Weatherford International PLC (WFRD) 2012 Q4 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 fourth-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 your conference.

Thank you. Good morning, everyone. As usual, John will read his prepared comments and I will read mine. Then we will open it to Q&A. John, please?

Thank you, Bernard, and good morning, everyone. Before my prepared comments I would like to remind listeners 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.

In the fourth quarter 2012 we recorded a net loss of $122 million, or net income of $8 million on a non-GAAP basis, compared to non-GAAP net income for the third quarter of 2012 of $140 million as detailed in the non-GAAP reconciliation table in our earnings release. Fourth-quarter net income was unfavorably impacted by the excluded items highlighted in our press release totaling $111 million before tax and $130 million after tax.

To understand our overall Q4 results you should note that our adjusted earnings before tax were $200 million, as detailed on the non-GAAP reconciliation included in our earnings release.

Also impacting our fourth-quarter operating results were one-time charges of about $30 million on a pretax basis for various balance sheet out-of-period items giving adjusted Q4 operating results before tax of $230 million. If you use a 45% effective tax rate you get about $0.17 per share of EPS, or roughly in line with consensus. Putting it another way, the 92% tax rate versus the guidance of 45% impacts our Q4 EPS by about $0.14.

The excluded items for the fourth quarter on an after-tax basis were primarily composed of $64 million in losses, including a $34 million tax impact associated with legacy lump sum contracts in Iraq, $43 million related to additional professional fees incurred in Q4 in connection with our income tax restatement efforts, and $23 million for severance, exit, and other charges.

We have isolated the losses incurred in Iraq in Q4 on lump sum contracts as an excluded item to clarify how MENA Asia Pacific operations are performing and the impact of these contracts on the region. The excluded losses relate to our early production facility, or EPF, contracts, and turnkey drilling contracts -- all in Iraq and all of which were entered into by a prior hemispheric management team in a different phase of the Iraq market development. Our Zubair EPF contract continues on track and we expect it to be profitable, but we will exclude it as well.

Fourth-quarter revenues of $4.1 billion were 6% higher sequentially and 9% higher than the same period last year. North American revenue was down 1% versus the fourth quarter of 2011 and down 2% sequentially. International revenues were up 18% versus the same quarter of 2011 and up 13% sequentially.

Adjusted segment operating income of $469 million was down 23% compared to the fourth quarter of 2011 and down $30 million, or 9%, sequentially. Segment operating income margins of 12% were down 4% compared to the fourth quarter 2011 while declining 2% sequentially.

North American operating margins for the quarter declined 380 basis points sequentially to 13%, primarily due to the decline in the US rig count and softness in Canada. Pressure pumping margins declined further.

International operating margins were down 40 basis points sequentially to 10%. Sequential international margin improvements in Latin America and MENA were more than offset by declines in Sub-Saharan Africa and declines in Russia and Asia.

During the fourth quarter 2012 we generated EBITDA, defined as non-GAAP operating income plus depreciation and amortization, of $699 million, including depreciation and amortization of $343 million compared to EBITDA of $717 million with depreciation and amortization of $329 million in the prior quarter. This represents a decline in EBITDA of 3% sequentially.

Capital expenditures were $478 million for the quarter net of $29 million of lost and whole revenue, representing approximately 12% of revenue. This is down from $540 million, or 11% sequentially, and in line with our expectations of a 10% CapEx reduction in Q4. Full-year 2012 CapEx of $2.2 billion was 14% of revenue. For 2013 we expect capital expenditures will be between 8% and 12% of 2013 revenue.

Net debt for the quarter decreased $207 million. This represents the largest positive free cash flow from operations in a single quarter in over 30 months. Our DSO metric reflects a decrease of six days from 92 days in Q3 to 86 days in Q4 and in line with our target of 85 days. DSI decreased by six days from 87 days at Q3 to 81 days in Q4 and beat our target of 86 days.

