Weatherford International PLC (WFRD) 2012 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 2012 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.

Thank you, good morning, everyone. John will read his prepared comments; I will do the same immediately after. John, please.

Okay, thank you, Bernard, and good morning, everyone. Before my prepared comments I would like to remind listeners that this call contains forward-looking statements within the meaning of applicable securities laws and also includes 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 included in our press release and also on our website.

I will start with some remarks on the third-quarter operating and capital efficiency results, then focus on the exhaustive process we are completing related to the restatement of our financial statements, the results of this work and our timing to complete the process, and last I will give some outlooks for the fourth quarter and 2013.

In the third quarter 2012 we generated earnings before income taxes of $191 million, or $264 million on a non-GAAP basis compared to non-GAAP earnings before income taxes for the second quarter of 2012 of $146 million as detailed in the non-GAAP reconciliation table in our earnings release.

Third-quarter earnings before income taxes were unfavorably impacted by the excluded items highlighted in our press release totaling $73 million on a pre-tax basis. The excluded items for the second quarter were primarily composed of $29 million for a lower of cost or market write-down related to guar inventory; $27 million related to additional professional fees incurred in Q3 in connection with our income tax restatement efforts; $11 million for consent fees related to our senior notes; and $6 million for severance, exit and other charges.

The additional professional fees in Q3 are specific to the expanded and comprehensive procedures related to our income tax accounting restatement. These costs were higher than I expected and I'm breaking them out to give any clear view to the efforts we are dedicating to this project, a true run rate for corporate expenses as we put the tax matters behind us, and the savings we will realize in a post-tax material weakness situation.

Q3 professional fees related to taxes of $27 million compared to $11 million in Q2 and $14 million in Q1 and as summarized in our selected statement of operations information. In Q3 we recorded a $29 million non-cash write-down of guar inventory that was purchased in anticipation of a product shortage.

This inventory was purchased at prices higher than current market values and we currently plan to liquidate this position through bulk sales rather than through consumption over an extended period. As a result, in Q4 our margins will reflect market prices for guar.

Also in Q3 we completed a consent solicitation with our senior note holders to allow us an extension of time to file our restated financial statements with an earnings impact of $11 million.

Third-quarter revenues of $3.8 billion were 2% higher sequentially and 13% higher than the same period last year. North American revenue was up 7% versus the third quarter of 2011 and up 4% sequentially. International revenues were up 20% versus the same quarter of 2011 and up 1% sequentially.

Segment operating income of $521 million was essentially flat when compared to the third quarter of 2011 and up $119 million or 30% sequentially. Segment operating income margins of 14% were down 1% compared to the third quarter 2011 while increasing 3% sequentially.

North American operating margins for the quarter increased 330 basis points sequentially to 17% primarily due to the Canadian seasonal uptick following spring break up and increasing Artificial Lift margins. This was partially offset by lower US pressure pumping margins. International operating margins increased 250 basis points sequentially to 11%.

During the third quarter 2012 we generated EBITDA, defined as non-GAAP operating income plus depreciation and amortization, of $745 million with depreciation and amortization of $329 million compared to EBITDA of $606 million and depreciation and amortization of $311 million in the prior quarter.

Capital expenditures were $540 million for the quarter net of $32 million of lost and whole revenue or approximately 14% of revenue. Full-year 2012 CapEx is projected to be between 14% and 15% of revenue and we expect fourth-quarter CapEx to decline by about 10% from third-quarter levels.

Net debt for the quarter increased $347 million, a significantly lower increase than in Q2. This was primarily due to capital expenditures and working capital metrics that were significantly improved sequentially but still resulted in an overall increase in working capital.

Our DSO metric reflects an increase of five days from 87 in Q2 to 92 in Q3 and this increase can be attributed to three days in Venezuela due to the presidential election and well-publicized system issues with our customer in Saudi Arabia negatively impacting the timing of payments from customers and two days for cash received on Monday, October 1 rather than September 30 due to the quarter following on a weekend.

DSI increased by six days from 83 days at Q2 to 89 days in Q3, primarily due to lower sales than anticipated impacting our inventory levels.

During Q3 the Company devoted significant efforts to understanding the drivers of our working capital, developing processes to accurately forecast and track targets and goals, and establishing reporting systems to monitor progress.

While our Q3 working capital results are not where I want them to be, I expect our current focus and efforts on working capital and capital efficiency to yield improvement in future periods. We are starting to see reductions in inventory orders, improvements in inventory redeployment and tracking, and improvements in time to bill and time to collect receivables.

Based on our improved understanding of the challenges we face and changes to the business environment I now target 85 days and 86 days for receivables and inventory respectively by the end of 2012. During 2013 we target meaningful improvements in our DSI and DSO as we expand our focus on working capital improvements.

During the third quarter we conducted additional reviews of our percentage of completion accounting for a contract in Iraq. As a result of this review we determined that we did not have adequate documentation to support our accounting for increased scope of work as either change orders or claims as defined under US GAAP.

As a result we have concluded this represents a material weakness in internal controls related to our percentage of completion accounting for the contract in Iraq and we have made adjustments to Q1 and Q2 to reflect the accounting under percentage of completion for change orders and claims.

We have included in our press release a schedule that provides details of all adjustments to Q1 and Q2. We have implemented new controls, provided additional training to our staff and these controls will provide greater oversight of our accounting for percentage of completion contracts going forward.

These new controls were performed at the end of Q3 and will also be performed for Q4 and we will assess the effectiveness of the controls at year-end when I anticipate the material weakness will be remediated as part of our annual internal control assessment.

