have on and around product lines and the evolution of research and development and the acquisitions that are necessary to build and nurture our product lines -- those are very, very broad. We have two leaders in product lines in two leaders on the operating side, this is a very good team. It's probably -- for me at this point, it's probably the cleanest operating team I've had as far back as I can remember.

If I had just one additional follow-up, I think coming into the 3Q, there was some general expectations that your Eastern Hemisphere would grow double digits, maybe plus. What do you think the major bottleneck was, looking out to third quarter, relative to coming out of the second quarter?

I think, if I was to summarize it, two things. Undeniably, everything was slower than I expected, undeniably. Procedures to go through borders, inspection of equipment, speccing of equipment, preparation of well sites -- everything was slower than I expected. Or perhaps, let me rephrase this, the way things are unfolding, as I often say, is no different than it always unfolds. Unfortunately, even I myself tend to forget that things take more time. And therefore, I would say, if anything, we were a little bit too optimistic into how quickly these things get done, even though we know. So it's not from our lack of knowledge. There's nothing in particular, Kurt, except there is a certain slowness about everything getting done, particularly -- this is the one part I forgot -- particularly when international markets wake up. When they get going after a year or two, it seems that things are more efficient and they move faster.

But when they pull back, go through a deep recession like they did, and then they reawaken, that's when, ultimately, everything seems to be more sluggish. Something like that would be my most qualitative description of what happened. We are taking into consideration, and we have -- in the course of the quarter, we've done a number of Wall Street communication in different parts of the world. And in what we've done we try to convey the fact, at this point, changing a little bit our message that although the international growth will be everything people expect -- and that's why I use the analogy of '06-'07, at the same time the beginning is always slow. And we take it into consideration now very carefully in our financial pronouncements.

Ladies and gentlemen, this will conclude the Q&A portion of the call. I would now like to turn the call back over to Duroc-Danner for closing remarks.

Thank you very much. This concludes the call. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.