Weatherford International PLC (WFRD) 2011 Q2 法說會逐字稿

Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International second-quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

As a reminder, ladies and gentlemen, today's call is being recorded. Thank you. I would now like to turn the conference over to Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Sir, you may begin your conference.

Thank you. Good morning, everyone. Andy will read his prepared comments, and I will follow up with the same.

Good morning. For the second quarter of 2011, we report non-GAAP EPS of $0.17 before excluded items. This is a $0.07 improvement over the prior quarter and at the high end of our guidance. Items excluded were $16 million after tax or $0.02, made up of $13 million of after-tax severance and exit charges and approximately $3 million of after-tax expenses related to investigations.

A reconciliation of these items can be found on our website at Weatherford.com. Sequentially, the field accounted for the entire earnings uplift, growing the operating income line by approximately $68 million or $0.07. An $8 million improvement in below-the-line costs was offset by an increase in the effective tax rate, which came in at 27.2%.

On a consolidated basis, revenue increased $196 million sequentially or 7%, and advanced $615 million or 25% compared to Q2 2010. Consolidated EBIT before corporate and R&D was $421 million, with operating margins at 13.8%, a 140 basis point improvement compared to Q1. Incremental margins were 34.8% company-wide.

Operating profit in our international markets improved $108 million sequentially as revenue grew 14% or $212 million. Margins expanded 580 basis points to 10.4% on incrementals of 51%. This international performance was partially offset by North America's $16 million revenue decline and $40 million retreat in operating income, as strong growth in US revenue and steadily expanding margins were overwhelmed by the impact of Canadian breakup.

The strongest regional performance came from Europe, West Africa, FSU, where operating income leapt $55 million on $82 million of revenue growth. Incremental margins were 67% as the winter seasonality in the North Sea, Russia, and Caspian abated, and we experienced higher demand for Drilling Services, Completion Systems, and Stimulation and Chemicals as well as improved utilization in Integrated Drilling in Russia.

In the Middle East/North Africa/Asia-Pacific region, revenue grew $42 million or 7% with the resulting $23 million uplift in operating income. Incrementals were 55%.

Improvements in Asia-Pacific, particularly Australia and China, helped to offset the impact of a full quarter of reduced activity due to political unrest in the Middle East and North Africa. By product line, Well Construction, Integrated Drilling and Artificial Lift posted strong performances.

Latin America added $30 million sequentially at the operating income line on $88 million of revenue growth. Incrementals were 34%. Argentina, Colombia, and Venezuela posted strong sequential performances. Drilling Services, Stimulation and Chemicals and Artificial Lift benefited from improved demand.

During Q2, we generated EBITDA of $598 million with DNA running at $282 million. Capital expenditures were $364 million for the quarter, net of $23 million of lost and whole revenue. Net debt increased approximately $145 million this quarter to $7.0 billion. Operating and working capital increased $193 million.

As of quarter end, a ratio of net debt to net capitalization stood at 41.5%.

In July, we successfully renegotiated our revolving credit facility. Capacity was increased to $2.25 billion and maturity was extended to July 2016 while reducing fees and improving pricing terms.

For the third quarter, we expect earnings per share of $0.24 to $0.26 before any excluded items. We expect a seasonal recovery in Canada, coupled with otherwise steady improvement in the US and international markets.

I will now hand the call over to Bernard.

Thank you, Andy. I followed my own comments on Q2.

Quarterly revenues reached a new historical peak of $3.1 billion. Year-on-year revenue growth was up 25% while sequential growth was up 7%. This is achieved in spite of the Canadian breakup, which for Weatherford is always a large financial event. We are, by far, the most Canadian of our peers. As a reminder, for legacy reasons, Canada is still our second largest country by revenues.

The international segment earned the quarter with a sequential of $108 million improvement in operating income and 14% quarter-on-quarter growth in revenues. The international margin recovered 580 basis points sequentially to 10.4% as a result of 51% overall incrementals.

The international performance was broad-based but was strongest in Russia; Caspian; North Sea, UK in particular; Australia, and in China for the Eastern Hemisphere. Colombia and Argentina for Latin America. The two highest performers company-wide were Russia and Columbia.

MENA recovered some. It was held back in part by North Africa. Operating margins continued to be burdened by operating losses in Libya. The other factor is volumetric. The region is set up for a materially higher business volume.

Pricing, and by pricing I mean international pricing, was not a factor in Q2. Pricing will become a factor in forward quarters.

The Canadian breakup and steep decrementals weighed on NAM results. The US operation showed strong revenue growth. It grew at significantly more than twice the rate of the rig count, and at higher margins. But the US could not overwhelm Canada's seasonal impact.

What follows is a synthesis of how I see -- how we see -- 2011 unfolding. We expect 2011 closer to a 25% top-line growth on 2010, which is a little higher than 20% originally anticipated. The full-year revenue growth should be stronger in North America than in the international segment, which is fairly obvious, as midyear North America shows a 50% year-on-year growth versus a modest 8% for international. The international segment, though, will have a strong second-half finish to 2011.