In addition, because we have not filed a Form 10-Q for the second quarter, the impacts of certain subsequent events are required to be included in our second-quarter 2012 results. Until we file our 10-Qs for the second and third quarter there may be some additional adjustments for events that occur subsequent to today and must be adjusted to those periods.

We made substantial progress toward the completion of the income tax restatement of our prior financials, but, because this process is not totally complete, we report our results on a pre-tax basis and will report our tax numbers with our filings.

I told you on our last call that we would undertake an expanded and thorough process to review our tax accounts. The scope of this work has actually expanded in an effort to provide a most complete and thorough review possible and with the goal to bring an ultimate conclusion to our historical tax accounting issues.

While we are not complete we are nearing completion and I expect we will file all our restated and quarterly financial statements by the end of November 2012. I want to caution though that before we can file financials we must complete our procedures, our independent auditor must complete their reviews and audit procedures to their satisfaction and we must answer any additional inquiries or procedures identified by our auditor or by us.

While I'm very sensitive to the needs of our stakeholders for us to file our financials as soon as possible, our primary focus is on accuracy and completeness. I believe that transparency into our progress and process is important to our external constituencies.

To provide insight into our work and what we have accomplished we have included a presentation on our status in the 8-K that will be included in our earnings release that will be filed later today. The presentation can also be found on our website and in the Investor Relations section and under Conference Call Details.

Our progress has been an extremely well organized and well coordinated approach to review our accounting for income taxes and we have brought in experts in international tax, internal controls, tax accounting, tax technology, process design and project management. This process has been fully coordinated with our independent auditor.

I believe that we have the best -- the best team of external experts and internal staff working on this project around the clock and seven days a week. No efforts or resources are being spared to complete the project. Most important to the project is the hiring of quality tax and accounting professionals to sustain our processes and internal controls going forward.

While we have made some staffing changes, we have an excellent team of committed and smart professionals and we are recruiting the best tax professionals into our organization. We are setting high standards and excellent individuals are coming on board because the opportunities, exposure to complex international taxes and the culture we are building is the environment that smart, motivated individuals can thrive in and there is light at the end of the tunnel.

Second, second to people, is our tax basis balance sheet reconciliation process. During Q3 we have undertaken and are nearly complete with a massive and thorough review of our income tax accounting. This focused on several areas and included not only our corporate personnel, an army of expert advisors, but also our field finance organization with full commitment and support from our operations.

The field involvement and support has been tremendous and this has been the highest priority for the organization during Q3. Our processes included preparing tax basis balance sheet for effectively every legal and reporting entity, completing return to accrual analyses for all tax returns filed and completing a balance sheet validation of accrued withholding taxes as well as all other tax accounts on the balance sheet.

Our process was comprehensive and focused to assure our recorded tax balances are accurate. While this process identified some adjustments to prior year taxes, these are not material and support the work that we performed at year-end 2011.

Concurrently we focused on uncertain tax positions as we had identified issues in this area in Q1 and Q2 of 2012. Our procedures included surveying and assessing every legal entity for any possible uncertain tax positions and assessing each issue in accordance with complex US GAAP requirements. We also reviewed all open tax audits across every jurisdiction and tax returns for tax benefits taken that may require a reserve.

These processes identified additional reserves beyond the amounts we identified in Q1 and Q2. We also revalidated uncertain tax positions existing at year-end 2011 and this process did not identify any significant overall adjustment to those previously existing reserves.

As of Q2 we identified $92 million of additional tax adjustments related to prior periods and an additional $15 million of known exposures where our assessment was not complete. So at that time we thought our adjustments could total $107 million.

As of our reporting today, our work has identified approximately $150 million of total adjustments to prior years. This amount is inclusive of amounts identified in prior quarters, not additive. The substantial portion of the total adjustments to prior years are related to uncertain tax positions, those identified in the first and second quarter and additional amounts identified in the procedures I described above.

While we have not completed our restatement, you can take comfort in the quality of work and level of effort devoted to this process. Our approach has been comprehensive and I believe we are nearing the end, but until it is complete we may identify additional adjustments to the amount -- to the amounts we ultimately report.

Subject to the risks and uncertainties regarding forward-looking statements highlighted in our press release and public filings, Q4 non-operating costs, excluding tax professional fees, are projected at about $45 million for corporate, general and administrative costs. Depreciation and amortization projected at about $335 million, interest at about $128 million and R&D at about $70 million.

We have not completed closing our books for the third quarter as the completion of our tax restatement and review of tax accounting is not completed. However, I currently estimate an annual effective tax rate for 2012 of approximately 45%. This should yield non-GAAP quarter numbers without excluded items of approximately $0.20 per fully diluted share on an after-tax basis for Q4 2012.

My ETR guidance for 2012 has increased from about 38% to 45% for the following reasons. First, unexpected additional losses in Iraq have continued to the point where we are required to record a valuation allowance for net operating loss carry forwards and this increased our tax rate by about 3%. Second, our mix of earnings for where we currently expect to earn income during 2012 changed from our Q2 projections and this increased our rate by about 2%. Third, additional withholding taxes have increased our rate by about 1%. And forth, losses in deemed profit jurisdictions have increased driving our ETR up by about 1%.

