Weatherford International PLC (WFRD) 2011 Q3 法說會逐字稿

Good morning, my name is Regina and I will be your conference operator today. At this time I would like to welcome everyone to the Weatherford International third-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).

We ask that you please limit yourself to one question and one follow-up, then re-enter the queue for any additional questions that you may have. 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. As usual Andy will read his prepared comments and I will do the same. Andy, please.

Good morning. Before moving on to our prepared comments and Q&A, I'd like to remind listeners that this call will contain forward-looking statements within the meaning of applicable securities laws and will also include non-GAAP financial measures.

A detailed disclaimer related to our forward-looking statements is included in our press release which has been filed with the SEC and is available on our website at Weatherford.com, or upon request. Similarly, a reconciliation of excluded items and non-GAAP financial measures is also included in our press release and on our website.

Moving on to our prepared comments -- for the third quarter of 2011 we reported fully diluted non-GAAP EPS of $0.26 before excluded items and fully diluted EPS of $0.25 on a GAAP basis. The non-GAAP result is a $0.09 improvement over the prior quarter and at the top end of our guidance.

Items excluded were $7 million after-tax, or $0.01, made up of $6 million of after-tax severance and exit charges and approximately $1 million of after-tax expenses related to investigations. Sequentially the field accounted for the entire earnings uplift, growing the operating income line by $104 million or $0.10.

Field contribution would have been $0.11 but for an $8 million negative FX impact we had to absorb from [Barrett's] as a result of their currency-related book losses on their outstanding debt. Below the line costs were flat sequentially despite $20 million of our own FX losses due to a strengthening of the US dollar. In total FX-related book losses were $28 million for the quarter.

An increase in the effective tax rate, which came in at 29.6%, cost $0.01 compared to the prior quarter, primarily due to a change in mix where we generated income. On a consolidated basis revenue increased $321 million sequentially or 10.5% and advanced $843 million or 33% compared to Q3 2010. Consolidated EBIT before corporate and R&D was $525 million with operating margins at 15.6%. This was a 180 basis point improvement compared to Q2. Incremental margins Companywide were 32.4%.

Operating profit in North America improved $109 million sequentially as revenue grew 20.5% or $275 million. Margins expanded 360 basis points to 21.7% on incrementals of 39%. This North American performance was partially offset by a $5 million retreat in operating income internationally.

While Latin America delivered better than expected results, it was not enough to entirely offset the $8 million negative FX impact related to Barrett's and declines in the Middle East, North Africa and Asia Pacific region. The strongest international regional performance came from Latin America where operating income advanced $20 million on $94 million of revenue growth. Mexico, Brazil and Venezuela all posted improvements while productline participation in the uptick was widespread.

Europe, sub-Sahara Africa, FSU posted a relatively flat performance excluding the negative $8 million FX impact from Barrett's. Barrett's has debt denominated in US dollars on which they recorded a $20 million loss due to the strengthening of the dollar against their functional currency, the ruble. We picked up approximately 40% of this book loss in our operating income results for the region.

In the Middle East, North Africa, Asia Pacific region revenue declined $45 million. The deconsolidation of three joint ventures in the region made up $25 million of the revenue decline. For the balance Algeria declined due to the expiration of contracts while our mobilization of equipment out of the country pending additional tenders weighed on margins, as did a negative swing in Iraq profitability and continued operating losses in Libya.

During Q3 we generated EBITDA of $713 million with D&A running at $288 million. This is the third highest quarterly EBITDA performance in our history, the only better quarters being in the second half of 2008. Capital expenditures were $349 million for the quarter net of $28 million of lost-in-hole revenue. Year-to-date capital expenditures were $1 billion net of lost-in-hole revenue or 11% of annualized revenue.

Net debt increased approximately $301 million this quarter to $7.3 billion. Operating working capital metrics improved across the board with DSOs dropping from 89 days in Q2 to 85 days at the end of Q3. Days sales in inventory improved five days from last quarter to 82 days. Our internal targets for the year end remain at 78 days from sales outstanding and 73 days of sales in inventory.

With respect to inventory, we believe that achieving our internal goal will be difficult given our strong market prognosis for 2012. However, we still expect progress on inventory metrics during Q4. Subject to the risks we've highlighted we expect fourth-quarter earnings per share of $0.30 to $0.34 before any excluded items with profit growth in all our geographic regions. With that I'll turn the call over to Bernard.

Thank you. Q3 was a good quarter, another step towards building an increased level of profitability. This was despite punitive foreign-exchange book losses and disappointing performance out of the Middle East.