North America will strengthen further in the second half of 2011. It will be a reflection of our position on and around wet shales, oil, and heavy oil. We are, above all, a mature play and unconventional company, starting with oil, heavy oil, CBM, tight gas, shales, and tight oil. This is a function of our proprietary formation evaluation, the zonal isolation open hole, closed-loop drilling, artificial lift, production monitoring and optimization capabilities.

The second factor will be the rise of Canada as a North American play after years of lagging the US.

And finally, when it comes to North America, the catchup in volume and pricing of a number of product lines where the supply/demand curves are crossing their sweet spot where we have particular strengths. This would include, front and center, artificial lift, managed pressure drilling, open-hole completion, directional, and formation evaluation. Positive pricing trends in North America will accelerate in the second half of 2011.

The outlook for our international segments, whether Latin America or Eastern Hemisphere, have strengthened in a number of markets. Latin America, the second half of 2011 performance should be driven by Colombia, Brazil and Argentina, Columbia being the fastest growing in the region. Brazil will be scaling up with the execution of contracts.

We expect in 2012, growth to accelerate, driven again by Colombia, Brazil, and Argentina. Argentina should perform particularly well.

Mexico should also do better. We would anticipate our Mexican operation to improve in 2012 both land and offshore, including the deepwater segment. In fact, Latin America as a whole should grow in 2012 at a materially higher rate than in 2011.

In the Eastern Hemisphere, we expect a strong performance in the second half of this year from the North Sea, continental Europe, Russia, MENA, and much of Asia Pacific. Australia and China will be the two strongest performers in Asia.

A few comments on MENA and Russia -- MENA will improve in the second half and even more so in 2012. The major movers for us will be Saudi Arabia, Iraq, and Kuwait. These three markets and our operations there will have the greatest impact on the region. Should we execute well in these markets, MENA will return to the pivotal role it traditionally played in Weatherford.

North Africa has been the weak link for MENA. In North Africa, Algeria, and Libya are obviously the critical markets. Their prognosis are different. Libya is on hold and a source of losses as we await the end of hostilities and a political solution.

Algeria, on the other hand, is evolving positively. It is slow, but it is constructive. We're making progress on the ground operationally while the market is gradually improving. We expect late in the year and/or early 2012, a marked acceleration in client contracting and activity in Algeria. And indeed, we expect Algeria to join Saudi Arabia, Iraq and Kuwait as the driving force in 2012 for MENA.

In Russia, we anticipate the beginning of a multi-year cycle of expansion. It will be driven by the redevelopment of many of the existing oil-producing reservoirs, using a different approach and the gradual opening to drilling of Eastern Siberia's new reservoirs. Russia is the second-largest offshore market after the US. What happens there matters to Weatherford, particularly with the infrastructure and presence we have built in that market.

As a synthesis, we side with those who view North America as a stronger for longer play. We are staunchly constructive on the North American outlook, particularly for the oil and liquid plays.

With respect the international markets, we see a much stronger prognosis than is presently recognized in both hemispheres. There is macro economic risk. The many national imbalances are a source of instability and potential economic reversal. And all could be abruptly adjourned in the event of a deterioration in economic conditions. But assuming, as economists like to say, ceteris paribus, which means all things are being equal, we are very encouraged by both the near- and long-term prognosis for oil and gas. There are strong secular forces that support that view.

Translating top line to profitability, we're planning on gradually hiring North American margins for the balance of the year. Internationally, we look for continued margin improvement ins 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 questions, please.

(Operator Instructions). Jim Crandell, Dahlman Rose.

Good morning, Bernard. First question is going from a 20% increase in revenue to a 25% increase in revenue is a fairly big jump, and just on my estimates for the second half would imply an incremental $300 million. Besides North America, where would you say you've become more optimistic over the last three months that drives this higher revenue growth?

The Eastern Hemisphere, Jim.

Specifically, countries?

I think it's reasonably widespread, so I would say Europe, Russia, the Middle East and Asia is here. Just I mean I think -- if you exclude sub-Saharan Africa, we don't see particularly strong growth in the second half. It's pretty much the entire hemisphere, spread around.

So you think over the past three months, that things are -- look like they will unfold better in the second half than what you thought three months ago in the East.

Top-line-wise, yes.

Okay. Could you talk in a little bit more detail, Bernard, how you expect some of the Persian Gulf countries to evolve here in coming quarters -- and particularly the speed at which Saudi, Kuwait, and Abu Dhabi are going to contribute to your business here in the next two or three quarters?

I think in the case of Saudi and Kuwait, the expansion which will occur will be mobilized and organized in the next six months. I think it will impact either Q1 or Q2. In fact, it will impact both because it's normally spread over more than one quarter as the volume ultimately translates into top line.