While the increase in our ETR is frustrating for us and for our investors, we understand what is driving the increases and we understand actions we can take to reduce it. Due to the substantial dedication of resources to the tax restatement process, we have not and will not be able to devote resources to mitigate our ETR during 2012. However, we have devoted time and expertise to our ETR situation and we have identified a number of tax planning opportunities that we will implement beginning in 2013 to start reducing our effective tax rate.

For modeling purposes you should use a 34% effective tax rate for 2013 and expect further declines in future years ultimately to levels consistent with other non-US domiciled companies. The slope of the decline is difficult to predict right now and the mix of earnings or changes in tax laws are always a factor. We expect the quarterly rate to be lumpy during 2013 with some quarters below 34% and some above, but the average at 34% for the year. I will now turn the call over to Bernard.

Thank you, John. The third-quarter is best described as one of intense transition but a very productive transition. Also a quarter with a lot of noise. Both characterizations are true. They reflect the Company's urgent drive to put all reporting issues behind it as fast and as thoroughly as possible and let the Company's industrial position shine as it should.

In Q3 we made correcting the uncertainties around our legacy tax accounting the Company's overwhelming priority -- this is Companywide. We achieved what we set out to do. At quarter's end we have assembled 100% of the historical tax and tax reconciliation information for all jurisdictions, all deal entities and for all relevant timetables.

To be clear, this isn't a sample of the relevant information we assembled, it is 100% of all. We have all the needed historical files to have the Company on the soundest tax accounting footing humanly possible. This is a massive effort the likes of which is hard to convey.

Beyond the tax and accounting organizations is the entire local field administrations who delivered this result, local jurisdiction by local jurisdiction, deal entity by deal entity in over 120 countries. This is major undertaking that mobilized all the organization during the whole quarter.

We are confident we will put the tax accounting issues behind us including filing our interrupted 10-Q and 10-K and resuming thereafter a normal filing schedule. It is now a question of review and audit which is well underway. We expect to file our financial statements by month's end, that is end of November.

We've also decided to take a number of additional reserves and losses where we felt it was appropriate. We brought to the P&L our best estimate for closure of a number of legacy contracts, primarily in Iraq. In so doing we also change the allocation of contractual losses to the right quarters, Q1 through Q3.

We shouldn't have any further P&L effects on these contracts, they are behind us. Operationally they will be all completed sometime between the end of Q4 and the end of Q1. I know this has taken six months longer to achieve than our original expectations. We were too optimistic. But at the very least the negative P&L effects stop here.

In total we took the MENA alone about $137 million of losses for six remaining unfavorable contracts spread over three quarters year to date. We've also gone through our inventory and taken a best estimate of any remaining obsolete or slow-moving inventory to the P&L. We've taken a $55 million additional reserve for obsolete inventory which is booked in Q2.

Lastly, we are taking approximately $800 million of goodwill impairment charges that was also booked in Q2. If it isn't apparent to all let me make it clear, our forthcoming filings will reflect a review of our books as extraordinarily unusual in its depths and its scope.

Operationally I will try to comment on sequential trends before the additional write-offs and reserves in prior quarter, that means I'm going to use original numbers. It will be clearer to show progression and setbacks.

First, to put Q3 into perspective, the quarter came in on a non-GAAP basis at $0.18 using 45% tax rate or $0.20 using the expected, originally expected 38% tax rate. The difference between the latter and Street expectations of $0.23 is just about entirely bridged by the MENA write-offs in Q3.

I realize fluctuating earnings per share and varying tax rates are confusing at best. I express these numbers here for no other reason than to calibrate where the quarter was operationally versus expectations.

The quarter was good in North America and this is particularly true considering the market environment. Canada had only a modest seasonal gain because of well-advertised climatic reasons. The volume turnaround was half what it normally is and on an already very weak Q2 coming out of an unusually long breakup.

Cost control and efficient operative delivery yielded very strong incrementals. This helped North America more than the underlying market moves would have suggested. Canada did well considering the very subdued seasonal improvement. The US experienced the same deterioration in pressure pumping in both volume and pricing as our peers did.

It was a very severe compression with essentially breakeven operating income, yet represented 10% of North American operating income as recently as Q1. It was almost entirely made up by further gains in Artificial Lift and Formation Evaluation.

The US ended Q3 with only modestly declining revenues and operating income, margins overall barely declined. The combination yielded to North America a 4% growth in revenues and at 17.2% operating income showing a 100% basis point -- 100 basis point gains on Q2.

The International segment did not progress as well sequentially, a combination of either particular country circumstances or write-offs flushed through the quarter. Latin America's progression was halted with flattish revenues and a 70% -- 70 basis point decline in operating income. This was caused by the quarter's sharp decline activity for Colombia.

Activity was curtailed in Colombia due to regulatory changes and delays. Activity has since rebounded some, although full recovery may not happen until 2013. The European, Russia and SSA region also showed decline in revenues and EBIT; the main factor was significant one-time losses recorded in SSA for the quarter for distinct but analogous reasons to MENA. And very much like MENA, they are not expected to be recurrent.

The second factor was weakness in the Caspian markets due to lull in activity by BP and in Kazakhstan. This isn't expected to last beyond the third quarter. Russia was strong and performed as expected with improved profitability. Europe was marginally softer in North and North Sea but wasn't -- but that wasn't a factor. The region's main mover again was primarily SSA quarterly write-offs and soft Caspian market conditions.

MENA was same as in prior quarters, a tale of two regions. Asia-Pacific had again a strong quarter continuing to progress on all fronts and showing higher revenues and operating income. This was overwhelmed in the quarter by MENA made that much worse by about $30 million of additional losses booked in the quarter. The reasons behind the poor MENA performance should not last beyond Q3.