Working capital declined by $111 million and was partially driven by reductions in accounts receivable and inventory that was flat with the prior quarter. This represents the first quarterly reduction in working capital in over 30 months and is significant progress in our journey to improve capital efficiency.

We will continue to make progress with our capital efficiency initiative in 2013. Improvements will not be linear, but will continue to trend favorably during the full year to 75 days for DSO and 77 days for DSI by the end of 2013.

We are in the process of providing company-wide training in capital efficiency concepts as we roll out new metrics to track and monitor working capital and capital efficiency across the organization. We will also drive improvements through modifications to incentive-based compensation metrics related to capital efficiency.

As an update to our internal controls, I expect that when we file our 10-K, which is nearing completion, we will report the resolution of the material weakness in our percentage of completion internal controls. While I do not expect we will report remediation of the material weakness in accounting for income taxes at year-end 2012, we have made substantial progress toward the remediation and final resolution of this matter during 2012.

Due to the completion of the restatement in mid-December, we did not have enough time to complete the testing process, assure our processes are mature enough for a company of our complexity, and fully verify the sustainability of our controls at year-end 2012. Since October 1, 2012, we have hired an additional 18 high-quality tax professionals into our organization from multinational companies and big four accounting firms. I am convinced our efforts will show results in 2013.

Subject to the risks and uncertainties regarding forward-looking statements highlighted in our press release and public filings, Q1 non-operating costs, excluding tax professional fees, are projected at about $55 million for corporate, general, and administrative costs; depreciation and amortization at about $345 million; interest at about $130 million; and R&D at about $70 million. Our tax accounting and remediation costs, which we show in excluded items, will decline in Q1 to about half of Q4, and you will see a decline each quarter of 2013 at a good clip.

Our annual effective tax rate for 2012 came in at 50% on an adjusted basis compared to my prior annual ETR guidance of 45%. The impact of the 50% annual rate is that in order to catch up the prior quarters the ETR for Q4 is 92%. I want to make sure that I point out at the 50% annual ETR excludes the impact of losses in Iraq for lump-sum contracts as we will now treat these as excluded items, so our GAAP increase in our ETR is higher than the 5%.

Our annual ETR was higher primarily due to the impact of lower earnings before tax than we anticipated. This was an exceptional impact on our annual ETR, because certain taxes do not decline as our pretax earnings decline. In these cases the same amount of taxes is spread over lower earnings, resulting in a higher ETR.

Withholding taxes, valuation allowances, and deemed profit taxes are examples of these. I have previously discussed that the significance of these taxes was not fully known until we completed the restatements of our tax accounts in December 2012. We will use what we have learned to reduce our tax rate going forward.

I can spend a lot of time explaining why 2012 taxes are what they are, but I don't think that is the best use of time. A 92% tax rate for the quarter and a 50% annual rate are not in line with how we manage our income tax expense going forward. Instead I will spend a few minutes talking about our 2013 tax rate and why we expect our tax rate will decline substantially as we progress to a normal rate for a non-US domiciled company.

First, and what is always first, is the people. We have a great team and they need a little time to be able to do what they do really well. This includes tax, accounting, treasury, operations, and other parts of the organization that will work together toward the goal of significantly reducing our ETR.

Second, we now have a thorough understanding of what is driving our rate to its current levels. This makes it easier to target and prioritize actions that will result in reductions to our annual ETR.

Third, we have developed action plans and have started the work. We have already executed on certain issues in Q1 that will drive our rate lower and you will see results in the Q1 annual ETR.

My guidance for 2013 is an annual ETR of approximately 34%. I expect some quarters will be below this level and, therefore, other quarters may be above to achieve an average of 34%. The mix of earnings and the level of profitability will have an impact on the ultimate tax rate, positive or negative. After applying a 34% effective tax rate, Q1 earnings per share should come in at about $0.16 to $0.18.

Finally, as you are all aware, Venezuela devalued their currency on February 8. We initiated a program last summer to reduce our exposure to devaluation in Venezuela and this resulted in a significant reduction in our exposure. However, Venezuela is a market where we conduct significant operations and mitigation of currency exposure takes time.