With respect to Iraq, as it continues, it -- they can be lumpy depending on when contracts start and when mobilization is completed, but it's continuous through the second half of this year and the first half of next year.

In the intermediate run, it is not unreasonable to expect Iraq to be the largest play in the Persian Gulf.

Okay. Bernhard, to what extent in the quarter just completed and looking at the second half, are the cost reductions that you and Peter have affected in the Eastern Hemisphere a contributing factor behind your improved earnings outlook?

I think everything helps. I think upgrading the quality of our skills where needed is as important as the -- as lowering some of the overhead expenses, so every bit helps. I wouldn't want to credit anything in particular. So I would just leave it at that.

Okay, and last question, Bernard, Artificial Lift in North America, I believe you've had two rounds of price increases. Have you seen now the sort of complete impact of the first round? And I'm assuming that you haven't seen any impact on the second round of increases and that should be incremental here going forward?

It's easy. We haven't seen in the P&L yet, and it's not significantly, the first impact. So it always takes a little bit longer than is assumed. We expect to see the first impact in Q3 and 4 and then presumably the other wave of the price increase is in Q4 and in Q1.

Got it. Okay. Thanks, Bernard.

Brad Handler, Credit Suisse.

Good morning. Can you guys please just step through a couple of pieces of your guidance for us just to flesh it out a little bit? So for example, maybe you can share your assumptions for Canada in the third quarter with respect to revenue recovery?

Sure, Brad. I think that let's just talk about North America as a whole. I think if we think in the area of revenues up 10% sequentially, maybe a little bit north of there, the drop obviously was severe from Q1 to Q2 as it always is for us. Typically we get back about 50% to 60% of that revenue drop sequentially going from Q2 to Q3. And I would expect obviously, coupled with that, to be the incremental margins to be more robust than you might expect, somewhere in the 40% to 45% area for North America sequentially.

Got it, thanks. And then I guess I'll just stick with the same them.

The prognosis for stronger Eastern Hemisphere -- it sounds like it is quite broad. What are the incremental margins outlook for the second half of the year conceptually? So that you'd be willing to put yourself on the spot, I suppose.

Yes, if you will be kind enough to just let me focus on Q3 so we don't get too far ahead of ourselves here. I think that on the revenue growth side, something between 5% and 7% and incrementals in the 35% plus range, going from Q2 to Q3 internationally.

Okay. That works. Thank you. I appreciate that color. Maybe last one for me, any updates on your CapEx plans for 2011?

No. I think, Brad, it remains where it stands. We are -- we will make plans shortly for what needs to happen a little bit later on as in Q4 and Q1 looking into 2012. But for the balance of the year, I think it remains where it stands.

Did the allocation -- has the allocation shifted at all, even within your 2011 spending, just based on your apparent (multiple speakers)?

Yes, Brad, that's a good question. And, yes, it has. We are -- it -- it did sift about two or three months ago, so it's not a recent phenomenon.

Yes, we are spending a bit more in North America as you would expect. So I would say right now, it's probably one-third, two-thirds -- one-third North America, two-thirds rest of the world. And this is rough, but you are close to reality.

That works. I'll turn it back. Thanks, guys.

Bill Herbert, Simmons & Company.

Thanks. Good morning. Andy, just sticking with North America for a sec, applaud the relatively conservative guidance, but if you have a similar relationship with regard to US revenues versus land rig count, which is -- the land rig count is already up 4% quarter on quarter, and we are only July 26 here; and Canada is snapping back pretty hard as it typically does, especially following a pretty severe breakup, 10% revenue growth quarter on quarter -- that doesn't strike you as conservative?

I think that's what we would like to stick with, Bill. And I think maybe as opposed to thinking how high the incrementals may be, again, it's something tempering our thoughts on how robust those incrementals can be and why we're not talking about 50% or north of that, is that we think our Canadian operations -- it was a brutal spring break-up from a weather perspective. But we think our Canadian operations did a very good job with respect to, I would just say tactics, in terms of scheduling work.

We were also -- I think they did a good job of managing the cost structure. We've done that better the last two years than we have in the past. And so I think that they performed a bit better, and that is masked by the -- I would say the tougher weather that was experienced up there. So I think there is a little bit less for us to get back from an operational leverage perspective than sometimes there is.

Okay. And secondly, with regard to the roadmap for international margin improvement, second half of this year, 10.5% round numbers second quarter, targeting substantially better than 11% for the fourth quarter. Should we get the bulk of that in the third quarter based upon the seasonal tailwinds that you are going to have in northern Europe?

I think, Bill, it's likely to be really staged in Q3. You get some in Q3 and some in Q4. We're not suggesting it will happen in Q4. It will happen -- it will be staged essentially because it will come out of different parts of the Eastern Hemisphere and Latin America. Some rising and some on the contrary, settling down temporarily for a few months -- seasonality and things like that.

Okay. Last question I have is back to your comment, Bernard, with regard to the North American outlook, and I think justifiably talking about a series of product lines which have yet to really inflect and should be coming down the road, especially Lift.