As a synthesis to the International segments, sequential declines in revenues and operating income was a combination of pullbacks in Colombia and Caspian, which are temporary in nature, and contractual losses write down in MENA and SSA which should not be recurrent. The rest of Latin America, Russia and Asia Pacific continued to progress well with good operational and financial performance.

So forward our outlook, sequential first. We expect North America to be essentially flat in Q4, both US and Canada. The pressure pumping segment will continue to deteriorate but a counter balancing effect of our production in Formation of Evaluation product lines should overcome its effect.

The International segment should be stronger in Q4 for the Eastern Hemisphere in both revenues and operating income; Latin America should also progress but more modestly. All in Q4 had about $0.20 with a 45% tax rate, up from $0.18 at the same tax rate is our best estimate to date.

Year over year 2013 looks constructive all around. We expect steady improvements in North America and even more so in the International segments. 2013 should be the year of international improvements and pretty much across the board. Latin America shows a very strong year, the Europe, Russia, SSA region and Asia-Pacific all have solid growth and positive margin improvements planned. MENA should return to being a positive contributor after two years of difficult transition.

As important as the operating outlook and industrial positioning are, we have two other clear and distinct priorities that are even more critical. One, completing our regulatory filings by month end and thereon focusing on yielding a lower effective tax rate. No one at Weatherford believes the 45% tax rate; our estimate for 2012 is either acceptable or even reasonable. John mentioned an estimated 34% in 2013 reported tax rate. We should endeavor to beat this number when the year is counted.

Two, a single-minded focus on return on capital employed and free cash generation. 2013 should be the year of balance sheet improvements. Too long has this organization been an exemplary growth machine but a weak custodian of shareholder capital. By and large I am responsible for this dichotomy and I will change it. The proof will be in the doing for quarters ahead.

Expect continued growth at Weatherford at a more measured rate and a continuous improvement in all our use of capital metrics. Expect positive free cash flow in Q4; expect positive free cash flow in 2013 thereon. The Company's focus will be on returns and the quality of growth as measured by margins, not the absolute rate of growth. The Company's culture and its values will change. With this I will open the call to the Q&A session, please.

(Operator Instructions). Jim Crandell, Dahlman Rose.

Bernard, how much can you see yourself reducing CapEx in 2013? And if earnings let's say meet your business plan how much can you see yourself reducing debt in 2013?

Too early to tell with specific numbers because our plans are not finalized yet and are different choices we have to make. But I would say that we intend to make significant -- significant changes in the amount of leverage when the year is counted. I will leave it at that.

I mean, would it be unreasonable to think that you might reduce CapEx from $2.1 billion to $1.5 billion or in that neighborhood?

Again, it is too early, Jim, so don't lock me up in a number. But that is not unreasonable.

Okay.

Remember the ratio of revenues that we use -- 10% to 15% of revenues. What I will tell you, which is for CapEx, which is a measurement. What I will tell you is that I would expect that ratio to steer towards the 10% rather than 15%, that might be a better way for you to look at it. And I would expect it to steer as close to 10% as we possibly can make happen. That is probably a better way to look at it.

Bernard, Russia has been a very large important country for you. With Rosneft taking over TNK-BP how do you think your business could change in Russia? And can you give some estimate as to maybe the percentage of your business that was TNK-BP and is there any vulnerability to Weatherford from this happening?

The amount of business that TNK represents is just under 50%, I would say between 40% and 45% of our Russian business. The shift to Rosneft, which is also a good client, should not have any consequences whether good or bad, it is just a consolidation in the Russian E&P market. That should not affect us either in a good or a bad way. It all depends on our performance really at the end of the day.

Okay and last question, Bernard. As you go into 2013, would you expect your earnings internationally early in 2013 to fall off seasonally as is usually the case? And on an operating pre-tax basis, I mean is it -- I mean should we expect any improvement in earnings sort of Q1 versus Q4?

Again, I think that is probably better ask when you look at that specific model. But I would say this, given the fact that the international numbers at Weatherford were impacted by events that are essentially one-time events, you would have two forces in motion -- the typical seasonal forces that tend to lower numbers, think Russia, think Asia-Pacific, two very good performing regions.

At the same time we've got regions who will not be impacted by legacy issues, think MENA will be the classic example. So I think it is a fair point that we should not expect as much of a decline on the International sides, Q4 and Q1 as you would traditionally for seasonal reasons. To what extent one of them will (inaudible) around the other I think that is a modeling issue.

Okay, thanks, Bernard.

Jim Wicklund, Credit Suisse.

Bernard, can you talk to us about Iraq, Kurdistan, how you can lose documentation, who was running that -- what happened there?

Well, I will say a few things on the operating side and I will turn it over to John if he wants to add some comments. First, it wasn't in Kurdistan, it was in the South. That is the first thing. So you have two distinct markets, so it was in the South.

Second, it wasn't so much that documentation was lost, it was an early production facility, in this particular instance, early production facility contract where there were a number of change orders that were requested on an urgent basis verbally. And if you know a little bit about how operations are run in southern Iraq, it is not the easiest of places to get various approvals done in a timely manner given the various layers of approvals.

As a consequence we are full of good will, our operations and the administrative talents we had then there decided to proceed with the various change orders, not having documented them in the proper way.

Now from an accounting perspective, and I will let John step in, that is unacceptable. Because if the documentation is verbal, however good intentioned you are, and you proceeded to spend the money and to make whatever change orders were required by the client, then I am afraid that it is not proper procedures and so we sanctioned it and that is that. There was no -- there was nothing that was lost.