As a result of the devaluation, we expect to record in Q1 2013 an after-tax loss of about $60 million, which we will treat as an excluded item.

I will now turn the call over to Bernard.

Thank you, John. Well, the fourth quarter was the last step in a year of immense internal focus. The 2012 audit closes a chapter of our exhaustive tax accounting introspection.

We believe we have a sound and appropriate set up accounts, both tax and operations. The Company can now move forward in 2013 and beyond, and financially perform without any encumbrances. Specifically, the events that matter for Q4 were as follows.

The quarter had the highest revenue and free cash flow in the Company's history. Free cash flow of $207 million is of the kind that matters most, from operations not sale of assets. This is an indication of things to come.

John addressed the extraordinarily high tax rate for Q4. This is the closing step to a year of tax accounting remediation. It was a massive effort all year, but one that is behind us.

We have completed all that could be done to remediate what was diagnosed as a material weakness in tax accounting. We cannot have this tested until the end of this year. There was no time available due to the testing to demonstrate remediation at the end of 2012 as we need to allow our controls to function properly for a few quarters.

If you wonder why there was no time, it is simple to explain. The extensive restatements of our historical 10-K's was successfully completed mid-December. By then we had, in effect, to choose between completing the 2012 audit on time, which we will do, or testing for tax accounting internal controls. There is not enough time to do both.

We chose the lesser of two evils and completed the 2012 audit. We will have our tax accounting internal controls tested as a matter of course with year-end 2013 and we believe our material weakness will be successfully remediated then. We believe this because as a point of fact the internal controls have already been vastly upgraded.

The other material weakness issue, which was on POC accounting, will be remediated upon filing of our 10-K in a few days. This will leave just our tax accounting material weakness as detailed above.

The professional fees expense associated with the restatements in our accounting for income tax remediation efforts were extraordinarily high. This will, henceforth, come down rapidly.

As a matter of policy, the Company will continue to focus on improving internal controls and use increasing levels of automation at all levels of the Company to minimize the risk of human error and maximize speed of reporting and transparency. This is a joint effort between operations and finance, and it will make a difference. We have paid a heavy price for human error, never again.

The operating results were impacted by about $30 million of one-time charges, which weren't relevant to this quarter's operations as John explained. This made results appear weaker than they actually were.

From an operating standpoint, Latin America and Asia Pacific had strong quarters. Canada was much softer than anticipated, purely for market-related reasons. The US pulled back further in simulation of volume and pricing while lift and completion strengthened. Caspian and SSA fell back seasonally.

MENA deserves more granularity. We took the decision to single out a segment of MENA's results out of Iraq and segregate it from our reported numbers. All contract commitments before July 1, 2011, and all EPF contracts will be segregated from our ongoing results for Q4 retroactively and forward.

The reason for this decision hasn't anything to do with Q4 in isolation. It is intended to provide transparency on the operating performance what is the Company's long-term business. The results of MENA have been severely tainted by punitive economics born out of contractual commitments made 18 to 30 months ago in the early days of Iraq and by a management team which has been replaced.

The drilling-related contracts entered into pre-July 1, 2011, were at terms materially different and with substantially different economics than anything we have taken on since. These terms will not be duplicated. Furthermore, we have developed an infrastructure in southern Iraq which changes the economics of our operation substantially from what they were till recently.

As a reminder, these contractual commitments cover five projects -- three drilling related and two EPF. Two of the drilling projects will be over in Q1. The remaining drilling project and one of the EPF will be over in Q2, but no later than Q3, leaving the second EPF project, Zubair, to be completed in first half 2014.

Also relevant, as a matter of policy, the Company will not engage in any future EPF contracts in Iraq or anywhere else. The Zubair project will be the Company's last.