Quarterly revenues reached a new historical peak of $3.4 billion, year-on-year revenue growth was 33% and sequential quarterly growth was 11%. This was achieved in spite of the deconsolidation of three joint ventures which mechanically reduced Eastern Hemisphere revenue in the quarter by $25 million. Our prior prognosis for 25% top-line growth 2011 on 2010 seems accurate.

Gyrations in foreign exchange markets had distorting effects on earnings per share. Foreign exchange resulted in a punitive $0.03 penalty for Q3 of which $0.01 came out of the Barrett's and therefore operating income in Russia. These losses are neither cash nor operating; they reflect intra-company markup or markdowns of subsidiary balance sheets when converted from local currency to dollars.

There's always some noise, positive or negative, coming out a foreign-exchange book entries; this quarter the scale of the impact is noteworthy. The quarter was earned entirely in the western hemisphere; both North America and Latin America performed very well. The US, Canada, Mexico, Brazil, Argentina, Venezuela all had strong quarters.

The strongest productlines were Artificial Lift, completion and formation evaluation. Eastern Hemisphere was flat for the Europe, Russia, SSA segment while the operating income showed a decline adjusted for the $20 million foreign-exchange book loss at Barrett's detailed above; our operations recorded in fact a higher operating income driven by further strengthening of our Russian operations to profitability.

MENA was squarely a MENA issue. Middle East profitability would have improved on the prior quarter's performance except for the following three items.

One, start-up costs related to new contracts in Saudi, Kuwait and Iraq were higher sequentially as those contracts approached commencement.

Two, contracts in Algeria that we expected to be extended were instead allowed to lapse. We demobilized equipment and people to Tunisia pending the outcome of new tenders.

Three, in Iraq we incurred higher costs than expected. This was a combination of shutdown cost on a completed contract, higher idling cost in order to keep people in country for upcoming projects, and teething problems on recently started operations.

I know it sounds like a lot; this has been a transitional period for MENA. We don't expect these factors to weigh on the region for long. We expect '12 to be a much better year for the region. Which brings me to '12. What follows is a synthesis of how we see '12 unfolding.

We still have a positive outlook for North America [in small measures]. Assuming a flat US rig count from here, top-line should rise modestly compared with 2011 exit rates. Margins would also continue to expand from their 21.7% Q3 levels.

Canada should rise after years of lagging the US. Expected market move is entirely oil-based, heavy oil into liquid shares. This matters to us. We are heavily Canadian in our [NAM] mix for legacy reasons.

In the US we see the oil and liquid segment strengthening further; making up for what will be a necessary pullback in gas and shale gas activity. Weatherford is positioned strongly on and around oil segments. We expect our Artificial Lift, production optimization, formation evaluation and open hole completion product lines expanding in '12 both margin and volume wise and drive the results for the region.

This production optimization and completion, to pick a few, are back-end weighted in both pricing and volume and the important reasons behind our expected revenues and margin performance in '12.

With respect to stimulation in the US, we expect some weakness and perhaps a correction. The issue is in part a withdrawal from gas and a migration to liquid plays, which is a disruptive process. Second and perhaps the biggest issue, the rate of capacity expansion, which is itself a combination of low barriers to entry and high pricing with a promise of quick and exceptional returns.

Until and unless there's a slowing of the capacity expansion rate the prognosis for US stimulation isn't as constructive. Stimulation is an important US product line in Weatherford and we are therefore not immune. But the other product lines in North America overwhelm it in size and contribution.

In summary, we may be [gently contrary] in the assessment of our North American prospects, but we still expect a positive performance for our operation in both revenues and margins through 2012. This is a specific result of who we are and what we do.

Latin America's outlook is for further strengthening in all of our key markets. We expect growth and further margin improvements in Colombia, Brazil, Argentina and Venezuela. Also Mexico should do better. We anticipate our Mexican business to materially improve offshore in the south and finally in the Chicontepec play itself. This is the first time in some years where we can see a squarely constructive growth and profitability outlook for Mexico around the corner.

In the Eastern Hemisphere we expect a further strengthening of our European and Russian operations. Russia will build on a now predictable political and environment, accelerating decline rates in traditional oil plays, some fiscal incentives for exported oil, and finally the emergence of a powerful reentry play using multi-zone stimulation technology.

The European market should benefit from a well behaved 2012 North Sea, which is traditionally a large market for us, and emerging strength around our central and European region. Which leads me to MENA, which is the obvious turnaround.

New contracts should drive '12 profitability, the terms and pricing are substantially better than '09/'10 contractual conditions. They're the ones that we've been starting up, to be clear.

Two, completion of existing contracts that were signed up in '09 and '10. We're attempting to finish all significant oil contractual commitments by Q2 next year.

Finally, the reboot of North Africa, both Libya and Algeria. Well, Libya has been on hold until now and a source of heavy losses, this will change. We're in the process of reviewing and inspecting all of our operations; we'll make the necessary repairs and preparations for a return to operations.