Actually there was nothing that was given; in other words had we had a written documentation it could not have been lost, it's not possible. Understand? This is in the South, not in the North.

So a lot of it has to do I think with the fact that infrastructures in the South are so challenged that invariably engineering plans by the best organized clients or by the best organized oil field service company could come awry when it is confronted with the actual physical reality that you have on the ground.

And so changes to plans are going to happen. The problem is matching the documentation requirement with the operating reality, therein lies the challenge and the problem. This will never happen to us again, it may happen to other people though. Do you understand, Jim?

I do, I do.

Bernard, you stated that very well, there is no need for me to add.

Let me -- as a follow-up, how much exposure does the Company have in percentage of completion contracts overall?

Listen, it is very simple. Let's just move the clock because we have a couple that are finishing in Mexico, so by year-end that is gone; we have one in Gulf of Mexico which is finishing by year-end or Q1, that is gone and there was no problems with them at all.

You will be left in 2013 for simplicity's sake with essentially two -- one drilling which is in China Pacific going very well with no issue and just one new one, which is at the end of the day it's just one project. So it's very too easy for you to squint on it, which is for ENI and it is in Iraq. So it is the second reason for you to focus on it.

And it is a large contract, it's about $800 million over the next 18 months. So you can assume about $500 million give-and-take would be in 2013, so it's a big number and that's it. One contract, one client, it's brand-new, different terms and conditions. That's it, there's nothing else.

And that would assume (multiple speakers) sitting on (multiple speakers).

To summarize again -- sorry?

I assume both you guys are sitting on who's ever in charge over there to make sure this doesn't happen again?

Well, I mean you've got the operating performance, which we're sitting on for sure; the documentation rigor, that is no issue, that is just what it's going to be. So that is not going to happen again period. The real issue is the operating performance.

We have put new controls and procedures in place. And as you characterized, we are monitoring those very closely.

So just again, Jim, for clarity's sake it is one contract from this point forward period. I'm sorry to say it is also in Iraq, different contract, different client, different circumstance. But that is all we have at this point forward. There is no love lost for percentage of completion, anything in this Company.

Okay, my follow-up question -- the methodology that you use to determine the level of impairment for the geographic sectors you mentioned, John, what methodology was used to determine the level of impairment I guess is -- there are a couple of (multiple speakers) that have been used.

This is the requirements that are laid out in US GAAP accounting. And whenever you have an indicator of impairment, which we identified in the second quarter, then you go to a two-step process and the first step is you look at discounted cash flows for the reporting units that have been identified with potential exposure.

After you complete your step one test, if you pass then you don't move forward and we passed with one of the reporting units we were looking at that had to go to step two, which is a fair value test and a fair value approach to valuing the assets of that business and comparing it to the amount of goodwill that you have allocated to the reporting unit.

And it's very standard in terms of the process that you follow, and it's very structured in US GAAP accounting. We brought in an outside valuation expert to help us with the step two portion and this is all based on historical goodwill, it is all non-cash.

Okay, gentlemen. Thank you, much. Best of luck.

James West, Barclays.

John, a quick question just on the Iraq contract and the accounting here. So we have basically written it down to zero; my understanding I guess is that you were losing money on that contract. So is it safe to say that this will help boost MENA margins going forward?

Going forward, yes. And actually the additional charges and adjustments that we took took the contract to a loss contract. And so, going to loss that meant we had to pull all costs that had been deferred into the current period.

So going forward there is a much lower risk for any additional negative impacts and you could even say in 2013 there is a potential that we could have some positive impacts as we recover -- and of course we are going to focus on attempting to recover -- any change orders that we did not have documentation for previously.

Okay, and then -- sorry?

No, it's all right, please, please.

Bernard, you had mentioned at one point in the past that you still -- you thought at that time that MENA could exit this year at somewhere around a mid-teens exit rate -- not 4Q, but the exit rate for the year. Is that still achievable or has that been pushed out a little further?

James, maybe I am turning a conservative leaf here, but I will say it's pushed out.

Okay, okay, fair enough. And then just one last question for me. Bernard, in your prepared remarks you talked about steady improvement in North America in 2013, I think there is some debate in the market right now about what 2013 is going to look like in NAM. Could you perhaps provide a little more color on why you see that market progressing upward rather than maybe flat to down?

Well, it may reflect the assessment of our own position in the marketplace more than anything else. But look, the product lines that have damaged North America will bottom out. When will they bottom out? In our particular case I suspect they are very close to bottoming out now. Let's say they bottom out in Q4, I'm referring to pressure pumping. So that is that.

The other product lines have been continuously improving and they are improving to a great extent because they are gaining share. It's not a lot of share, but it's a little share, it's enough for us. And I don't see any reasons looking at the exposure we have and what we are trying to -- markets we have tried to serve in North America, I don't see that process stopping.

So what has helped our North America numbers so far, which is overwhelming the declines of pressure pumping, I see it continuing. Of course Artificial Lift and Formation Evaluations are the two primary drivers, Completion also. I see that continuing just at the degradation of the economics of pressure pumping will stop. So you just have the positive factor, essentially it.

The other consideration is how -- what will be the evolution of Canada 2012 over 2013? I'm not a raging bull at all. On the other hand I think that after a very -- from a market perspective, not from a performance perspective. The Canadian performance has been very honorable at Weatherford. From a market perspective I think the likely evolution of the market from 2012 to 2013 in Canada is going to be reasonably constructive. That is also helpful.