The segregated numbers will be visible for all. The old contracts add up to almost $137 million in losses in 2012 made worse by inefficient tax treatment, grossing up these losses by $34 million in taxes to $171 million on an after-tax basis. The terms and the high costs of start-ups in that market explain why the numbers were so punitive.

By contrast, it is possible that in 2013 the number shown for these contracts will be a positive contribution as the drilling projects, save one, wind down in Q1/Q2 and EPF remains till the first half of 2014. It would be driven by the successful completion of our last EPF contract in Zubair, which is likely to be profitable. But EPF will not be part of the Company's core competency. It may be profitable, but it won't be our recurring business.

The other geographic markets in MENA, Saudi Arabia, Kuwait, UAE, and Oman perform well in the quarter and are gathering momentum. North Africa remained very weak for obvious political and security reasons, but it did not deteriorate any further. North Africa has bottomed from a profitability standpoint.

Everyone at Weatherford is happy to close the door on 2012, which was for the Company an exceedingly difficult year. 2013 should be much more constructive. I will hit all the main markers of the ongoing year as we see it.

Financial reporting. This will be a quiet year for financial reporting. You should expect a back-to-normal reporting with no delays or negative surprises.

Our financial reporting will be transparent. We will strive to make our quarterly guidance reliable. The tax accounting material weakness will be tested and remediated at this year-end, which is the earliest we can affect it. We have no other issues; they are all behind us.

We are planning for lower tax rates. This is a high priority. We now have one of the most talented tax management teams in the business. We have extensive knowledge of our existing tax structure and in great detail. This will help with tax planning.

The reported tax rate in 2013 is estimated to be circa 34% with some variation throughout the year as mix fluctuates. Reported tax rates will move lower in years ahead.

The Company will balance its traditional pursuit of growth and a cash return focus. The operations understand this in no uncertain terms. This is Weatherford's ethos and direction.

In 2013 the Company's target is to earn free cash flow from operations of $500 million to $600 million. This does not include proceeds from sales of assets. This is commensurate with double-digit rise in our top line 2012 on 2013.

Free cash flow, as it turns out, will equate the principal payments due this year which are about $550 million. We have no other principal payments till 2016.

CapEx will average between 8% to 12% of revenues, down from the prior range of 10% to 15%. To be clear, this means in absolute dollars it will be significantly down year on year.

Asset rationalization is underway. It is a multi-year process. The first stage is to dispose of assets and businesses supporting about 10% of existing revenues. This should take about 18 months to accomplish or by Q2 2014.

We don't identify the various assets to be divested, but we will report on all successful sales. In this regard, we completed the sale of our industrial screen business due to close within Q1. Actually it closed just a few days ago. The net proceeds will be about $130 million in cash.

As a reminder, we will also realize proceeds from our sale of subsea controls last year. We hold debt and equity securities worth a total value of about $180 million. We expect them to be realized in 2014.

The Company's core business long term will be well construction, formation evaluation, and completion and production optimization. The chosen segments of specialized focus are mature reservoirs and unconventionals. I think many of you know this.

Lastly, the Company will make every effort to bring the process with the US government to a comprehensive settlement this year. This should eliminate all non-operating noise.

The 2013 geographic prognosis for our business is as follows. Canada will have a more constructive year, particularly the second half. There are both oil and gas reasons to be more constructive on Canada, albeit it is likely to be a gradual process.

Much of the difficulty has to do with the access to markets. We suspect there is a myriad of methods, short term and long term, by which this will be remedied, notwithstanding political difficulties. The discounts in local oil prices are just too great.

The US will have a modestly improving year, driven by continued progress in lift, completion, and formation evaluation. Stimulation is expected to be flat. Price and volume that is, will be on a Q4 basis without much recovery until 2014.

True, the prognosis for stimulation does improve as a function of time. The structural problem of low barriers to entry will not change. Stimulation is a very important competency which will grow in relevance. It is also one whose economics will be constrained by frequent and recurrent period of excess supply.