As we mentioned, Algeria has been very slow. That market is now loosening up, perhaps in sympathy with the resolution of the Libyan Civil War. It's also helpful that we have made good progress on the ground operationally. It will take time; in the quarters ahead we expect both Libya and Algeria to improve markedly.

As a synthesis, we are positive on our 2012 North American outlook. We respect the international markets; we see a much stronger prognosis than is presently recognized in both hemispheres. Latin America should be fairly obvious. Eastern Hemisphere has in our view an equally positive prognosis.

We suspect this will be credible in markets like Russia where we have demonstrated performance and capabilities after the effective integration of our 2009 turnkey acquisition. We would suggest MENA will have an equally constructive turn despite recent difficulties in that region. We're working diligently on returning MENA to the high profitability and performance it traditionally had at Weatherford. We expect it to the question of time, discipline and focus.

Translating top-line into profitability we're planning on gradually higher North American margins for Q4 and into '12. Internationally we look for margin improvements in Q4 from Q3 levels and further strengthening in 2012 driven by both volume and pricing gains.

There is macroeconomic risk. The many national imbalances are a source of instability and potential economic reversal. It is obvious in equity valuations. Should the imbalances ultimately result in the significant deterioration of economic conditions, then our outlook will change. However, should the turn of events prove to be one of economies essentially muddling through, we feel our positive outlook will be correct. With that I will turn the call over to the operator for Q&A.

(Operator Instructions). Jim Crandell, Dahlman Rose.

I'd like the first question to talk about your guidance for the fourth quarter. It sounds as if, if you back out some of these issues that affected the third quarter, currency, tax rate were already into the low 30s and you seem to be forecasting improvement globally Q4, Q3. What am I missing in terms of the overall outlook?

Well, I think we're being careful, which historically probably would have been a good idea. And I think we're just being careful now is probably the entire explanation for our guidance.

Is there any region of your four major reasons where you expect flat to down results in the fourth quarter?

You always have seasonality, Jim, but on a structural basis, meaning bad things happening, no. MENA is on the mend, MENA will take a few quarters but that -- I don't think the results of MENA in future quarters will be lower than what they've been in Q3. I think actually the opposite. But it will be on the mend for a few quarters. Other than that the answer is no, there is no -- other seasonality, there's structurally no reason.

It just seems to me that the number seems unusually conservative given everything that at least I know about the quarter. Secondly, Bernard, could you talk about when you see Saudi and Kuwait kicking in? And I would think that this would have a pretty significant effect on Weatherford when it does.

And also Iraq, there's a lot of contracts that are under the radar screen in Iraq too -- and other places throughout the Middle East which are smaller. I think Q1/Q2, some of them will be operating in Q4 already, but I think my experience with these contracts suggests that you will start having some benefits through the P&L certainly in Q1, and I would say Q2 will have just about the bulk of them, would be my guess.

Okay. And in Iraq, Bernard, including Kurdistan roughly how many strings do have operating today and roughly how much of your revenue in Iraq is now tied to integrated contracts and how much is discrete products and services?

It's a good question. We only have nine strings in Iraq; we have now moved that up. But to answer your question, I would say this would be an educated guess, approximately 60% of our work is not integrated project. Put another way, 40% of our work in Iraq is an integrated project. Almost two-thirds of it is not at this point in time. That's in the process of -- that's a mutation that's taking place.

And the nine strings includes (inaudible)?

Yes, they do.

Okay, good. Okay, thank you.

Ole Slorer, Morgan Stanley.

Andy, you ran through some FX members very quickly and I think I missed some of it. But what was the effect -- first of all, did all the FX numbers, were they included or excluded from your adjusted number of $0.26?

All of them were included. And then (multiple speakers) included in the $0.26.

And if we take -- and you mentioned something about Barrett's, and I didn't -- and the Russian currency exposure. I didn't quite catch it. Could you just read -- run through those numbers again?

Yes. So during the quarter Barrett's has outstanding debt and it's denominated in US dollars. Their functional currency is rubles. So on the weakening of the ruble against the dollar during the quarter they had to record a loss and their loss at the Barrett's entity was $20 million. And as a 40% owner of that, we pick up 40% of their results, we picked up $8 million of that $20 million loss in our operating income for the region.

That is why earlier I mentioned that that half of the Eastern Hemisphere, the operating income was actually up, not down, because it took on $8 million worth of -- we call it book losses because they are neither economically nor certainly cash wise relevant. Up or down, by the way. At times it could be up, up or down.

So in other words, your underlying run rate in the Middle East -- sorry, in Europe, CAS, West Africa division was more like 16.1% rather than the 14.7%?

