Weatherford International PLC (WFRD) 2011 Q1 法說會逐字稿

Good morning. My name is Carlene, and I will be your conference operator today. At this time I would like to welcome everyone to the Q1 2011 Weatherford International earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions). Please note that questions will be limited to one question and one follow-up from each participant.

Thank you, I would now like to turn the call over to Mr. Duroc-Danner, Chairman, President and Chief Executive Officer of Weatherford International Ltd. Sir, go ahead.

Good morning. Andy will start with his prepared comments. I will follow as usual. Andy, please.

Good morning. For the first quarter of 2011 we report non-GAAP EPS of $0.10 before excluded items of $18 million after-tax. GAAP EPS was $0.08. My notes will address the non-GAAP $0.10 number. Sequential and year-on-year comparisons are to our non-GAAP 2010 results, which have been restated.

The excluded items include $8 million of after-tax severance charges and a $9 million after-tax charge incurred in connection with the termination of a corporate consulting contract. Both of these items relate to efforts to improve our cost structure. They are expected to benefit future periods. We also had approximately $1 million of after-tax expense related to investigations. A reconciliation of these items can be found on our website at Weatherford.com.

Sequentially the field declined at the operating income line by approximately $75 million or $0.06, while below the line costs came in approximately $18 million or $0.02 higher.

Lower minority interest and taxes added $0.02 as the recognition of discrete tax benefits pushed this quarter's effective tax rate down to 21.4%.

Of the $75 million drop in the field there was a $97 million drop internationally, offset in part by a $22 million improvement in North America. Approximately $16 million of the international drop related to a charge due to a new equity-based wealth tax in Colombia. Although the amount is payable over a four-year period we determined that the appropriate treatment was to recognize the entire amount in the first quarter.

The $18 million sequential flux in below the line costs were driven principally by corporate expense, which at $56 million was approximately $13 million higher than the prior quarter, due principally to increased professional fees and employee costs.

R&D expense was approximately $7 million higher than the prior quarter, principally due to write-off of prototypes. Other came in at $19 million, $1 million higher than Q4. FX losses were $17 million for the quarter compared to $10 million in the prior quarter. Interest expense declined $3 million sequentially.

On a consolidated basis revenue decreased $67 million sequentially or 2% and advanced $525 million or 23% compared to Q1 2010. Consolidated EBIT before corporate and R&D was $353 million, down $75 million sequentially, with operating margins at 12.4%, a 220 basis point decline compared to Q4.

International margins dropped approximately 540 basis points, including the effect of the Colombian equity tax.

North America revenue climbed 8% sequentially and 53% compared to Q1 2010. Canadian activity was strong, while colder weather temperatures subdued progress in the US. Operating income of $284 million stepped up $22 million sequentially and margins climbed 20 basis point to 20.9%.

Middle East, North Africa, Asia-Pacific revenue fell $109 million sequentially or 16%, as political disruptions in Middle East, North Africa and challenging weather events in Australia and China took a heavy toll, accounting for approximately two-thirds of the drop. Operating income declined $38 million on decrementals of 35%.

Europe, West Africa, FSU revenue declined $18 million or 3%, but was up 12% compared to the same quarter in the prior year. The winter effect in the North Sea, Russia, and Caspian were primarily responsible for the decline. Operating income declined $27 million.

Contributing to the severe decrementals were increased employee-related costs, as well as higher fuel and transportation costs in Russia.

Latin America revenue decreased 8% or $36 million on a sequential basis and declined 4% or $17 million compared to Q1 2010. Mexico and Venezuela led the decline. Operating income fell $32 million. As mentioned earlier, approximately $16 million of the decline was due to the charge for the Colombian equity tax. Adjusting for this effect, decrementals were approximately 44%.

During Q1 we generated EBITDA of $510 million with D&A running at $277 million. Capital expenditures were $308 million for the quarter, net of $48 million lost in hole revenue. Approximately 75% of CapEx was either for assets managed on a global basis or for specific countries outside of North America.

Net net increased approximately $547 million this quarter to $6.9 billion. Operating working capital increased $365 million, of which approximately $50 million was due to a book FX impact of the weakening US dollar, with growth in both receivables and inventory.

Our DSO target for year-end remains at 78 versus 92 currently, and our DSI target for year-end remains at 73 versus 87 currently.

Cash interest payments were $64 million higher than book expense due principally to the timing of coupon payments on outstanding debt. As of quarter end the ratio of net debt to net capitalization stood at 41.5%.

I have the following guidance for you for 2011 -- D&A, $1.15 billion; corporate expense, $195 million; R&D expense, $255 million; net interest expense, $450 million; other expense, $50 million; minority interest expense, $20 million; and capital expenditures, $1.6 billion.

Finally, we expect Q2 earnings per share of $0.15 to $0.17 before any excluded items, with approximately a $0.05 drop in North America more than offset by improvements internationally.

Thank you, Andy. A number of political, climatic and self-inflicted headwinds affected us in Q1 -- the loss of North Africa as a region, the temporary shutdown of Egypt and Tunisia, the ongoing shutdowns in Libya and the paralysis in Algeria.

Two, the temporary loss of Libya, Yemen and Bahrain operations. Three, the loss of much of our Australian business to the extensive flooding of Queensland.