So we add these pieces together and you can see that North America is likely to behave reasonably well at Weatherford 2012 on 2013 with some gains, both top-line and most importantly margin.

Okay, that's very helpful. Thanks.

Angie Sedita, UBS.

Bernard, strategically when you think through your regions around the world and given the difference in profitability and margins among your regions -- obviously you're grappling with Iraq and that will resolve soon. But when you think forward going into 2013, 2014 are you considering de-emphasizing some of your markets and focusing your efforts where you do best? In other words, do you need or want to be in MENA and SSA long-term to the degree that you are today?

I think it is a very good question, but I think you should replace the word product service lines with regions. And so, although it is true that we do need to be in every single country and so forth and so on and try to have a presence and break into market shares everywhere, I think that is not necessary nor is it wise.

I do think your question should be asked exactly the same words with product lines as opposed to regions. Do we need to be emphasizing as many product lines as we do with the same degree of both people and capital support? And the answer to that question is no. And so there is a triage going on of where we're going to emphasize our efforts.

And by and large the issue of returns and the issue of capital deployment is an issue of internal discipline, but it is also an issue of -- really of allocation of scarce resources, meaning allocation of capital between different product lines. That is my opinion even not more relevant, but as relevant as the issue of discipline and compensation and culture, which are normally addressed in these calls.

And, no, I am not going to discuss which product lines are going to be somewhat de-emphasized or completely de-emphasized and others are being sort of pushed because it's a strategic issue.

And then I assumed this evaluation is going on currently and when would you expect to have this completed where you will now move forward with maybe a realigned product line by region?

I think it is done already, Angie, and so the question is execution -- it's execution.

Okay, fair enough. And then the decline in margins in Europe, sub Africa -- Sahara, Africa, FSU from 17% to 15%. Could you give us a little bit more color on that? And then when you look forward into Q4 in 2013 is that 15% the new run rate or will you return to prior levels?

No, no, you had sort of two effects. The first one is just a drop which is -- it happens in our Caspian market and Azerbaijan and Kazakhstan, in two instances to our large clients pulled back on volume for no other reason than the inevitable randomness in the way business moves from quarter to quarter. So that is not a sustainable problem at all. So that will come back. The other one is that we took a fair amount of --

Charges.

Yes, charges, we zeroed in on a number of contracts also in SSA. This really sort of intends to be our -- to have as clean of a -- and I don't like the word clean because we were clean before -- but as thoroughly scoped and zeroed in of a set of books as we possibly can in this respect. We sort of cleaned up whenever we had in SSA that was not, in our opinion, properly reflected. And that of course impacted the region.

If it wasn't for both the Caspian, which is a legitimate shift in business to the right, happens, and the SSA event which is one time you would have found the margins of the region perfectly fine. So, no, I don't think that the quarter's margin, which are honorable but not as good as they were, to be a reflection of what will happen long-term, no.

Okay, okay, perfect. And then finally, on Artificial Lift the outlook for 2013 still expects further pricing and growth or is pricing starting to flatten? And where are you seeing the growth on a region basis?

Actually I will give you some insight on CapEx. Part of the reason why CapEx bulged in Q3 more than John and I would have liked is actually very legitimate, which is that we have commissioned, opened and finished five new Artificial Lift plants whose volume are desperately needed in order to be able to address the markets that we have.

And finally, the bulging in inventory also, some of it has to do with those plants that are coming on stream. So that is sort of a side comment that reflects the prognosis of lift. Lift has got steady volume growth into 2013, pretty much across the board. It is likely to be up double digit, and I will leave it at that. Pricing will flatten in terms of increases in North America. Pricing has got quite a bit of headroom in the international markets on Artificial Lift.

Great, great, thanks. I will turn it over.

Joe Hill, Tudor, Pickering, Holt & Co.

Guys, you referenced adjustment in MENA that you say would bridge us from the $0.20 to the $0.23 that The Street was looking for. And I am looking at the EBITDA, $33 million, which there is a line in the release that says that you can get $521 million in EBITDA just for excluded items. So I thought that was a good number.

So can you quantify the adjustment to that line item to get to $33 million so we can get a better look at the profitability of the region?

As the losses in Iraq were just in excess of $30 million.

Yes. Well, you had 1, 2, 3, 4, 5, 6 different -- there were other losses in MENA, but there were six specific sort of entries in Q3 on and around MENA that add up to $30 million. I don't need to go much beyond to bridge $0.20 to $0.23. I'm not sure that was a really meaningful exercise. But I would just try to convey the fact that that was an easy way to bridge it. But there were more losses than that in MENA.

Okay, so clearly the region is more profitable than it looked in the quarter based on that?

Well, we will find out in the future. I will say this, it used to be -- used to be one of our best performing regions. I understand this was now [three] years ago. But for the same reason why it used to be are reasons why it should be. I'm not suggesting it will happen overnight, I'm suggesting that it was and it could and then in the quarters ahead the numbers should be gradually better in MENA. There is no reason why it would not.

Okay, I will just focus on probably what is the most important question for me then and that is ex noise, ex geographic specific issues, in today's operating environment, Bernard, what is your estimation of the earnings power of the Company? Let's use a 35% kind of statutory tax rate for that exercise.

Joe, in a way I don't want to answer that question. It's much higher than where we are today. Anything else I would say in -- I think would be probably -- it's not the time for me to say things like this. It's materially higher -- I will say this, the quality of the operations is excellent.