That's correct, that's absolutely operationally correct. You add back the $8 million that is -- there's no -- it is what it is.

And when we look into the fourth quarter, is there anything within the Middle East, Europe, West Africa which is developing adversely or is it all pulling in the right direction?

Pulling in the right direction, seasonality is the only issue. Seasonality is a generic thing for everyone.

And seasonality in this case would be the Russian market?

Yes, the Russian market, although the real seasonality in Russia is Q1. Q4 is half seasonality. And other than that, that's sort of the only seasonality I can think of.

So going back to the Middle East, clearly the 2.7% margin suggests that there are some deep holes, contracts that might be losing a little money or is it not affecting in a more operating type level. So what does it take to get that back to the 12%-13% type or mid-teens type level?

Can you give -- I don't care which number, but please could you give some indication of [wanting it] behind you what is obviously bleeding? And what is the underlying performance that you would see as more reflective of the current market conditions?

Happily it's not operational performance. If it was it would be a much harder nut to crack. It is a combination of what I read was really what it is, three things. We do have the burden of oil contracts and some of them have been truly unprofitable in -- as we bring them to an end, that's a fact of life. That's one.

The deep holes you're referring to is an issue, but then again that is good to be behind us too. The second thing is the event that we detailed both in Algeria and in Iraq, which let's take Iraq first, just in between contracts. That's very an efficient and that doesn't go on for terribly long.

In Algeria we have a context which is what it is, whereupon things that function for years and years and years have been not as functional in terms of decision-making by the clients. It's just -- it's the same for everyone. It was our turn to have contracts which normally were extended without any difficulties. Quite a few actually.

They have no -- the client has different authority today and so goes to through a different process with these contracts. And so unfortunately by the time the envelope on our contracts was finished there was no authority to keep the operations going and, you don't know this, but you can't stay in country in Algeria if you don't have a contract, you have to leave the country with your equipment. I know it's odd but it is what it is.

And so we had to move our workover equipment, managed pressure drilling equipment, coil tubing equipment -- it's quite a bit -- outside of the country and the closest base where we could hold everything together with the intent of course either of exporting it out of North Africa, we have need for that equipment elsewhere, or awaiting for the client in Algeria to go through the procedure to re-extend the contract for us to go back in.

I would characterize that as an administrative glitch, it is what it is, again. Put all put together and you've had a terrible result in MENA, period. That's it.

But, having just been to see the region, I mean it appeared to have quite a momentum in the revenue line based on (inaudible) when it comes to your own rigs going in, from 5-10 rigs in Saudi, I mean the momentum --.

Yes, directional that in wire line and in completion, etc., etc., yes, that is a paradox. But the paradox is that region, which was until about a year ago our very best region outside of North America, has fallen on hard financial times. Partly mistakes were made undeniably for which I take full responsibility, partly simply it's the luck of the draw, we're very north African. So there you are.

I do think that if, as I said in my notes, with time, focus and discipline, it's all it takes. That region will go back to its former ways. We do have a lot of business booked, that is not an issue. And happily, as I said, what has ailed us has not been today our operational performance. Having turned around operational performance in some regions is a much harder nut to crack, as I said.

So all in, I think it's -- honest to goodness it's just a question of time. This is why I sort of zero in around Q2 or something like that for not only the new contracts to be beneficial as opposed to being hurtful, but also for former problems to be dealt with, whether administrative problems or just the expiration of oil contracts that were truly unfavorable and so forth.

And in the fourth quarter to the first quarter, can you give some kind of an expectation for (multiple speakers) particular region?

I think Andy will do this probably in the call that he does afterwards on around the modeling. But I will say this, what I think Andy will tell you, however conservative he is, he will tell you that we do expect progression from Q3 to Q4 and from Q4 to Q1 in MENA, we do. And so he'll give you a bracket for that.

Thank you.

Angie Sedita, UBS.

On Iraq, it was reported -- and you can tell me if it was correct or not, reported earlier this week that there was a $200 million award for Weatherford with Petronas in Iraq. If that's the case could you give us some details and the timing of that project?

Actually this was in -- you have to be a bit careful, Angie, with news coming out of Iraq. This is about I'd say six months old as a signed contract. I don't know why there's such a delay. We don't report contracts. We don't issue press releases and things like that, we haven't in years. But Iraq does have an odd sense of timing.

So Garraf, both in terms of -- that's one of the few integrated projects, new ones, that we've taken on. Then the contract you're referring to which is on the production side of the business, they've actually both quite -- I'm happy to celebrate it, but they're quite old. Again, they were signed I think in -- Q1, I think late Q1, (multiple speakers) Angie.