Four, the seasonal pullback of North Sea, Russia, Caspian and China. Russia's and China's declines were severe. Finally, the harsh weather in the US during much of February scaled back progression in an otherwise strong North American region.

All of the factors described above were known. The economic effect was worse than anticipated to the tune of about $40 million worth of shortfall that penalized the quarter a further $0.04 than expected.

Two nonoperating factors weighed on Q1. The full accrual of a tax on [in-country] equity borne out of the recent governmental decision in Colombia. The tax is due over a four-year period. This isn't a Weatherford issue. All participants in Colombia are subject to this one-time tax on assets deployed. We, however, have a large and growing operation in Colombia with significant assets. This amounted to about $0.02 penalty. Even though it has no relevance for quarterly operating performance, it is booked as an operating cost, not as part of the tax line.

Below the line items are ForEx losses, (inaudible) write-offs and other corporate costs amounted to $0.03 penalty compared to expectations.

This all adds up to a very messy quarter and poor results. It doesn't reflect the operating quality and tactical positioning of Weatherford, nor does it do justice to the market forces at work. We see a strong North American market and improving international performance in the second half of the year.

I will follow with a synthesis on how we see 2011 unfolding in an attempt to provide perspective. 2011 should be a better year for Weatherford. We expect 2011 to show a 20% topline growth on 2010.

The mix of geographic performance will likely be different than we had originally anticipated. The year-on-year growth should be stronger in North America than in the international segments. In fact, by the time the whole year is counted, our North American business should make a new high in size.

Our 2011 strength in North America will be a reflection of our position on and around shales, which is privileged. This is a function of our custom design formation evaluation technologies, zonal isolation, open hole technology and Artificial Lift production optimization capability. We believe Weatherford has a number of proprietary advantages in all three steps.

I didn't mention stimulation, even though we have arguably a sizable fleet. Growth in stimulation reflects rough decisions on levels of capital commitments and other strategic differentiation. We have and will grow our stimulation fleet with discipline, caution and contractual protection. We are also open to the notion of supporting third-party stimulation players with our comprehensive product line and technology offerings for an integrated approach.

The second factor of North America is the rise of Canada as a strong player after years of lagging the US. We are, as a point of reminder, by legacy heavily weighted towards Canada.

And the third factor for North America, the catch-up in the volume and pricing of a number of product lines where the supply demand curve are inching towards their sweet spot, where we have particular strengths. This would include Artificial Lift, production optimization, managed pressure drilling, drilling tools, fishing. The trends are also favorable for directional, formation evaluation and open hole completion.

We expect in 2012 market tends to flatten out, particularly in the US. But our best guess today suggest that Weatherford's North American performance in 2012 will remain stout respectable growth, driven by the same factors highlighted above.

The outlook for our International segments, so the Latin America or Eastern Hemisphere is almost exact converse to North America. International segments should have low double-digit growth in 2011. That is, of course, a fraction of North America's expected performance.

The 2011 evolution is likely to remain roughly similar in Eastern Hemisphere and Latin America. This takes into account the shutdown for the time being of important weather operations like Libya.

Latin America's '11 performance should be primarily driven by Colombia and Brazil, Colombia being the faster growing of the two. Argentina should also perform strongly in its gas and early shale business, but from a smaller base.

Mexico should be down year-on-year, but this is misleading. Whereas Q1 '11 was substantially down versus Q1 '10, the second half of '11 should be stronger than the second half of '10. This is partly due to how the quarterly numbers lined up in '10.

But there are other factors at work. We have been recently given incremental business, a number of plays online and off-shore, which will strengthen our Mexican operation for the second half of '11, and bode well for '12.

The Latin American region should exit '11 with a more balanced mix. Whereas in formative years, Mexico was close to two-thirds over the Latin American region, it should account for less than one-third in 2011. Part of it is a decline in revenues from Mexico, but part of it is a strong rise of other operations.

We expect in '12 growth to accelerate, driven again by Colombia, Brazil and Argentina. But Mexico should also do better. That country should be ad infinitum in the penalty box. We would anticipate our Mexican operations to strengthen in '12, particularly in the second half both land and offshore, including the deepwater segment. As a result, Latin America as a whole should go grow in 2012 at a higher rate than 2011.

In Eastern Hemisphere, MENA and Asia-Pacific has had the hardest time in Q1 for all the reasons mentioned above. The handicaps were obvious. Looking at the whole year I don't think anyone is planning for the return of Libya as a business this year, [despite] a lot of revenue for the whole year.

Yemen and Bahrain also assumed to remain disrupted. We assume a recovery in Egypt and Tunisia, but not a catch up for Q1's lost activity. The whole year will, therefore, be more of a three-quarter business rather than a four.

Now withstanding all these headwinds, MENA, Asia-Pacific should still experience low double-digit growth in 2011, secured by strength in our Asia-Pacific operation. Indeed, for 2011 Asia will be for the first time the driver behind MENA, Asia-Pacific as the region's growth, the high expansion rate, then the Middle East. Australia recovery is the largest single factor for the strength throughout our Asian business.

With respect to the Middle East, progression in Iraq, Kuwait, Oman and also Turkmenistan and India and the beginning of a strong recovery in Saudi Arabia.

We haven't said much about Algeria. Algeria is traditionally a bedrock of strength and profitability for our MENA region. It rivals the leadership with Saudi Arabia and Iraq. We remain uncertain at this time as to the likely prognosis for this all-important market. It was uncharacteristically weak in Q1, primarily for client administrative reasons. Time will tell.