I think the perception when one looks at Weatherford today, this is a company which was not well run. I mean, it is a very fair comment when we look at two things. One, some of the practices we had on around taxes. Number two, the rigor of capital allocation. I think both are being addressed, although the issue of tax has been addressed to the nth degree with enormous amounts of rigor, you should take some comfort into it.

We probably will end up with our -- I don't like this comparison, but we will probably end up with one of the best sets of books imaginable of any companies out there because of all this process. So that is one thing.

The capital allocation rigor is going to be addressed -- is being addressed, this is not just another set of comments on a conference call from a CFO and a CEO, no. This is a change of commentary on Weatherford and it was about time. And it is a desirable change in culture.

And I will say one thing about Weatherford, the organization follows and it follows with a great deal of drive. I am certain this will make a difference.

So these two issues which probably have the financial market characterize Weatherford as was an interesting growth company but really it's not well managed, which is a fair comment when it comes to those two points are being addressed.

I do not believe the comment it is not a well-managed company can be fairly assigned to Weatherford when it comes to operations. By and large the quality and the strength of operations has been masked by a number of legacy issues.

And so in a way to answer your question, with the legacy issues about to be put behind us in a very thorough way -- very, very thorough way, very exhaustive way, maybe too exhaustive for our shareholders but it will be very, very, very much closed.

With that being placed behind us I think you will get an understanding of the earnings power of this Company and the cash generation power of this Company. We let the operations essentially be able to shine without anything masking what we can do. Sorry for the long answer.

And, Joe, I will very briefly add to that as well. The transformation that we are starting right now makes it a little more difficult to have that forward-looking visibility because we will be changing the way we allocate capital. So the businesses that generate better returns will have more capital allocated --

By far.

-- will not have as much capital allocated. So until we complete a budgeting process and really a longer-term forward-looking under a new scenario it is a little more difficult for us right now to give you that view. But very meaningful difference than what you have seen in the past.

Okay. Let me just follow up because there is a bit of a nuance here. I think there is some concern amongst investors that the changes in the accounting imply that the level of profitability the Company has historically enjoyed, say during the late 2000's here, is not something that is attainable in the future. And I just want to know if you feel the same way.

Oh, most definitely, I will -- most definitely. I would just say that the accounting noise has overwhelmingly been in two particular buckets, one, tax and tax related. As John indicated, and I indicated myself, no one thinks 45% is a reasonable rate and I don't think anyone thinks 34% here is where we will end up at all, it's just a staging point.

So, first bucket was on the tax side, nothing to do with the operational performance. The second one has been -- the big, big, big issue has been goodwill impairment, which is a function of the price of the stock primarily followed by a number of tests. Then also it doesn't have much to do with the level of profitability of the operations.

Then the rest has been I think things -- I find very shameful, but they are not in the scheme of operational profitability, they are not material for the long-term profitability of what we can do. So don't confuse tax noise and goodwill noise with the reflection of what we can earn and what we used to earn.

I would say today the Company is a much better company operationally than what it was. I also think that the past returns that we had are the -- I'm talking about the margins -- the past margins and the economic performance we had are margins and economic performance we can match and we can beat. So I will just leave it at that.

Okay, that's what I was looking for. Thanks, Bernard.

Kurt Hallead, RBC Capital Markets.

Bernard, I just want to get a little bit more maybe color on how you see things evolving as you head out into 2013, pricing dynamic by product line. I know that you have stated that Artificial Lift should continue to perform well. And I know you stated that pressure pumping will continue to deteriorate at least through year-end, maybe into early part of next year.

So if you could potentially walk us through the pricing dynamics -- you know, don't go enough to get too specific, but generally speaking how would you rank the pricing power opportunity set in North America by varying broad product groups and International, can you do the same for us?

I can do it with a synthesis. I think pressure pumping will bottom out sooner than people think, bottom out probably in Q1 or something like that in the North Americas. It doesn't mean that the business will become overnight a good business, but it will simply mean it will stop deteriorating.

I am referring to pricing which is a much bigger mover -- volume and pricing, which are both much bigger movers of the profitability of product lines than cost components. So that is one thing.

I think that in terms of pricing for the other product lines, there is a little bit left I think of headroom both in Artificial Lift and in Completion, but that is sort of it. You don't have a lot of pricing headroom in product lines in North America. You just have more volume depending on the particular segments you are in. So that is the North America.

I think there is headroom on pricing on a number of product lines. In the international markets, it is not across the board, it's not everywhere, it depends on the market. That headroom would be essentially around the production and Formation Evaluation product lines more than anything else. And that is probably as much as I can give you, Kurt. (Multiple speakers) International, some.

Okay. I know you said that it is very much dependent, and I understand that, on country and project and customer and all those dynamics that come in International, so it's hard to generalize. But when you think it through and you kind of look at the map, is there a greater opportunity for pricing power let's say in Latin America broadly, Eastern Hemisphere, is it Russia? Where, if you were to broadly characterize and not go by country but by region, is it greater in one region than another?

I could not say that it is greater in Latin America than the Eastern Hemisphere or conversely, it's not true. It just depends. You have headroom in both cases, not for everything, not everywhere. And there are tremendous differences from one region to the other and even for one country to the other. It really depends on the circumstances.

So I would say that I think the headroom is about the same. I think that you have buckets of -- within Eastern Hemisphere of really quite good pricing headroom. And so I would probably at the end of the day say the Eastern Hemisphere has more headroom than Latin America, but it is like pulling teeth. I don't -- I wouldn't say that is a terribly meaningful statement.