That's not surprising for the news sources that are out there. And then just to go along with that, with Iraq obviously the profitability declined, as you mentioned. Should we start to see new contracts rollover in Q4 or is that more of a 2012 event?

I think it's all of the above, Angie. I think our best sense, and you understand this is not like a mathematical equation which has a precise answer. I think given where we are in the commencements of these various contracts -- and understand, it's not only Kuwait, Saudi and in Iraq too, it's also other places like Oman, etc.

I think the -- what will drive the margin back to a more reasonable level for that region, they used to have extremely high margins and will again one day, is simply the passing of time. So I think Q4 and Q1 they'll start to have some benefits coming through.

I sort of zero in on Q2 as being when just about the bulk of the first wave of what we've done will be through the P&L. And I could be a bit early, I could be a bit late, I don't know. But that's my best guess. But as Andy will try to do off-line when he goes through the model where he -- you will get a sense of progression Q4 and in Q1 coming out of the Middle East. But it's an operating -- it's an operating guess.

Okay, very helpful. Then finally just quickly on your second-quarter conference call you mentioned pricing strength in Artificial Lift and managed pressure drilling in North America. Give us a little update there today on the status of the pricing within those product lines. And has anything changed over the last couple of months or nothing at all?

No, no, on pricing we have a very -- good pricing trends and lift, NPD in the completion also, in formation evaluation also, I tried to single out many of the product lines which we have strength in North America, and the ones I just mentioned -- lift, production optimization, formation evaluation, completion just to name the primary ones -- all of them have pricing which will flow through the quarters ahead of us.

Lift, as I remember, has something on the order of 10%-ish of pricing increases which will flow through -- a little but will flow through in this quarter, but you should expect much of it to flow through in Q4 and then in Q1 and there on. Very, very strong, very strong momentum in this product launch in North America. It's all oil-based.

Right, right. Great, great, thanks, guys.

Brad Handler, Credit Suisse.

One of the questions on the revenue side, maybe I'll ask you a couple related to your cost side in the Eastern Hemisphere, Mr. Fontana being in place is maybe something that we've focused on as driving efficiencies and the like.

Can you give us some examples of some of what you all have been doing on the efficiency side of the equation, maybe it's about how regional centers are organized or some other cost savings type measures that help point us towards margin improvement as well?

Brad, because we're growing the top-line by about 25% per annum, '10 on '11, and the prognosis on the international side is for -- if anything similar growth or possibly stronger. Much of the focus of Peter and his team has been on managing the growth efficiently.

So it's not so much a question of my telling you we took out umpteen people in this place and in that place. It's far more on the one hand upgrading the quality of the people and the processes and the training and the way -- the manner in which we deliver our products and services to the field, seeking to have the highest quality of delivery possible, that's one.

But two, it's also the -- so a numerator/denominator relationship between the growth on the one hand and the quantity of people employed on the other. Meaning how efficient we're going to be in terms of the number of people we're going to use to fund the growth. That's where you'll find Peter and his team's contribution.

You should also remember that Peter is not new at the job. Put another way, he ran the Western Hemisphere for Weatherford for quite some time. So a lot of -- although the project that we got involved with in the Western Hemisphere, the much maligned Chicontepec Mexico Project, not very popular on Wall Street.

The one thing that Wall Street has always missed there is that we did manage to run 43 strings very efficiently in that project, very quickly; it was entirely to his credit. The only reason the project failed and he learned to hate it simply because the client pulled the plug on it. That's it.

Understand your answer, absolutely. Maybe give us just a little bit more in terms of that notion of efficiency. I mean, I know it's hard because we're dealing with a lot of countries; we're dealing with a lot of different issues. But is there -- can we think of it in terms of striving toward more just in time, for example, or is it purely about man hours that you can somehow work down on a given project and that's part of (multiple speakers)?

It's actually -- Brad, you don't need me actually to answer that question because you answered it yourself, that's absolutely -- you have the two answers which I was going to give you. One is productivity and we are striving to measure delivery of products and services in terms of man hours and precisely with delivery.

But it's also we have more and more metrics on and around quality as perceived by the client, which is not something that has very much to do with man hours, it has to do with number of rejects, number of problems that we may have by productline, by location and so forth and so on. These sorts of things.

The other thing also that we are striving to measure and enforce for our culture is the notion indeed of just in time. Now to hear about it because we're trying to manage the growth and lower capital intensity, which should come through in our numbers.

And to dutifully report DSIs and DSOs, DSIs being the more relevant point here. Because DSIs coming down, which is the inventory, less inventory intensive and we have a ways to go, may also come at a cost of delays in delivery of services and products if you think about it.

We're trying to do the opposite and I think we can, which is lower DSIs, therefore lower intensity of capital, and at the same time faster delivery. So big supply chain work which is underway here. Those are the underpinning of the cost issue.