As it now stands, expect MENA's business to heal in the second half of '11. Sources suggest strengthening 2012 performance in MENA, and all coming out of the Gulf countries.

It looks like MENA is operating on only one cylinder, waiting on North Africa. Our outlook though is sufficiently strong in the core Gulf market that MENA may exhibit much higher overall performance levels next year, irrespective of the lack of incremental contribution from North Africa.

The balance of the Eastern Hemisphere is straightforward. We expect our regions in the North Sea and Russia to show their strongest growth versus the first half of '11. This is partly seasonal, and partly the beginning of a shift in some of the key markets. Russia, in particular, should strengthen further as '11 unfolds.

Although it is too early to tell, and the presidential election may push back the full measure of the Russian growth until second half 2012, we would anticipate the beginning of a multiyear cycle of expansion in that market will be driven by the redevelopment of many of the oil-producing reservoirs using a different approach in Western Siberia and the Volga-Urals, and the gradual opening to drilling of Eastern [half] Siberia's new reservoir.

In closing, notwithstanding Q1, we reiterate 2011 should be a year of steady sequential improvements.

Finally, comments on capital deployment and earnings performance. We expect CapEx, as Andy mentioned, to trend higher than originally anticipated towards approximately $1.6 billion, reflecting an inflection point in growth. Our operating working capital targets imply incremental working capital to be held at 15 -- that is 15% of revenue growth in 2011.

Capital efficiency remains a priority. When the full year is counted we expect growth, both CapEx and working capital, to be financed out of free cash flow.

There may be over the next 24 months some disposition of non-core assets. The cash proceeds, if successful, will be assigned to debt reduction. Acquisitions will be the alternative uses of cash.

Translating topline into profitability, we are planning on gradually higher North American margins for the balance of the year, ignoring the obvious Q2 impact of Canadian seasonality. Internationally, we look to margin improvement, particularly in the second half of the year, with an exit rate considerably better than 2010's 11% margin.

With that I will turn the call over to the operator for Q&A.

(Operator Instructions). As a reminder, questions will be limited to one question and one follow-up from each participant. (Operator Instructions). Dan Boyd, Goldman Sachs.

Bernard, you're raising the CapEx again, but obviously a lot of moving parts in your business, a lot of that seemingly transient. So there are two parts to my question.

One, if we were to look at all those moving parts and we were to normalize them, say, things are back to normal X maybe Libya and by the fourth quarter of this year, where would you think margins would be, assuming no other improvements? Then, also, where are you seeing, or what is giving you confident to raise the CapEx again?

All right, so let's maybe handle the second question first, which is confidence on raising the CapEx -- essentially a function of business booked and the visibility we have for the balance of the year in our various regions. North Africa being the only question mark. So that is one.

Margins -- well, look, we -- giving specific guidance is probably foolish. What we can say is that we expect North American margins to continue to improve. Obviously, Q2 is always a good [step] aside because of Canada. But between now and year-end you should expect North American markets to move up.

Second, international margins will recover, partly because I think Q1 was unusually constraining and difficult in many respects, both political and climatic, so you have that.

Then, second, I think volume coming internationally. And, thirdly, pricing coming internationally. Not everywhere, not across the board. All three add up to providing a shift in margins for the international segment between now and year-end. So the forces in motion, we understand, and the business book we can see. Those are the two factors.

Maybe if you could even help me understand a little bit from a geomarket perspective of where that additional CapEx is going. North America is where all the strength is. Is that where it is going or are you seeing incremental opportunities internationally as (multiple speakers)?

No, the bulk of it is going internationally. What we have in North America is being held in terms of plans, and the bulk of it is going internationally.

Okay, thanks.

Brad Handler, Credit Suisse.

Thank you for the color, Bernard, on the different product lines and kind of the outlook for pricing. I guess I was just -- maybe I could draw you out a little bit more on some of those and ask if there are some regional differences there.

So for Artificial Lift, for example, is there a -- there isn't really an excess of capacity to work through, is there? I might have guessed there was already pretty good leverage on the Artificial Lift product line, just to start out with, for example.

Well, pricing on Artificial Lift today is a North American issue. In other words, in the course of the second quarter -- earlier actually in this quarter, we have moved our pricing structure in Artificial Lift up pretty much across the board.

So this is an indication of what is going on in some of the product lines in North America. It has not happened to that same product line in the international markets. The price increase is different depending on what component in Artificial Lift, but it is across the board. And it has happened, I would say, back maybe a couple of weeks ago. North America only, nothing international yet. So if that serves as an illustration then so be it.

Maybe I a similar conversation or similar on the managed pressure drilling side, I guess I would be curious for some commentary anyway about how you've seen demand pick up -- maybe over the last several quarters how that has run, and then the pricing dynamic. That seems like it is a fairly unique product line and a pricing set that you would get to -- you would have a large ability to dictate it, if I understand it right.

Well, I think -- I don't think one ever has (multiple speakers). Once in a while once does, but it doesn't last. Managed pressure drilling is two things. One, it is a product line which is moving rapidly in terms of growth based on different applications. I would break them down into two parts. In general, efficacy of drilling and then the other one is safety. It is all in a post Macondo sort of world.