Latin America will have a strong year in Mexico and Argentina, as well as some of the smaller markets such as Ecuador. Brazil and Colombia, for entirely different reasons, likely to be flat. The long-term prognosis for Latin America, though, remains excellent.

Europe, as in the North Sea, will be strong across the board. Continental Europe will be flat. Russia will be strong with double-digit market volume increases. The drivers are more horizontal drilling in general, the pursuit of tight oil reservoirs, and also the push in eastern Siberia. Caspian will be flat.

The Middle East will be strong in Saudi Arabia, Kuwait, UAE, and Oman. As a point of detail, the operating income in those markets finished the year close to 20% margin at the EBIT level.

The other moving target is both cost structure and higher quality revenues in Iraq. In this respect, Iraq will show progression in financial performance throughout the year and the MENA margins will blossom. This will be in spite of North Africa.

North Africa will not improve or not improve much. It will remain financially breakeven or a little better segment, but it should not deteriorate further. It may show some profitability in the latter part of this year, and we are more constructive on North Africa in 2014.

Asia will be strong, driven by China, Australia, and to a degree, Indonesia. For us and the region in general the long-term drive is significantly unconventionals, shales and CBM.

From a fundamental business standpoint, the trend suggests overall a solid 2013 with revenues, margins, and cash return improvement throughout the year. We start the year with over 80% of our 2013 budget under firm contract, which is historically a higher number than we have ever experienced. It will also be the year in which the balance between delivering growth and securing rising cash returns will be evident.

We have ended a grueling two-year process -- and grueling is not an overstatement, it's probably an understatement -- of tax introspection. This process is over. We are back to running the business with a streamlined organization and a narrow focus on core product lines where our industrial strengths lie.

Running the business will mean a higher quality of growth and solid cash returns. Our industrial position allows it.

With this I will return the call to the operator for the Q&A session.

(Operator Instructions) Jim Crandell, Dahlman Rose.

Good morning. Bernard, as I understood what you were saying, the charges in the Middle East come mainly from two things -- the Garraf early production facility contract and then the MOC/SOC turnkeys. Could you review what you think the risk is of further write-downs in each of those areas and the timeframe that we would be looking to completion?

Well, there are three drilling projects and two EPF projects. There is five all together. The drilling projects are in Garraf, Rumaila, and MOC. MOC and Garraf on the drilling side will be over this quarter. How do we know this? Because the last wells are being drilled and just about completed. So that is item one.

The drilling projects in Rumaila, old contract also, should finish sometime in Q2. If you want to be safe, it could dribble into Q3. It is a question of the number of wells have to be drilled.

Then, on the EPF side, there are two EPF projects that fall in the same basket. One of them is Garraf again, just EPF. That one will be over with this quarter, but then before we turn the keys over to the client we just have to run it for a short while. So that will be done in the first weeks of Q2.

That just leaves you, let's say, beyond Q2 -- or maybe beyond mid-Q3 if you want to be conservative. It will leave you with just the completion of the second and last EPF contract, which is Zubair, and that will probably go on until the first half of next year.

What do you think the risk of additional charges is for all those in the aggregate?

That is an interesting question. You could have some more losses on the drilling projects in Q1 and perhaps in Q2, small because there aren't that many wells left. On the other hand, at least this is what the analysis of the project suggests, certainly the Zubair EPF project appears to be profitable. Actually quite profitable.

And it remains on track.

And it remains on track. So you will not see one versus the other, they will be combined.

So I would say although you might have still some small losses, and I did say small, in Q1, as Zubair gathers profitability and the other ones sort of go away, which they will beyond Q1. Remember beyond Q1 two out of three of the drilling projects go away -- you are likely actually to see a positive number there.

Okay. Bernard, my follow-up question is, at least relative to my estimates, your operating income both in North America and in the Eastern Hemisphere came down with a more than I would have thought. For example, in North America I think operating income fell as much as revenue.

Can you talk to that a little bit, and then talk about sort of the quarter-to-quarter outlook for the Eastern Hemisphere and in North America?