And then if I may, just on this one you indicated a desire to alter the culture and values of Weatherford to be focused more on return on capital and free cash flow and balance sheet dynamics. And I think we all understand that it takes some time to change direction of an entity the size of Weatherford. So in your mind set what time frame do you think that you would be able to implement these changes and kind of have Weatherford on this new path?

I think the change is already implemented. I think there are some tactical changes, there are some strategic changes, there are some cultural changes. The tactical and the cultural are already implemented. There are some strategic things that over the next 18 months may come to pass. So the change is already implemented.

What you need to probably consider is that from July through I will say the end of September to early October, the focus that we placed the Company under was essentially supporting the enormous, enormous work that was done of re-documenting -- recompiling is a better term than re-documenting -- recompiling the enormous historical database of every single tax base, balance sheet and reconciliation with GAAP-based balance sheets for all the jurisdictions, all the illegal entities, et cetera, et cetera, et cetera.

That was an enormous undertaking which I suspect the Street does not understand how big of an undertaking it was since we set out to get 100% of everything. That was the only way we could be absolutely sure that things would be impeccable, which we intend for them to be. So now that we are coming out of this particular sense of overwhelming priority because it is done, now comes the implementation of the changes that were made tactically and culturally.

So I think the answer to your question is you will see results in Q4, you won't have to wait very long. You will see results in 2013. You will see results in terms of how we run the business, in terms of how the returns come through. You should not think that we abandon growth, no. It is a question of choosing the growth we are going to go after. It is quality growth as opposed to just growth, that is the one difference.

That is awesome, I didn't mean to interrupt. But then the extension of that just on free cash flow. Is that -- have you given some extensive thought as to how that free cash flow would be deployed? Are you thinking about -- is it debt reduction? Is it share buyback --?

Delevering -- yes, delevering. No, no, delevering.

No, that is our focus right now, Kurt, is --.

Delevering. Longer term different issue. Longer term it could be a different issue. But right now it is delevering, period.

Great, thanks, I appreciate that.

Probably, Operator, one last call because we have run the call over the hour.

Mike Urban, Deutsche Bank.

So a lot of understandable discussion about the changes in the culture, the strategic, the tactical, I think you spent a good bit of time discussing those. I think just given the strong growth culture that you had at Weatherford for so long, and to me it would seem that those cultural changes would actually be the hardest to implement and I kind of feel like people will do what they are incentivized to do. How do you create that culture? What have you done to incentivize structurally that behavior that you are looking to achieve?

Without getting into conversation schemes which are obvious, so you can obviously steer them towards a returns type of compensation, that has been done. I think, Michael, you may underestimate not only the drive and the -- I think the loyalty of the operations to the Company, but also how disciplined they are.

And at the same time the share responsibility that I have personally in not having steered the Company towards a more I think reasonable, mature, balanced form of growth. And I think the level of response that the operations will give to the direction which has been very, very plain in communication is different now, is different forever. You will be surprised.

This is an organization in the Company that really responds. At the same time -- if they did not in the past it is really at the end of the day sort of my fault. I sort of -- I made it into something desirable, returns, I never made it into something that was ultimately the objective of the Company without turning our back on growth, but making growth actually secondary to returns. And in doing so we will not lose the animal spirit, if you will, at Weatherford and the ability to grow. No, you'll just find it's much higher quality growth.

So as much as anything in addition to the more structural changes with respect to compensation and capital, it is a tone at the top issue as well?

Completely.

Oh, absolutely.

Totally in every single respect. I will also add there is one very senior -- very senior officer at Weatherford who is also one of my closest colleagues who is tasked, in addition to his portfolio, is tasked specifically with watching our progress and any kind of lack of progress along use of capital metrics Company wide.

That doesn't mean that John and I or Peter or all my other colleagues are not watching this also for their respective portfolios. But there is one individual who is tasked specifically with watching day to day, week to week our progress or lack of progress and immediately acting if there is any kind of steering away from the Company direction. We are actually quite disciplined, more than the Street realizes.

We have a full task force dedicated to this right now. I sit in on those task force meetings three times a week.

Okay, great. And then last question for me is along the lines of greater capital discipline, deleveraging, things like that. You talked about significant or potentially significant asset sales in the past. Just looking through the press release it looks like it is maybe $30 million, $35 million to date.

Has that been postponed rather than eliminated just because of the focus on the tax issues and the accounting issues? And is that part of what we should expect going forward? And I think you had talked about it potentially being as high as $1 billion, is that still a reasonable number to think about as you reposition the portfolio going forward?

First, yes, most definitely the tax and then the tax issues took us by surprise and that has been a major distraction. So no doubt about that. Can't fight more than one war at a time. So that is one issue.

The second one -- the second issue has been -- I would say in general has been valuations are very, very low, that's obvious. That also makes the decision to divest that much more difficult. But I think the two I would say the first issue is the bigger one which is highly distracted.

I don't think we are likely to be distracted from this point forward. I would say diminishing distraction, if you will as a problem that has plagued us for the past year -- or actually the past 18 months on the tax side is in the process really again of being resolved in a permanent manner and in a healthy manner.

So I think the distraction goes away and our focus increases on the divestments. Is $1 billion a reasonable number? I think so. I think so. In the course of 2013, we will see.

That's all from me, thank you.

Thank you. That should conclude our conference call. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. Thank you all for joining. And you may now disconnect.