So whether it is drilling efficacy or safety, you find gradually through positive education a spreading of the advantages in MPD, managed pressure drilling, or closed loop killing, whatever way you might want to call it, throughout the industry. And it is -- it is a multi-year type process.

Today what we are facing in MPD is as much an issue of us scaling up the size of the product line worldwide -- this is as much of an international issue as it is a North American issue -- in a manner that is responsible with high quality, as it is as much of that issue than it is the issue of how well or how quickly we can price this product line that we maximize returns.

There is really both issues at the same time. But you pick a very good product line also to show the dynamics in motion. MPD is different than Artificial Lift, which is a very well-known product line, but one which is hitting the sweet spot, albeit, with backlog that delay the recognition of pricing. MPD is different. It is a very large product line already. It is half of Drilling Services, so it is something which is not far from the $1 billion mark, but it is, through its application, gaining a lot of growth and also has obvious margin expansion and pricing (inaudible) opportunities.

But that [wasn't] more a question of scaling it up throughout the world in a irresponsible and high-quality fashion.

That makes sense. If you allow me just some of the quote more conventional lines, whether it is directional drilling and formation evaluation. I just want to make sure I am calibrated right on your comments. So as things start to -- there is enough tightness in the global markets for that, so you're getting pricing by the second -- starting to get pricing by the second half of '11 and it accelerates through that period, is that (multiple speakers)?

My comments on formation evaluation were -- first, it characterized how custom design they are for shales. That is a separate issue. The second comment I made is that I felt that in North America, not international yet, in North America directional, formation evaluation and open hole completion, all three of those, are probably positioned now to start getting some pricing recognition.

Some of the product lines in North America have pricing recognition already. I think you know which ones they are. Others, such as Artificial Lift or the ones I just mentioned, or MPD or fishing or drilling tools, these product lines now are getting some pricing recognition, which is necessary. It is only because they went down so much in the '09, '10 recession.

Does that have -- if I am thinking about directional, for example, or formation evaluation, does that start to -- that tightens things -- that suggests there is tightening globally as well, right? So you are making some pricing commentary about (multiple speakers)?

Not internationally; not internationally. I think internationally what I have observed on formation evaluation -- and open hole completion actually, come to think of it -- internationally I have not observed any propensity for some pricing muscle at all from any of the players.

What I have observed in North America is that -- North America, again, versus the international -- is that the market dynamics suggests that we have opportunities right now for individual players, certainly for people like us. My peers will do what they feel is right.

Interesting, great. Thanks for the answers.

(Operator Instructions). Please note that questions will be limited to one question and one follow-up from each participant. Angie Sedita, UBS.

Bernard, on Algeria you mentioned the uncertainty in the region. I know you had hoped of your six strings to have three to maybe even five turning in Q1. Could you give us some color on how many are turning or do you expect to turn in Q2?

And when -- do you have any clarity on what you could have all six strings turning? Could it be in the second half of 2011 or even is that a question mark?

No, actually -- tight streams manage (inaudible) close enough. You are referring to the integrated project for the [Bertkeen] field in Algeria. Actually, the news there is positive, which is that in -- as of right now we have two strings that are drilling and drilling well. There is a third string we will be starting to drill sometime, let's say, in the month of June, and the other two are pending.

We are waiting on well site preparation and the like. So what it means is that by the end of the second quarter -- this quarter, we will have three out of five. After all this time we are seeing drilling, and if the third performs like the first two, drilling well.

So that is constructive. My comment had to do really with the normal course of business where what we have experienced is an unusual level of delay or slowness, if the word existed, on behalf of our clients to go through routine procedures. As a result, at times projects go not funded and so are interrupted. This is not a Weatherford issue, this is a general issue.

And which one, I think you can explain by a great deal of understandable distraction, given the geopolitical environment that surrounds that country, which has remained reasonably quiet for the time being. So, in other words, our clients are distracted, and as a result things are not getting done. It slows everything down.

The [Bertkeen] field and the project you identified, actually after all this time, it is progressing well. Understanding that the funding -- the funding for the project was preapproved a year ago, so there is no administrative steps to be taken, just well site preparations.

So it is really a market which is doing well from the new project standpoint. They finally got started. It is not doing -- not operating normally when it comes the routine business, which is a variety of product lines and all sorts of different contractual applications.

Perfect, good, good color. Also, Bernard, in your opening comments I thought you mentioned that you may consider selling some non-core assets. Could you give us some color on what could be considered non-core assets?

It is -- when I drafted my notes, I hesitated to put that, because I thought I would get a question like this, which would be easily misunderstood -- my answer would be, of course. It is nothing material. In the aggregate it may add up being a nontrivial number, if we are successful. But we have a lot of small businesses which we inherited over the years as part of the process of growth, by acquisition in particular. We have nurtured these businesses. They're healthy. They're doing reasonably well. They just don't belong at Weatherford. None of them you would actually know.

So I would suspect that over the next 24 months, if we are successful -- well, you'll know about it. You will see it in our numbers. We will sell chunks of $50 million, $100 million or something like that or perhaps a bit more businesses.

And the only point is efficiency of capital, which is -- it is one thing to want to run your CapEx and your working capital efficiency, it is another also to give back to the -- to better owners in terms of core focus assets that don't belong at Weatherford. Simply because you should -- return on time, there is also the return on capital, you should focus on what you do well, that's it.