A lot of questions, Jim. Look, in North America you had -- two things happened. Maybe perhaps three things happened.

One, which I will not comment on, is you had a number of, let's call it, write-offs that took place in different parts of our geographic operation. So that may overstate or understate, if you will, a level of performance in a particular region. So you have that. I won't comment on it, but you should also have that in the back of your mind.

With respect to North America, you had two things. Q4 in Canada, which is really for us a very large spot of what we have in North America and is a stellar performer from an operating standpoint, business was not as good as we expected. It is as simple as that. And so the Q4 was really lackluster.

So we had some shortfalls in Canada. I don't think through any fault of our region or anything else like that. It is just market was lackluster across the board. That was a big impact.

With respect to the United States, you lost more -- had a decline in margins further in stimulations, which is not as large for us as it is for our peers, but it is not insignificant either. It is a large play. Lift, completion, and formation evaluation continue to progress, but could not offset the decline, volume, and margin in stimulation.

And that is really all that went on. There is nothing more than that.

So I will tell you again. We have some element of write-downs, which I will not comment on, which are embedded in the numbers. Two, Canada, which basically was less than expected. Quite a bit less.

Then, three, you had a lackluster market in the US. Particularly poor in terms of performance on the stimulation side, but I would say that any other product lines follow the same performance in stimulation. On the contrary I think lift, completion, and formation and evaluation progressed.

And how would you expect, Bernard, Q1 to look vis-a-vis Q4, both in North America and in the East?

Well, it is an easy comparison because Canada is likely to be quite a bit better in Q1 than in Q4, for obvious reasons. Not only because it is the strongest quarter of the year, but also because I think Q4 was particularly bad. Therefore, the comparison will look rather good.

The US will not change very much. I just don't think so. I think the US -- I think probably Q1 will be very similar to Q4. Both from a seasonality look a little bit alike because they are a cold months, that is number one.

Number two, I don't think that in case of stimulation the volume and margins will decline much more. They may decline a bit further, but they should bottom out in Q1, whereas the rest of the product lines in the business are continuing to progress.

So I would say that net-net the US in Q1 is likely to look like Q4. Canada will be better quite a bit.

And the Eastern Hemisphere, Bernard?

Well, Eastern Hemisphere for what time period?

Looking just at the first quarter versus the (multiple speakers)?

Well, first of all, in the Eastern Hemisphere Q1 is invariably a seasonal low. You know this. In the North Sea, in Russia, and in China that are very large segments of our business. So that is one thing, that is the seasonality.

So beyond that I think probably a better question is what will the Eastern Hemisphere look like in 2013 and we will let the year just take place. But, although you don't have strong market positions and performance everywhere, I singled out the markets where we will not -- don't expect to do particularly well. Continental Europe; Caspian won't do particularly well, I mean flat. And North Africa won't do particularly well, flat. So I have singled them out.

But the UK, Norway, Russia, the Persian Gulf, China, Australia -- those are very strong markets for us in the Eastern Hemisphere. Very strong performance for us on a relative basis, meaning as compared to where we were in 2012. So those will drive both the volume and the margin numbers in the Eastern Hemisphere for the year. Not particularly in Q1 simply because of seasonality.

Yes, you have some seasonality.

Again, North Sea and Russia and China, which is quite a few of the countries I mentioned, have seasonality in Q1. No other reason. But for the year they will drive volume, margin. This will be the first time in a long time that Eastern Hemisphere looks good on a relative and absolute basis.

Okay. Thank you, Bernard.

Ole Slorer, Morgan Stanley.

Good morning. Could you talk a little bit more granularity on Canada? Clearly, it ended the year on a very weak note.

Just up there recently, there was a tremendous amount of optimism amongst the local players but of a highlighting in a critical way how some of the non-Canadian operators struggled up there operationally. Do you see yourself in that camp, or do you think that your operations in the first quarter will be as good as that of the local players?