One thing that I am sort of curious about is the revenue per well opportunity on this backlog of new generation wells that are building, costing call it $5 million to $10 million per well to drill and complete versus what used to be $1 million well to drill and complete. Have you thought about the revenue per well differential if you will on this new generation well that's being drilled today versus what used to be the case?

Yes -- well, I have. It's a complicated question because of the -- it depends as in everything else in our business, it depends on the well, it depends on the reservoir, it depends on the location. But maybe what follows will be helpful.

Roughly 25% of what North America itself, top line, is Artificial Lift for us.

Okay.

What we are -- so you can derive the numbers. What we are noticing is that on -- not only on the wet shales, but also what we call tight oil and also tired oil, being developed with different approaches, are using the lessons learned from the experience of shales, we're noticing that the billings and the equipment specification of Artificial Lift is more than 2 times what it normally is.

And what you have to think of when you look at the Artificial Lift business is you've got a capital goods segment and you've got a maintenance segment. Obviously a new well -- cost of capital goods, the minute it goes in the wellbore, it starts a maintenance cycle. So it's a razor and a razor blade, if you will.

Definitely the capital goods segment of the Artificial Lift business is going to see, and I think it's beginning to happen now, you can see it, is going to see more than doubling of its size. And then, there will be a tail effect which is slower to come through the P&L through the maintenance cycle, but it's very powerful, as it spreads throughout the entire market of wells that we are maintaining throughout North America. So, that's probably as granular as I can get on the issue. But, definitely, there is an Artificial Lift aspect to what's going on.

I would also add one last point, which is we tend to be in North America -- not only because of our Artificial Lift, but in general, we tend to be later cycle. In other words, a lot of what we see in terms of volume and pricing is very often two or three or four quarters after the first wave of other product line's benefits.

That's helpful. Thank you.

Ole Slorer, Morgan Stanley.

Thank you very much. Bernard, could you comment a little bit on the US, specifically, not Canada? How far off sort of historic peak margins are you running at right now in the US?

It's running approximately 10 percentage points below our peak margins. Peak margins is defined by the peak that we have for a couple of quarters, which is higher than the yearly peak a few years ago, so about 10 percentage points below.

Okay, so your old margins will will (inaudible) in the annual about (multiple speakers)?

Think 30% -- 30, and so what I'm trying to say is that. Our US is bopping around 20% right now.

And which product lines -- I know that Artificial Lift was late in terms of realizing margin improvement; it was maybe earlier in the pricing cycle, but is a big backlog business, so timing there. What -- is Artificial Lift still the -- it sounds like that familiar question, still the lagging component? What sort of visibility do you have based on current pricing and phasing in of this business relative to, say, what you are executing from backlog? Can you describe that a little bit?

Artificial Lift are like completions but even more so than completion; it's not late; it just happens at a later stage. Typically, supply chains of players in Artificial Lift needs to be filled up. Then you reach a point where those are simply not -- no ease of delivery. And the barriers to entry in that business are high, and so there is a response to the pricing curve.

And as also Artificial Lift tends to occur not only when the well gets drilled and completed, but sometimes it tends to occur a month or three months or six months after the well is drilled and completed after the natural flow becomes extinct and you move to our artificial lift requirements, so all of these make for a later cycle play. A later cycle play doesn't mean a late cycle play. It just takes it a little bit longer to blossom. This is historically always the fact. So that's number one.

So how much visibility do we have? It is a backlog business, so we have quite a bit of visibility on the volume, on the type also of volume, meaning the type of equipment and specification, which is why I answered the question of your colleague earlier on, on the intensity of use of Artificial Lift, because we have quite a bit of visibility on the pricing which is within the backlog.

And where is the pricing right now relative to the backlog?

You mean how much of the backlog is priced at a higher price?

Where is the new business signed right now? What's -- how much profitable is that relative to what you executed in the second quarter?

It's more profitable.

Is it a step change, or is it a --?

Let's just find out.

I would imagine if you're 10 percentage points below on the US business, that this businesses would be more than that. I'm just trying to sort of get some kind of feel for the magnitude.

Let's find out. Let's find out.

I mean, as in find out, let time -- let the passing of time find out, Ole. I'm not going to give you an answer right now.

Okay, okay, okay. Sorry, sorry. I thought you were looking it up.

No. If you are waiting. No, no; I meant let's talk about it in three months and so forth. I'm not looking it up.

(multiple speakers) and is trying to get down to your third-quarter guidance, which I find refreshingly conservative.

Andy, a question for you. You burnt cash this quarter and increased net debt. Could you kind of reconsolidate that with the goal of reducing working capital and becoming more efficient -- and CapEx?