So it is not -- I don't think it is something that is terribly strategic, and maybe it is not something that ought to take too much of your time and attention. But I think it is in the context of capital efficiency, if you want to look at it.

Okay, perfect. That's helpful. Then finally, I know you cannot give a granular answer here on FCPA, but just very generally, I have heard that essentially it is three issues that could be resolved separately, given that they are being pursued by different governing agencies. Is that a fair statement? And what would the likelihood be that it is not resolved until 2012?

Well, I think -- you know what I'm going to answer, don't you, which is we have -- there are very extensive disclosures in our public filings, which, hopefully, are reasonably helpful. And I would encourage you to read them. Beyond that, other than tell you I hope for the best, I'm not to say anything, I can't.

All right, fair enough. Thanks, Bernard.

Bill Herbert, Simmons & Company.

Andy, so we are looking at a $0.05 hit for North America quarter-on-quarter due to Canada, which is sensible in terms of an expectation. With regard to international, getting to a $0.15 number overall for the second quarter does that lead us to the conclusion that international margins are likely back to Q4 levels? Is that fair?

I don't think that in terms of on the international side -- if you start with the $0.10, and depending on how you want to treat the $16 million number in Colombia, --.

Right, it is $0.01 or $0.02 out there.

So you can think of 12 minus 5 is 7.

Got that.

So narrowing the gap is -- we are talking about $0.08 to $0.10. And the variability and that really has a lot to do with, one, which countries pick up internationally in terms of perhaps solving some paralysis. And, two, which areas that happens in by product line and mix.

So it would be difficult for me to tell you that absolutely international margins would be back to Q4 levels overall. I wouldn't want to commit us to that. But is it possible? Of course, it is possible.

Okay, then let me address some of the other items that perhaps helps clarify that bridge, if you will. I didn't hear you talk about tax rate with regard to guidance. Perhaps I missed that. What should we be thinking about a second quarter tax rate?

I think there is, obviously, we previously announced 27%. There is upward pressure on that rate, we expect, due to a higher percentage of earnings coming out of North America than originally anticipated, as well as a flux of profitability in various international markets, given the low level of performance in Q1.

Then with regard to your corporate expense you guided to $195 million for the year. If memory serves me well, we did $56 million in the first quarter. What do you think is a reasonable expectation for the second quarter?

Mid-40s. Mid to upper 40s, but I think somewhere in the $46 million, $47 million range.

Remember, you had a number -- that is always stuff that is happening, so it is mixed emotions. But on and around corporate you have a number of different things, some of which we disclosed, which move that number up. I don't think these things are necessarily there in other quarters.

Okay, that's all I have. Thank you very much.

Rob MacKenzie, FBR.

Bernard, actually, I wanted to dig a little deeper on what you said about North America being stronger than expected here. So you guys laid out three things -- US shale exposure, Canada and catch-up in volume and pricing.

If we layer pricing into the first two factors, your US shale exposure in Canada, obviously Canada you said down Q2, but on the US shale side, how much of the incremental strength would you say is from your formation evaluation business that you mentioned versus Lift and the rest of it?

How would you split up that strength, and where are you seeing it more so? And how do you see that playing out throughout the year?

I are thinking it is going to go from strength to strength. I think Lift is faster, more measurable, more traditional. Lift has done well. Lift is likely to do better based on volume and based on pricing. We can see it in the order book, which takes us pretty much through year-end. There is still some volume we can add though, because there is some flexibility in our supply chain. So this is a -- we see Lift evolving in a traditionally very strong sort of way, backed by the price of crude oil. So that is traditional. And it is measurable. You can see it. You can see it actually evolving in 2012 in the North American market. Okay.

For the whole business for shales, and I think in formation evaluation is different. Shales, to begin with, are not a short-term phenomenon; it is a very long-term phenomenon. It is a sea change in our industry, whether it is gas shales or it is oil shales. Gas shales being more of the sea change.

We take the view, and the conference call is not the place really to do it -- to express it, but we own unusually good formation evaluation portfolio. We are not the largest in that business, I'm very clear. But we have an unusual portfolio of formation evaluation, which is strategically very suited, I would say, custom suited for shale.

As we unfold that product line, and perhaps we do well in terms of applications, you're likely to see that provide a boost to our formation evaluation business above and beyond what market forces would normally do. That is it. Sorry for the long answer.

Coming back to Lift for a moment, where would you characterize pricing today versus say six months ago? And how much further do you think pricing can go before we see (multiple speakers)?

Pricing just moved, as I tried to explain a bit -- pricing just moved a few weeks ago -- I would say two weeks ago, three weeks ago, actually in North America, at least for us. Our competitors will do what they feel is right. Moved for us across the board. And best I can recall this is really the first time we do this. I have to go back to the times prior to 2008 to remember any events like this.

I am just characterizing Artificial Lift. So that particular pricing move should -- will take an effect in our business, and therefore our P&L, I would say in Q4, if I was to guess -- about six months for it to roll through the business, because we do have a backlog.

But where is pricing now versus after that price increase, where is it versus -- I don't know -- the peak, we still have some room to go.

Then, if I may, one final follow-up, more forward-looking. Since we are really seeing the first real boom in liquids drilling in the US since probably the '70s, how do you think about the ultimate potential and how big this pipeline could ultimately become once again with huge focus emerging on liquids and gas becoming more marginalized?