I think we were born in Canada, so I mean this is a very, very early days of the predecessor company to Weatherford EVI. So we were born in two places. We were born in Midland, Texas, which is not Canada, and we were born in Alberta. This is where the first business we ever had, which was a lift business at the time, was born.

I am in the odd position of having been the midwife, probably for too long, but I can remember it very distinctly. And so Edmonton, Nisku, and Calgary was as much our birthplace as Midland, Texas.

So first thing is I wouldn't describe ourselves as non-local. We are local, this is number one.

And I mean this from the heart, Canada is a market and a play that should work. It should work simply because the issue is one of transportation of hydrocarbons to market. When you have a situation when the discounts, particularly on the oil side, are so great nature finds a way to get the product to the end market. This is as a proposition.

So whether it is by moving things by rail, which is a bit inefficient but is attractive economically; whether it is the patient grinding of getting pipeline projects through British Columbia, let alone the probably unreasonable proposition of building a pipeline to Alaska, you will get the oil to market. You really will.

At the same time -- I will get to the reservoirs in a minute. At the same time, on the gas side, which is -- we don't think of gas as being something particularly desirable, although that does change over time. There is a market for LNG which is likely to be good over the next five years and one that people don't seem to spend much time on.

The ability to move pipelines from Alberta through British Columbia on gas actually, paradoxically, far better than for oil or much faster. So you add all that together and then you look at the reservoirs -- and this is not the place to discuss the reservoirs, like Duvernay or Montney, and so forth and so on, or Horn River and the various attributes they have. But the truth of the matter is that Canada is rich in excellent reservoir prospects.

It has new players, and non-Canadian sources of money that you hinted that, whether they or called Sinopec or whether they are the majors that are now playing a much more active role. And this transportation to the end-user markets that I have described will happen. You will not hold it off.

It will be inefficient, it will be as slow, it will be grinding, it will be frustrating, but it will happen. In this respect, looking at the details of 2013, it strikes us that Canada is likely to be a better play than 2012. Not necessarily a great play for an oilfield service, but a better play.

I think it is going to be more in the second half of the year, but I also think that Q1 looks good. So it is not a matter of my postponing the day of recognition. Sorry for the long answer.

So you should be on track with the general recovery up there. On second question, artificial lift has been a great market but on the manufacturing side you have had some issues. You built out some roof line. Can you talk a little bit about where you stand there from an efficiency standpoint on getting product out the door?

If I could break out the artificial lift in terms of performance in 2012 I would highlight two things. One, it had a very, very good year with great progress over 2011 and excellent numbers. The second, highlight also the fact that narrowing our focus and not wasting time, money, and focus on other product lines in plays that are not good for us is something we need to do urgently. So that is as a point of reference.

With respect to supply chain, no, whatever we did in terms of expansion in supply chain, whether in Asia or in North America, which are the two prime areas of expansion, is done. And I think that a lot of the start-ups of those plants and everything else were done in second half of 2012, so it is performing very well.

The year in lift, again in isolation. If I was to break it out, which I will not do, but if I were to break it out will show an excellent year in 2013 versus 2012. Both at the revenue level, at the EBITDA level, at the EBIT level, and at the cash return level.

The other thing to remember, Ole, is we were a little bit constrained prior to the expansions and so we had a lot of backlog. These expansions actually take some pressure off some of our facilities and give us the capability to meet future demands as we continue to see robust growth in this area.

Very good point, John, thank you. As also, as the last point by our assessment, it is likely that the lift product line will have a higher growth rate than the Company as a whole.

Okay. So the cost of manufacturing should normalize, is that sort of what you are saying?

Absolutely. This is part of the reason -- what will drive or the drive the rise in EBITDA and EBIT and lift is essentially absorptions.

And, finally, I sense a little bit that you tried to derisk the Company by going away from some of these rather large and glamorous IPM projects. Whether it's Iraq or whether it's Mexico, I think it's fair to say that the Company has a great deal of revenue but always maybe an unacceptable risk and unacceptable call of working capital.