Yes, Ole. All right, well, look, the CapEx outlook hasn't changed. We've spent about $700 million halfway through the year and the guidance remains at $1.6 billion. The -- really if you look at it on receivables and payables, basically balanced out. Our growth was in inventory. Our DSOs improved by two days this quarter. But still we are about 12 days away from our DSO goal for the year. And inventory has built, as you would expect it to for things like Artificial Lift and completions, where we see strong ramps in activity.

And it's also built in our Well Construction business where we have high demand for some of our newer technologies. And then there's other bits and pieces of the things.

Remember, we are quite vertically integrated with respect to building many of our own kits that we put out then on a service model. So, we, in fairness with a more robust revenue outlook and activity outlook for the balance of the year, and what we see coming up, it's while we drive hard on operations on managing that inventory number and trying to get more efficient there with our capital all the way around, not just on inventory, we do need to allow them to have the capital they need to grow.

Absolutely. Could you update us on the current metrics for how we should think about working capital intensity on incremental revenue? Is it $0.30 on the dollar still? Or --?

No; $0.15 to $0.20 is what we would expect it to roll into for the year.

Okay. Very good. Thank you very much.

Angie Sedita, UBS.

Hasn't been said, but nice quarter.

Bernard, regarding your comments on international margin guidance for Q4 2011, your commentary is that it will quote be meaningfully higher than 11%. I'm trying to defer that. Does that imply that we could actually see margins in Q4 in the high teens?

I don't know, Angie; I don't know. I can see the trend. But beyond that, I wouldn't put any specific number on it. I would be afraid to. So I can see the trend. It's positive volume. It's positive in terms of execution quality, and it just might get positive in terms of pricing.

And so I don't want to give you the same answer I gave Ole, which is let time answer. But, I will just say that I hate to put a number on that because I'd be wrong.

Okay. Fair enough. And then if you were to look at MENAA margins in Q3, let's come in a quarter -- 5.5% in Q2. Could we be -- obviously issues still with Libya and North Africa -- could we be at low double digits in Q3 in MENA or is that a stretch?

MENA margins are very low, Angie. They're very low in large part for the reason you mentioned. It's not natural for MENAA to be that low.

On the other hand, MENA will be -- talk about volumetric issues. MENA has quite a bit of business which is booked, and which is a good thing. MENA will be mobilizing, organizing, and so forth and so on which you hear it so often that you're probably tired of hearing it. It's very seldom an efficient way to maximize earnings and so forth, so you have to take that into consideration also. I will leave it at that.

I don't disagree with you that it is an unnaturally low level of margins for MENA where we are right now. I think we're all very clear on that.

Right. So as far as the progression of margins, MENA will be the slowest for the remainder of the year based on what we see today?

It will be -- it will progress. Yes, it will be slower than its colleagues in European, Russian Caspian play. And, yes, also actually, it will be slower than Asia.

Be mindful of one thing; I may be wrong on this, Angie, so if I'm wrong you will correct me, but I think our peers tend to put North Africa in the European FSU as a sort of sub- what we call sub-Saharan Africa, what they call Africa, sort of region. So the MENAA Asia-Pacific is just the Persian Gulf and Asia.

We, on the contrary, for historical reasons, have North Africa within -- MENA and Asia-Pacific region. So in a way, us, the handicap for having a limping North Africa is on the one side of the reporting as opposed to the other for our peers; that's all. I may be right on this, and if I am, you may want to think about it when you look at margins.

No. Yes -- no, you are. Everybody else reports it differently.

And then separately, final question, both on asset sales and the revolver. Update on the asset sales. Could we see something potentially in 2011? Are you still aiming for potentially a $500 million to $1 billion in asset sales?

And also, you raised the revolver. Why was it raised? It's a fairly large revolver. Is that for M&A or potential FCPA fines? Could you give us a little color there?

No; the latter is very easy. The revolver is coming due, so as a point of normal management, we renegotiated a new revolver. It's a better one. The terms are -- the terms are better in all respects. It's also a larger one.

For no other reason, that liquidity is always good. There is no designated use of proceeds whatsoever, including the two categories that you mentioned. So none whatsoever. It's just good execution on the financial side.

With respect to the sales of assets, it -- I don't think we will have anything sold this year. I don't -- I -- it's a bit too quickly for us. It is an organized, methodical, and also I would say a reasonably low-profile process. Remember that what we are selling will be essentially the few non-oil and gas assets we have. And the few oil and gas assets that we really believe that they will be more valuable in someone else's hands because it's not what we do.

And so they -- these assets will come on the market at the right time. They will be auctioned. If the auction is successful, we will part with them; and if the auction is not satisfactory, we won't.

It would be very relaxed, Angie. It will take place between now and I say the end of next year. And yes, I do think we will net in that range $0.5 billion to $1 billion is very reasonable, yes.

Okay, great. Thank you.

Rob MacKenzie, FBR Capital Markets.

Thank you. Good quarter, guys.