I wish it is the only product line we had. Which is a silly wish, if you think about it, because that sort of summarizes (inaudible) prognosis. The product line, which was typically viewed as one where we are dominant, and in an application which has a secular growth based on accelerating decline rates, but other than that it is viewed as well-established and mature, has now become a very young product line in many respects in terms of growth prospects.

So it will become our largest -- probably our largest product line of all. It is challenged by the combination of a directional, formation evaluation on the one hand and MPD on the other, which is grouped in Drilling Services. So I don't know. I don't know which one will end up being the largest one. But between those two, you will have, without a doubt, our two dominant product lines at Weatherford.

I would also say that when it comes to the oily shales, whether hybrid or whether pure oil shales, they actually work on the same fields, obviously.

Right, great, thank you.

Kurt Hallead, RBC Capital Markets.

Bernard, as you look out -- when you look at the international opportunities, and I think you have said this in different discussions in varying forums, that revenue growth has never been the issue for Weatherford, right? You guys have opportunity to penetrate a number of different markets and you have taken advantage of those opportunities on a number of different fronts. The challenge has been taking that revenue and dropping it down through to the bottom line.

When you look at the opportunities that lay out in front of you internationally, where do you stand on your confidence level in your conviction on the ability to execute and to drive that revenue incrementally more so than you have been able to do over the last couple of years to the bottom line?

Aside from being more careful on and around saying things on parts of the world, given the geopolitical events that can take you by surprise, we feel we have good operating maturity on and around places like Latin America, on and around places like the Gulf region, on and around places like Russia, on and around places like Asia.

So Latin America, Asia, Gulf region and Russia will be places where we feel we have the ability to harvest in a manner where we yield margin and return and not just blunt growth. I excluded North Africa for no other reason than the geopolitical issues that I mentioned earlier on, otherwise it would be on that list.

Okay, then with respect to Russia, you did mention in your press release here that their increasing cost had an impact on the quarter. What is your expectation for cost increases, not just in Russia, but across your businesses in general, because we have continued to hear that labor is still tight, and some changes on raw materials?

Raw materials is not a big issue yet. Fuel is an issue. Labor is only an issue in some places. The problem in Russia is purely one of timing. Unfortunately, fuel is your highest consumption in the winter season predictably -- think about cold weather. And pricing is moving in Russia in the second half of the year contractually.

So you actually got caught simply in timing, which is you are pricing is coming, it is already agreed upon, at least in our case. But, unfortunately, you have to face with a spike in fuel costs, which is again the primary issue this winter at a time when the level of consumptions are always higher because of obvious weather-related issues. It is cold. That's it. So I suspect that come the middle of year and beyond pricing is coming to the rescue which is appropriate to cover that.

Okay. Then with respect to the Colombian tax situation, as you mentioned, it is something that gets paid out over a four-year period, and I believe it gets paid out twice a year. So they were expecting another impact then in the third quarter, I guess or (multiple speakers).

No, no, no. We fully booked it. We fully booked it. This is the full four-year amount. It is fully booked. Now it was done because it was deemed proper to do it that way. I have no other opinion on it. But the amount, which is -- the amount is to be paid off over four years has been entirely booked this quarter, and that's it. So you won't hear about this anymore until such time which the Colombian government decides to do something different or in a few years.

Then lastly on capital efficiency, I think you referenced -- I couldn't -- my mind wasn't working as fast as you were speaking, but -- so capital efficiency you said would be funded out of free cash flow. I think in some of your prior presentations you referenced that over the last three or four years your capital efficiency had been too high. So from a -- if you look at CapEx as a percent a revenue then, what are you looking at for 2011?

We operated for -- if you look at the year [2000], 2010, we operated in two different phases. A phase between 10% and 15% of revenues, that would be CapEx, and a phase where we move revenue and -- CapEx up to 20% or even 25% of revenue.

What I have said, and what I will say today, is that CapEx will go back to its prior range, which is between 10% to 15% of revenues, depending on -- and where it actually settles depends on purely on the quantity of business and the quality of the business and the expected returns, so say between 10% to 15%. We are back to the former phase, not the latter phase.

Thank you so much. I appreciate it.

Mike Urban, Deutsche Bank.

I wanted to talk a little bit about the visibility that you have into your business, and completely recognizing that this is just an extraordinary quarter in a number of ways and most of them not good. But you adjusted your guidance not too long ago, within just the last few weeks, and it seems like a few things snuck up on you here. We have seen that a little bit in the past.

Is there anything that you can or are doing organizationally to try and improve that visibility internally into your business and help you think about planning in a more efficient way?

That is a very long -- that is a question that deserves a very long answer. The short answer would be, yes. We are taking measures in order to provide, let's just say, guidance which is more reliable, as opposed to having guidance which sometimes is too optimistic, or perhaps could be construed as being well-intentioned, but at the end of the day doesn't help.

Now the organizational detail, I would rather not describe them on a conference call. But the answer is definitely, yes, we are taking measures. So time will tell.

Then, I guess in some ways related to that, in terms of -- I guess this is a little bit of a follow-up to what Kurt was getting at, you guys -- your actual earnings a couple of years back, three years back maybe, were around $2. You have made a number of investment since then -- in acquisitions since then, so presumably you think the earnings power is higher ultimately than that.

You talked about organizational and operational maturity in really most regions around the world. What are the impediments or what are the steps you need to take to recognize for that? And how much of that is a Weatherford process versus the market coming your way?