Got it, that's helpful, thanks. I'll turn it back.

Bill Herbert, Simmons & Company.

Bernard and Andy, trying to understand a little bit better the margin insulation in North America in light of your, I think, fairly balanced comments on pressure pumping. And heard you on the pricing increases for lift, so that helps. I assume that most of that's gross as opposed to net pricing, Andy?

That's correct -- I'm sorry (multiple speakers).

So then -- so you're offsetting cost inflation on your largest PSL in North America. Remind us what percentage of your EBIT today out of North America is coming from frac?

I'm going to answer, I think Andy is going to correct, between 15% and 20% -- 15 and 20, something like that, Bill.

That would be a good estimate.

Okay, well that explains it. So it's a lot smaller percentage than some may appreciate. Okay, and then secondly, with regard to switching hemispheres here for a second. Apart from the FX issue, Bernard, we haven't really talked that much about Russia. And two questions on that front.

One with regard to the third-quarter results. Surprised we didn't show a little bit more vigor on the revenue side given the positive seasonality in Northern Europe and Russia that typically unfolds. And then secondly, can you walk us through a road map for Russia over the course of 2012?

The only reason you didn't see -- adding back the $8 million of Barrett's, fine. Didn't see that particular region starter numbers is simple. Remember that it's not Russia, it's Russia with SSA and the European markets. SSA and the European markets are -- primarily SSA had a down quarter Q2 on Q3 for no other reason than traditionally we hear so often from companies is you had a bunch a products that didn't make it will be in Q4, that made a big difference.

So that's essentially it -- that's it. So if you isolated the Russian numbers by themselves they are the unsung heroes here because they got -- they got masked, if you will, both by the Barrett's thing, which is -- it is what it is, I think we've complained enough about it.

But also particularly by the luck of the draw, which is one region didn't really grow very much, and the European region, no particular reason, and they had a very, very solid Q2 and the Q3 was just flat, and SSA was actually down, not because of any detrimental anything. It just -- it's very products-based and it just basically rolled off into the following quarter. It being Africa, it's not always to keep tight, tight, tight, tight, tight delays compatible with a quarterly close, okay. So that's that.

With respect to 2012, it's a very, very big and -- very big market, Russia and it's not easy to say things that are sensible about it, but let me try. I do think, one, that there is no real -- there is no political question out there. Think what you will of what's going on in that country, but there is political stability. There has been some measures, however modest, on and around the fiscal side for exported oil, which are helpful.

Thirdly, in general, if you poke at what's going on on the oil side, but particularly in the traditionally large reservoirs, Western Siberia is a primary example, Volga-Urals is not far behind, Timan-Pechora is also not far behind. You have, hard to measure, but you have [tens of antecdotes] on accelerated decline rates.

And the clients are very, very preoccupied with the loss of production there for obvious reasons. They have been experimenting with some of the lessons learned in the United States on and around draining the reservoirs with multi-zone hydraulic fracking.

We have done extremely well on the completion side and with everything else that comes with it, which is of course stimulation. Here I'm very positive about stimulation you'll notice. Stimulation and coil tubing and so forth have done extremely well, developing that market.

And looking in 2012 we carry the largest backlog that I have ever known in Russia of work on and around that business which drives all the other (inaudible) that we're experimenting there. So for us 2012 will be -- in Russia will be a well behaved market in terms of meters drilled and work over and re-entry simply because of the political side, one; two, the fiscal stimulus and the need of the clients.

Underlying all of this is of course the price of brent, which is well behaved, that's clear. But second, in our particular case we carry more and more non-drilling related business on and around completion in that particular market. And we do have a backlog of orders there with three clients which are driving the business for us.

Great, thanks very much.

Joe Hill, Tudor, Pickering, Holt.

Good morning or good afternoon as the case may be (multiple speakers). North American stimulation, your comments there are perhaps reflective of some of the changes we've seen in the market recently. I was curious as to whether or not you think a downturn looks different this time due to the contracting structure that's developed in the industry since the prior cycle?

A very good question. I do think there's a number of take or pay, which speaking for -- in our particular case for the ones that we have, look to me as real contracts. Therefore there is a measure I think of hedging there, that's number one.

And the take or pays are often not only for stimulation, again speaking for ourselves, but also cover a broad range of other products and services making it into an integrated operation, something that never existed in the past. So point taken.

That's a segment of the market; I don't know what segment it really is because no -- none of our competitors and we wouldn't do the same thing -- we do the same thing also, would release all the information as to how much of it is really take or pay and so forth and so on. But I think it's a good segment, maybe half, I don't know. I made that number up. I don't take it to heart.