I wanted to ask a couple more questions on Lift from a little bit different perspective I guess. In the second quarter, how would you describe the trajectory of growth in Lift volumes, Bernard? And as part of that, what do you guys think is kind of the normal lag between when a well is drilled and when the Lift is actually installed, specifically in US right now?

First of all, in second quarter, remember, Lift volume was skewed because of Canada. That's number one. The number two, with respect to the lag, it's anything from 30 days or meaning as the well flows, then you -- after testing the well as needed, then you will proceed with the installation immediately of lift and typically some production optimization software and hardware, or all the way up to waiting some -- anywhere from six to 12 months before you will put in an artificial lift system on it. So that's your range. And it really depends -- it depends on the play -- 100% on the play.

Okay. In terms of the -- coming back to the trajectory part of my question, if we ignore Canada, what would you say the US trajectory of Lift volumes looked like April, May June?

It looked healthy, but the rate at which it I think it operated was lower than the rates at which we booked business.

Great. Okay. Fair enough. And then kind of the next leg, if you will, some quarters and months out, international lift -- internationally, typically, raw lift has not been as big; it's really been more of an ESP market; but the signs are very clear at this point that unconventional resources in international markets are going to be more relevant a year or two from now. What do you guys think of strategically in terms of how you position yourself to maximize your share of the lift market internationally as unconventionals grow there?

First of all, remember, that internationally, we play not only in raw lift, but in progressive cavity lift and gas lift and hydraulic lift. Remember also that we are I think by far, and I don't think anyone would begrudge us that, but the largest production optimization in lift company worldwide. I think the number of wells that today, oil or liquid wells, because if I add the gas segment, it's a much bigger number, that are on production optimization, organized and managed by Weatherford, exceeds 100,000 wells worldwide, and it's not. It's not, at all, all in North America. So that's number one.

Number two, remember also that although we do not consolidate, we play in the ESP market through our ownership in Borets, which is the largest Russian ESP supplier.

So, setting that aside, I will say that without a doubt, the more unconventional you go in oil and the more the developments of the ideas and the approaches of the United States on and around the shales spread to the rest of the world, including applications of the same approaches and technologies in plays that are not shale, but are simply an oil formation that could benefit from being redeveloped, all of these developments are very, very bullish from a secular standpoint for Artificial Lift and production optimization, particularly of the kind that we seem to excel in.

I think it's good for ESP's also. It's particularly good for the other forms of lift. I think are more designed and more economic for the type of flow and the type of depth and the type of downhole conditions that you have in the shales and shale look-alike in terms of technology type of well. Sorry for the long answer.

No, that's very helpful. Thank you. And then I guess the final line of questioning I had was coming back to some comments you made earlier about the split between the capped goods portion of it and the maintenance aspect of it. Can you give us some more color as to how we should think about the size, the timing, and how long that tail of maintenance lasts. And how do we think about modeling -- based on the proliferation of wells, how often do they need to be worked over?

It's hard to give you an answer, particularly on a conference call, that's sensible, but I will try nonetheless.

The capital goods, as I call it, is immediate, or maybe it's within three to six months; at the most, it's within the year. I would say most of it is within zero to six months. That's clear.

It's also clear that as the type of wells being drilled are for the -- either for the shales that are wet or for the -- what we refer to as tight oil or shale oil plays and/or tired oil, which gets redeveloped using different approaches, I think all of that creates a big lump of expansion on and around the capital goods segment.

The maintenance -- what you might want to think of is use the number of about a year -- that number is wrong, but I mean about a year -- after the first installation, so the maintenance cycle for that particular well to be alive; in other words, were the first intervention for -- you call it workover; it's not really workover; it's just production management. And you go back in and you would change components of the tools, etc., etc.

And so you would have a -- I would say it's like it's every year as the capital goods segment expands, you've got a tail effect a year later on the maintenance side which builds up.

These artificial lift systems are maintained continuously for the entire life of the wellbore. It definitely is like a razor blade. The beard grows back.

Thanks very much. I appreciate it.

James West, Barclays Capital.

You mentioned in your commentary that international pricing would become more of a factor over the next several quarters. I was curious about the magnitude of pricing gains that perhaps had been achieved so far that are on contracts that will start in the near term; and then where you think the market you and your competitors are bidding for jobs that perhaps haven't been awarded but could see even better pricing gains.

Difficult to give numbers on future pricing and even on pricing that have been booked in the international markets for competitive reasons, James. I will say this, as I look at some of the things that have ailed us in the past, and we may not be the only ones in this situation, I would say that the level of pricing declines that we experienced in the international markets certainly would be a big factor.

And so, I -- why did that happen? Well's that's a different discussion, and perhaps we didn't cover ourselves with glory in how we managed the declines in terms of pricing, so let's say there's a management lesson to be learned there.

But aside from that, it also means that there's quite a lot of historical latitude to get pricing back. I -- James, the level of pricing deterioration that occurred -- and we're still sort of going through that backlog now, although I don't think it will last terribly long, but we still are -- it's really remarkable in all my years.