(technical difficulty). I have some volume problems here. In order to answer that question effectively I would simply say it is a function of time. So the question is whether one just watches it and sees it unfolds, or one decides to believe that it is something which is on the way. It is fairly purely a function of time.

I realize the past two years haven't been a lot of fun in terms of predictability of results or even of some of the events. I think we know the quality of the operations that we have at this point in time and what their ability to deliver is, so I would just suggest that we wait and see what the results are.

So that suggests that just were the market to progress as the market is going to progress, which of course, you can't control, then you would get -- you think you would get to where you would need to be. It is just because of some of the specific investments, whatever, capital that you have employed, it is depressing your results relative to others right now. But ultimately you get to where you would need to be or are there things that you need to do to get there.

I don't think we need to do anything right now of any sort of great significance in terms of unusual things. In order to be able to deliver, what we need to deliver -- [I don't]. Purely the passing of time.

Okay, very helpful. Thank you.

Ole Slorer, Morgan Stanley.

Thank you very much. Sorry, Bernard, I had to drop off a little while, so I apologize if this has been asked already. But in 2005, 2006, 2007, 2008 your -- or at least 2006, 2007, 2008, your average margin across the board, the different mixes, was about 21% or something like that. So if you call that a sort of midcycle performance level for you historically since that list, anything in your business that is dilutive to that type of performance as you see things normalizing? Have you changed your business mix? You're more into IPO or project management so there might be pass-through revenues. Do you see any reason why this shouldn't be a new level once you start hitting your stride?

No, as ill timed as it may seem, I would probably make a case that it might actually be the other way around. In other words, that they ought to be higher. I am not being Pollyanna-ish, overly optimistic. But, certainly, I do not see any case for it to be lower given our ability to hit our stride.

Anything in -- let's say if there is no change in pricing from the current leading-edge, not the sort of -- I think one of your competitors that reported this morning called a lot of the recent project awards nonsense pricing. So hopefully nonsense pricing has changed.

So based on what you're seeing at the moment, at the way you are bidding, the way you're considering the terms [political], you're committing capacity, your are raising CapEx, if you are just -- pricing holds the way you currently -- what you currently see based on your CapEx increase, can you get your operations to generate that type of a margin without anything else changing, other than absorption?

I think, again, it is better to do it rather than just -- rather than describe the fact that you can do it. But I would say the answer is yes. I would also add that we have stayed away from those large projects, and nevermind where, whom and how. We have stayed away from those large projects. We have been remarkably absent from any press releases or things like that on anything.

If there are any that come out on a large project, which would not be us putting it out, it would be typically the client, you have to assume that it was something where we had minimally decent margin and return, otherwise, you would just see us not being there period.

What will be the geographic region or maybe a product line that will lag in this recovery as you look out the year? Is it Mexico and capacity committed there or can you bring that into -- back into Texas or is it Russia where you have taken on a big bet?

No, I think Mexico will lag; that is quite clear. Simply because I think you shouldn't expect our markets to do a lot more -- some, but not a lot more until the presidential election is done and so forth. So it takes you until the middle of next year for things to start to pick up. If that market doesn't get active, but I suspect you could say that. Although, again, it will not be a declining market, it will be an inclining -- an increasing market, just not by a higher rate, so it would lag.

We think obviously North Africa will lag, that is obvious, directly or indirectly because of the fear factor. And then I think when you look around, the Caspian Sea also will lag, simply because of delays -- delays in decision-making on big projects, very lumpy, but that's it.

I think Asia Pacific, the Gulf countries, you are very familiar with the three plays there -- three major players -- Saudi, Iraq and Kuwait and Russia, which I think is an interesting, very interesting play.

Then I think the key countries in Latin America, which you really have three -- Brazil, Colombia, Argentina. Argentina being very promising in terms of the market primarily because of the deregulated gas segment on and around the shales there. They will drive, I think, without a lag the market as the international market rises to take the place of North America as the main source of earnings and cash flow and so forth.

Then thinking about your margin progression relative to your peers, two of which have already reported, what is your exposure to the lagging kind of regions relative -- so what will Mexico, North America and Caspian represent (inaudible) your current revenue run rate? I presume it will be -- I don't know -- 10%, 12% or something like that.

Without doing a mental computation, probably so. I have to pause for a minute to think about it. Mexico remains sizable. North Africa, we are probably the most sizable, no question, that is true -- on relative terms, of course.

Caspian, I don't think particularly. I just mention this because it happens -- I think -- I don't think we are particularly more exposed than the others there. So I would say that perhaps that you can say that we have a slightly higher exposure to those who lagging markets. But I don't think that is a big percentage of our ownership at the end of the day. I don't think that moves the needle really. (multiple speakers).

So given that you bought Precision's technology a few years ago that they developed in Canada [for land] by luck or whatever -- that happens to just be -- seem to be the area where the biggest volume of work is coming down the pike, whether it is North America oil or -- coming in Iraq or Russia. Can you just explain a little bit more why you're not more bullish?

(multiple speakers) in general? You mean in general or something [particular in the] market?

I was just thinking why should the analysts be more opportunistic at the moment in terms of taking its spots in pricing relative to marketshare? Two years ago people fell over (inaudible) to grab a foothold in Mexico. A year ago it was disaster bidding in Iraq. At this point why isn't -- do you get a sense that the industry is finally waking up and realizing that it is not necessarily optimal to win every bid?