With respect to what is driving, what may be driving some of the softness -- for us there are two factors and we take one actually as more fundamental than the other. First factor is at $3.50 an Mcf gas can't go on, it's going to choke. So there will be some volume reductions I think everyone on this call understands. And so that will affect not only the product line but also it will affect stimulation front and center.

[Unhappily] there's activity moving up and we'll move up further in oil and liquid in the market. Very much like my comments on Russia, it is presumed there is some level of reasonable behavior on the oil side. And so okay, so you have this sort of shift. But the real -- for us the real fundamental problem -- and I don't know maybe we're wrong on this -- is just economics.

The return on and around new equipment coming in stimulation are very, very high. Without discussing numbers on the phone here I will just say that you have cash -- full cycle cash returns on new equipment in time periods that you can count them in the number of months.

Now, when you have that sort of situation and economics it means pricing is materially higher than long-term marginal costs. What does it mean? It means that you have an unlimited incentive for the supply curve to move up, meaning you can put as much equipment on the ground as you can get fabricated, which is essentially, Joe, what's going on.

Forget the larger players that are -- they're doing what they're doing and they're doing it with responsibility and intelligence and I'll count us in that category too. I think you've got -- dozens of new ventures in support. If you look at around at what's going on this is understandable.

Well, this sort of situation, however healthy the demand curve is, cannot go on forever. It just cannot. However down the demand curve is -- and I'm talking like an economist that I used to be a long time ago -- however [stout] the demand curve is, the supply curve will overwhelm it. This is what needs to be, I think, changed. That is our judgment and more important than the gas versus oil shift.

Okay, that's very logical. I was curious as to whether the difference between the haves and the have-nots given the new structure was perhaps exaggerated this cycle, but it sounds like it sure might be.

Just changing gears really quickly to Mexico, you sound much more upbeat on Mexico, good to hear. I'm wondering what the role of the production incentive contracts is in your outlook for strength there?

Everything helps of course, Joe, but first of all it's easy for me to sound more constructive on Mexico, it's been like a long dirge for the past two years. So anything sounds more optimistic for Mexico. It is really quite warranted. I think the primary healing in Mexico has been really the passing of time.

Mexico had issues it had to deal with with its own political constituencies, it did. It took the form of them curtailing dramatically the amount of cash being spent, never mind the approved budgets as how much cash they actually spent, it was a fraction of the approved budget. This has been going on for the past two years. This is what broke the back of our former, as I commented on before, much-maligned Chicontepec project; they just ran out of cash.

And not in terms of cash in the bank, in terms of authority. That is now behind them. Now they have to face the same problems as the Russians have which is accelerating declines. And so I think the prognosis is for a measured but healthy development into Mexico in all markets, not only the offshore markets, front and center, (inaudible) and everything in the Bay of Tampico, item one. In the south, in the other round of play that we refer to as Villahermosa, and of course also in poor Chicontepec which will get some measure of activity increases, all of the above.

Brief of fundamentally traditional need production to protect our production rate type reasons and the end of political limitation on the amount of their budget they can spend, they put that behind them, that's it.

Okay. And then real quickly, just you said something earlier which kind of piqued my curiosity; listing completions are getting some pricing improvement. What's driving the pricing improvement in formation evaluation at this point?

Well, there are two things. One I think is I think you'll find probably the same thing with our peers, directional, horizontal tools, whether MWD/LWD, and rotary steerable systems are still in short supply so that is getting good pricing.

In our case we also have by the -- I suppose by I would say either we have some foresight or maybe we're lucky, we have a combination of formation evaluation technologies, probably the one we talk about the most is the Gamma Ray [azimuth] -- the Azimuthal [3] to Gamma Rays for the [ILWD] systems where we sort of have a unique formation evaluation capability, which are very popular with [shales]. That drives it in our case.

But I mean, in general formation evaluation which covers for us core evaluation, our surface logging, LWD in all of its (inaudible) -- clearly the one I just referred to, are just I think in terms of quantity of use are very popular in North America. Probably the underlying reason is that the clients don't really understand the geology and geophysics of shales and they won't for quite some time, even though they are productive.

Okay, I'll turn it over. Thanks a lot.

Mike Urban, Deutsche Bank.

I wanted to follow up a little bit on your outlook on Russia. Clearly a positive from an activity and even sounds like a mix standpoint. Wanted to get a sense for what pricing is doing. If I'm correct I believe it's renegotiated once a year, should be right around this time. With that better activity outlook is the pricing outlook firming up as well?

It is, but I will caution you that getting higher net pricing, as one of the questions I was asked, was it gross or net, getting net pricing increases out of Russia is harder than getting water out of a stone. So it's very, very difficult. But it is happening, yes.