So just take the past in this case as an indication, but in a more constructive way, of what the future could hold for us in terms of pricing, perhaps for the industry in general in the international markets.

How far below do you think market pricing you are or were during the downturn then?

I don't know. It's an impossible question to answer. Too complicated. Too many product lines. Too many contracts.

There is a -- I'd just look at the overall effect. And it's -- you can't generalize that. And you just can't print something on that and say well, they were X% low, because it's not that something that's granular. But just know that the level of pricing deterioration was such that it's just a lot to recover, and I will leave it at that.

Okay, understood.

And then just on North America, given the weakness you saw in Canada in the quarter, heavy incrementals or good incrementals as you come off into the third quarter, should we think about fourth-quarter North American margins perhaps in the 25% plus range?

I think that that would be aggressive, James, for where we are coming from, and I don't -- at this point, seasonality in the wintertime -- it's not clear whether folks will work through the holidays this winter, so I think that's a bit aggressive and optimistic.

Okay. Fair enough. Thanks, guys.

Joe Hill, Tudor, Pickering, Holt & Co.

Good morning. That was a pretty good quarter, guys.

Thanks, Joe.

Looking at a very strong performance in the Europe, West Africa FSU market, just trying to delve a little deeper into that. Bernard, you mentioned Russia. Obviously you've touched on your ownership in Borets. Was the ESP business in Russia a very strong contributor to that performance?

No.

No?

It was a good contributor, but not -- in terms of delta, no.

Okay. What about the businesses you acquired from TNK?

That's a big chunk of what we have, so you just described much of our Russian region. Yes, of course. They are well integrated. They are performing well. So the credit ought to go, for the performance of the region, in large measure, to Russia -- not entirely, but in large measure to Russia. Therefore, to the assets that we acquired and that we integrated, well, was it two years ago now.

Okay. And then, I think you guys had said Canada was likely to be a $0.05 hit from Q1 to Q2. It sounded like based on the qualitative commentary that it was a bit worse than that?

No, $0.05 is right in the range.

Okay. Okay. And then, you guys have talked a little bit about Algeria accelerating into year end with maybe Sonatrach doing a bit better. And I think, Bernard, you had said in the prior call that you were hopeful that you would be up to three strings working by June. Can you give us an update on what that acceleration means in the context of your prior commentary?

The acceleration I was referring to is what I suspect will be the beginning of a number of different tenders and contracting opportunities that will open up in Algeria. Really those opportunities sort of occurred six to nine months ago.

I do think you have there the penalty, if you will, for the relative chaos that's surrounding Algeria from 2005. Think Tunisia, think Libya, and of course Egypt further away. That resulted in delays, in decision-making and so forth.

I think that by the end of the year or it could be in Q1 -- I mean these things [conflict] -- you will have, in our judgment, a sizable expansion in the amount of business volume being led out by Algeria's market as a whole.

With respect to our operating capabilities in Algeria, we should have touched wood in a matter of literally days -- should have all five strings operating, hopefully will.

Joe, let me correct something. The $0.05 was the net impact in North America, approximately. It was really $0.04. But the Canadian impact itself was circa $0.10 down.

Okay. That's very helpful. Thanks, Andy.

And then finally just to follow up with the last question here, I noticed you guys cited Venezuela as being a relatively strong performer this quarter. Obviously the outlook for the country's leadership there is a little bit endowed. Are we able to maintain that strength of performance in the short run or do you think that's going to tail off?

I don't think the performance was a big deal either way. I think that -- it's in Andy's comments; I think the -- tried to provide just as many countries as had a positive impact as possible. I wouldn't single out one in particular except it was a major one, and that wasn't the case of Venezuela.

I would expect a vertical situation in Venezuela. Gosh, it's very hard to speculate on the medical condition of a leader, let alone the implications if a condition -- his medical condition is not a good one. So it's -- we'll take it quarter by quarter.

We keep Venezuela at a reasonably modest size. It's a very important market in terms of reservoirs. So we are very aware of this.

It's also a market which has more and more returning foreign presence. You'll probably have to wonder why because of a lack of alternatives, so you have a number of different companies going back -- Russian companies of course, but also some large IOC's going back. So I think it behooves us to stay active in Venezuela, but in a cautious way.

Okay, fair enough. Thanks, guys.

Mike Urban, Deutsche Bank.

Bernard, you've said a number of times that you are clearly pretty heavily under absorbed in MENA. Was the extent of that? How much would you say you are under absorbed in the region? Maybe another way to look at it is how much would the revenue to grow to get you -- to grow you into your cost structure in the region?

I think if you grew by 10% to 20% volumetric-wise, it would be enormously helpful. I think also that -- that's item one.

I think we summarized MENA, into three buckets, if you will. One is pricing and that's going to work itself out.

Two, volumetric, which means that it could -- would be happier with let's say 10%, 20% volume growth. It's simplistic because it depends on the product line and the service line, but let's stick with that.