May I suggest something? I'm probably not the right person to ask this question to, although I have an opinion on it, which I will keep to myself. You should ask someone who has had a good quarter whether this is a time to become more aggressive. When I have a good quarter, maybe you can ask me that question and I will tell you what I think.

Okay, I hoped to ask you this quarter -- this question after the next quarter, Bernard.

That makes the two of us. That makes two of us for sure.

Stephen Gengaro, Jefferies & Co.

Two quick ones. The first, as we think about the balance sheet I was surprised by the drop in cash. Can you address that?

Andy will say something about it, but I will say it is very typical of this quarter of the year. It always starts this way. That is why we talk about the full year. But having said this, Andy will give you some more granularity.

I think we walked through it fairly -- I think in the notes. Where if you look at the net income on a GAAP basis around $60 million, with $277 million of G&A. It puts you at about $337 million. And the gross CapEx was $356 million, and we had $365 million of growth in working capital.

We also -- one of the major items in terms of mismatch between cash payments and book expense was the timing of the cash interest payments on our debt. Which we have heavy cash interest payments the way our bonds are timed in Q1 and Q3, and lower amounts in Q2 and Q4. So that was in addition, I think, it was $64 million of cash that went out.

Also, in my own prepared comments you had the reminder that when the full year is counted, very much like the prior year, we expect the growth to be financed internally -- entirely by internally generated cash like CapEx and on the working capital. I think that is very reasonable. There is reasonable expectations for you to have for us to carry out.

So with CapEx free cash flow neutral at least in 2011?

Yes, that is the expectation at this point.

Okay, thanks. Then my follow-up was, as I think about your revised guidance and then the quarterly results, and what maybe March might looked like as we look into the next couple quarters can you frame for us what surprised you, I would assume in March, given the timing of the guidance and how that should impact us looking at the next quarter?

Maybe, Andy, you want to say something?

Obviously, March results were weaker than we expected. It wasn't necessarily isolated to any one region, and it wasn't isolated just to operations, but also in some of the below the line items. So in terms of what we have done of looking through and thinking about the guidance that we would feel comfortable providing to the Street, because obviously the fields provided their forecasts for Q2 after looking at their Q1 results, so our estimates and our guidance for you is based on that field forecast.

So it wasn't just -- it was as much -- there is some below this line stuff here, it wasn't just operation that was the variance versus the expectation?

I think it would be -- that would be substantially correct, very substantially correct.

That is helpful. Thank you, gentlemen.

Geoffrey Kieburtz, Weeden & Company.

Bernard, I would like to go back to something you're talking about a little bit earlier just to clarify here. You have characterized some of the disappointments we have seen in the international market as idiosyncratic in the past. We continue to see some of those disappointments, but you also talked earlier about some changes you have made, I guess to sort of summarize, related to how you formulate your guidance. I guess it is a two-part question.

Do you continue to believe that the disappointments you have seen in the international market are in fact just idiosyncratic or is there something larger going on? And is that disappointment really in the markets themselves or in your guidance development?

I think without a doubt our guidance -- I have to say our guidance wasn't good. Why it wasn't good is an interesting question. There are probably myriads of reasons. Probably it might be that I am simply too optimistic. This has happened in my years, and you have known me for a long time, so you recognize that as being true.

With respect to the idiosyncratic comment, well, I would stick by it, actually. How would you call the events on and around half a dozen countries in the Middle East? What would you call them?

No, I hear you. Particularly this quarter it is easy -- it is very evident to call these events idiosyncratic, and I get that. But when we look at Latin America, for example, we don't have those same issues.

No, we do not. We do not. And that -- absent all the other events, you have just seen a region which didn't do that great in Q1. So what? Maybe it does better in Q2. That (inaudible) that sort of response in the aggregate it was not. It didn't -- the stars didn't align well at all.

So I think the conclusion is that I think if guidance has been overly -- how shall we say -- well, it has been unreliable, you can blame me for it. And just assume that whatever needs to happen for guidance to be tighter, has happened and will happen. And without falling in the other excess, which is just being misleading on the negative side. So assume that it's going to get done.

Also assume that the potential at Weatherford International market is as ready and as good, not as it was, but as I expected it to be. That again, I think it is a function of time, so I am saying this, let's see if it can happen over the next couple of quarters and the next few years.

If that answers your question maybe, Geof, you will be the last questioner (multiple speakers).

Could I add one more? It is a little bit -- it is related, but it is a stretch. You did talk earlier about your expectation for international margin realization as we go forward. Could you give some comments on North America? You had high 20% margins in North America. Kind of same question as you had on the international before, do you think you get back there or Do you think you exceed that level?

We are at 20% and some -- between 20% and 21% right now in North America, if my memory serves me well. The prior high was just shy of 30%. So let's say we have 900 basis points between where we are today and the prior high. Depending on whether events in the world change things -- I'm referring to GNP and things like that -- I would be disappointed if we did not cross our prior high in North America.

Now that is just a personal thing, so let's see if it happens. But that -- actually I have said this before in different forms. That will be our expectations here.

Great, thank you very much.

Thank you very much. And I think that is all. I have to stop now. There is another call that started on the hour. That is why we can't go on. Thank you very much for your attendance. Operator, you can stop the call.

This does conclude today's conference call. Thank you for participating. You may now disconnect.