Okay, great. And one of the big issues in MENA seems to have been just some of these old contracts rolling off and not so great pricing and terms. Is that -- I realize that's the region where that's the biggest issue. Are there other instances of that in other markets around the world that will help you as you get into the latter part of this year and 2012?

I think all of us have that issue. In our case, without revealing too much for competitive reasons, it is particularly concentrated in MENA and there are reasons for that. But it is generally an issue, yes. And your timing is absolutely right. That's when they all roll off -- not all, but the bulk of them, yes.

Okay. And then, so you do have that elsewhere though, it's just concentrated in MENA?

Yes we do, yes we do.

Okay, okay. And so, as that all kind of rolls together it sounds like you've got this gradual margin progression over the next two or three quarters. It sounds like you could be setting up for a more meaningful step up in the second half of next year as it stands today -- obviously things can change. But just wanted to make sure that that is kind of the message that we're hearing or if I'm hearing that correctly?

Remembering the comments at the end of what I read, which is these economies of the world just muddle through -- and muddling through means what it means -- are prevailing mediocrity I think that's right. If it's worse than that, I think obviously things will change.

Right, makes sense. And then last question is, we've talked about most of the other regions around the world, I know we haven't talked much about the Asia-Pacific region. Is that just kind of status quo and then steady improvement along the (multiple speakers)?

No, I'm glad you asked. There are just so many things we can mention in one call. But Asia-Pacific is moving up. Probably the one thing I would point to is expansion of what we're doing in China, both in terms of the drilling and the production offerings that we have. That's one.

And then second, Australia has been slower to come back than I would have expected. Australia was -- Western -- that would be Eastern Australia, Queensland and the big unconventional plays there. You will remember they were extremely flooded, and not just normal seasonality, but major, major, major natural events. And they of course recovered from that, but the rate of recovery has been slow.

These are miner comments, but I would just point to that. But in general Asia-Pacific was well behaved, probably not as strong as I would have expected primarily because of the fact Australia, which is our largest market, has been slow to rekindle its operations and so forth. But we do have large, large projects on and around of the unconventional play which is, again, anything that is land and unconventional tends to be one of the things we specialize in.

Great. That's all for me. Thank you.

This is going to be our last question because there's another call after us I'm told. So with your permission one last call and we're finished.

James West, Barclays Capital.

Bernard, just a couple quick questions and I'll perhaps be more direct than others have been. But on Algeria, just to be clear here, just a clarification. You didn't -- you weren't replaced or lost contracts, these are just contracts that have yet to be renewed?

That's correct. We may be replaced; I mean this is in the hands of the clients. And we're constantly gaining share or losing share, it happens all the time. But all they are workover, managed pressure drilling, coil tubing which we've been doing for quite some time simply have fell into an administrative trap, so that is absolutely correct.

The only thing we haven't exported in other markets where they would be needed are -- is simply because the anticipation is that they will return. We kept the equipment and the crews and there in Tunisia. Why Tunisia? Because it's next door. We have a large base and they cannot stay in country, it's as odd as that.

I won't make too much of it because then you get into the details of these particular countries' politics and so forth. But it is something very unfortunate and hopefully one I will never see again.

Understood, okay. And then MENA margins as we exit 2012. At that point you should be past all the transitional issues that you're facing right now. Any reason why we shouldn't be back to 13% to 15%?

We'll be more cautious on those because I think there's enough good things happening in Weatherford that we don't need to be over committing on MENA going back to its former ways, which incidentally were much higher margins than what you're suggesting. So again I'll let Andy deal with it in all of his modeling work. But I would say that, no, he will tell you that, no, it will take more than the just one quarter to get to it.

End of 2012 --?

(multiple speakers) I'm sorry, I thought you meant 2011. My mistake, my mistake, James. I think -- although that's all sort of a rough view on my part, you have to look at it in more detail. But the answer would be, yes and end of 2012. I'm sorry, I thought you meant the end of this year.

Okay, right, okay, good. And then just last one. Andy, tax rates have been bouncing around a little bit, how are you thinking about taxes for 4Q and then for next year?

Our current expectation is 30% plus. So I think it might, depending on international performance, incrementally sneak up a little bit and then next year let's wait until we have finished our budgeting process for next year and the expected allocation or distribution of our operating income.

It's entirely a function of where the business originates, James, it's not (multiple speakers) unfortunately we can only know it (inaudible), we can estimate it's [ex-ante], but it's one of those things that we can't know until the quarter is over.

Sure, fair enough. Thanks, guys.

Which concludes our call so that you can be ready for what is apparently a call scheduled after us. Thank you very much.

Ladies and gentlemen, this does conclude today's call. Thank you all for participating and you may now disconnect.