And three, I think it's fair to say that traditionally, Weatherford is -- has been very large in MENA and very large within MENA in the NA in the word MENA, which is North Africa. And so we have undoubtedly probably been hit the hardest with the events in North Africa, Egypt, Tunisia and Libya, and even though it's not in North Africa, Yemen, which was a very high margin business for us. So I'm not complaining. It is what it is, and it will heal, but that's the third factor.

Okay. Very helpful. And then it sounds like you are seeing pretty broad-based improvement in the Eastern Hemisphere, I guess with the exception of sub-Saharan, you mentioned; not a big region for you historically, but if you could update us on what's going on there both in general and specific to Weatherford?

You mean sub-Saharan Africa?

Sub-Saharan Africa, yes.

I think SSA will have a very good prognosis in 2012 coming out of far more markets than historically the content it's had. I think the opening of different markets in eastern Africa, which really are brand-new if you think about it. You've gone to Kenya and places like that, all the way down to Mozambique, is very promising.

I think on the western side of the market, I think you'll find the former French colonies, and Angola, all the way down to the south, also are very promising in 2012. It's just that they just won't do very much more that we can see at least for us in the balance of the year. That's all. Don't read more into it, Michael.

Okay. Thank you. And last question is it sounds like you had a good quarter in the UK, North Sea. What's the prognosis there given some of the tax changes? Sounds like, if anything, it would be a 2012 event, but would be interested in your take (multiple speakers).

The UK is perennially -- it perennially functions the same way, which is business conditions improve and then the UK treasury slammed the industry with taxes. Business conditions deteriorate, you know.

This time, it seems to be a little bit different. Business conditions improved, and indeed, right on time, the UK treasury slammed the industry with a number of different taxes. I do think that in spite of that, activity and plans were still looking very robust for the second half of the year in 2012, and of course second-quarter activity was very robust.

But then, some of the changes that were made or give-backs, if you will, and they're pretty arcane, Michael -- the tax changes that were given back by the UK treasury, so please don't ask me to explain it; I will have a hard time. I tried to understand it; it wasn't easy.

But as our clients are telling us, the give-backs in terms of taxes by the UK treasury have been very well received, and it seems now that activity in the UK second half and also next year is really looking very bullish. Norway is more sort of our predictable, reasonably subdued in single digits. UK will be more I think much stouter in terms of volume.

That's all for me. Thank you.

This is the last question. There's another conference call immediately after us, so operator just one last question, please.

Robin Shoemaker, Citi.

Thank you, Bernard. Yesterday, one of your competitors talked to us about the international market and indicated that there was a potential to renegotiate some contract terms on existing contracts as one way of improving international margins, apart from, of course, pushing for higher pricing on new contracts. And I just wanted to ask you if that is an opportunity or you see that as a potential opportunity, even in a small way to improve your existing international margins.

Robin, yes, it is, double-edged. When you do that, typically your client asks for more time. And you typically don't get as much as if you just wait for the expiration of the contract and then you basically go back till the market turns. I mean there's nothing new under the sun. The client will listen to your pain and your frustration, and to be fair, it doesn't have to really move because a contract is a contract, but will, with a quid pro quo. And a quid pro quo, Robin, centrally that we extend the contract by X amount of time. So that's the choice you have to make is whether the immediate benefit is worth the more mediocre outlook longer term.

I see. Okay. That's interesting.

The other thing I wanted to ask is quite a bit of discussion here recently in these calls this quarter about the emergence of international shale plays. And I just wanted to ask you broadly how you approach that opportunity with your existing suite of businesses or whether in the international shale arena, there is potential for Weatherford to be involved in providing hydraulic fracturing services in markets where those would be part of the service?

But, remember, that although we only have one-fourth or one-fifth in terms of amount of horsepower per share -- per share of stock market share -- of stimulation capacity in North America, we are very active in the hydraulic stimulation market. And it is a business which has low barriers to entry so you can expand it reasonably readily and easily.

In the international market, we focus on a number of discrete plays which -- I will just name a few right now, but there are others that I just would like to just not to mention, but we focus on Argentina; we focus on continental Europe; we focus on Russia; we focus on China. And in those markets, we seek to offer a broad suite of capabilities ranging from formation evaluation where we feel we have formation evaluation capabilities that no one else has, either individually or collectively, open-hole isolation technology, which again, we consider to be one of the best in the industries, as that's item too; and of course, artificial lift production optimization; and underneath all of this, of course, hydraulic fracking.

So, yes, the international play is one that we are very focused on. And it's one which is going to be a little bit different in each country. I mentioned a few countries; there are others.

And I would say that for a supplier like us, you have to pick your battles. And you have to be both aggressive and watch execution very carefully.

Right. Okay. All right. Well thanks very much, Bernard.

Thank you. This concludes our call. Thank you very much. There's another call after us, so we would like to leave the opportunity for all the audience to switch to the other call. Thank you again.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.