So am I right in kind of sensing that you are going a little bit away from this, not only in Iraq but maybe holistically? And is that also part of, John, why you are more confident in getting the working capital and capital efficiency down, or are there other reasons?

We will both answer. First, I will tell you we don't intend to derisk the Company a little. We intend to derisk the Company a lot. John, do you want to comment on what Ole asked?

Yes. This is not why we will achieve the working capital improvements. The working capital improvements are structural changes that we are making throughout the organization.

This is focused around receivables, focused around inventory. It is making sure that we get our invoices out the door sooner; making sure that we follow up and do things correctly the first time. In inventory it is about being more efficient from a supply chain perspective. More efficient with how we distribute product across the organization and how we provide that to our operating locations to deliver to the customer.

Thank you very much.

Jim Wicklund, Credit Suisse.

Good morning. A bit following up on that. You talk about how you are changing compensation to reflect the improvements in capital efficiency that you are pushing through. And I know, John, you mentioned the structural changes in working capital improvements.

To me, I guess, it is structural changes in compensation to promote capital. You are a big company; how long does that take and how far down do you try and push it?

First, the compensation structure in simple terms, Jim, looks like this -- 45% balance sheet, 45% income statement, 10% safety -- in simple terms.

Now as you go down the levels four, five, six from our level -- I don't like the word level, but you are talking about organizations and that is probably the best word I can use -- the definition of income statement and balance sheet becomes simpler and simpler. As you go up the levels they become more and more complicated. Well, more what you would be used to.

So someone who is like five levels down in the hierarchy -- and we have a pretty flat organization as big of a company as we are -- will not have the same sort of definitions, or DSO and DSIs and that sort of thing, that someone who will just work directly with me or just two levels down. I'm not sure that helps, number one.

Number two, in terms of the organization being big and, therefore, it doesn't move, or put another way it ignores what is being said and so forth. Weatherford doesn't only have sort of immaturity weaknesses. It has also immaturity strengths.

What do I mean by that? You would be surprised -- I am surprised every time I encounter it, which is on a weekly basis, the level of -- how do I call it? There is a great loyalty, bonding, a great many employees within Weatherford for the Company. Which means that we tend to -- and I used this word before in other conference calls -- we tend to react in a tribal way, which is when there is a change in the way the drums beat, for lack of a better term, the tribe responds.

What I'm trying to tell you, Jim, is from a cultural standpoint -- every company is different and there are some strengths and weaknesses. We know our weaknesses. God, you have seen them in 2011 and 2012. I don't have to draw you a map. But beyond those weaknesses there is a great strength to which those people follow whatever is the direction, particularly with the change of values.

In my comments I used the vaguely pompous word ethos. It is a word I chose carefully. The value system has changed. Value system would have changed four years ago. We didn't have all the problems we have internally.

There was a major distraction. So it is not that we didn't understand we needed to be done, we just got seriously distracted to a degree that you probably cannot measure. The distraction is finished now and the value system has evolved the way it should have evolved and it is understood. It really is.

Jim, let me give you a little additional color. I fully expect a significant part of my compensation is going to be tied to success and improving our capital efficiency. Therefore, because of that I expect that to ripple through the organization to make sure that I meet the goals and objectives the organization expects from me.

We love to hear a vested interest; that is good. My follow-up, let me change directions if I could.

In Iraq your Zubair contract, which is going to run through the middle of 2014 or so, that is an $850 million contract or so and you say that it is currently on schedule and running profitably. This was, I assume, done by the successor management who wrote the original contracts that didn't work as well in Iraq. There is a great deal of potential there, should we get excited?

I think it is going to be -- look, it is the second and the last EPF contract that we will ever do. It is a good contract. Although we have put in the same lump, because you have to be fair.

You can't just -- if you are going to categorize contracts that were taken at a certain point in time as not being reflective of what the Company is doing and will do long term and all, if you decide that you will not be running an EPF business as a matter of long-term policy -- all of which is correct -- you can't just keep the good contract and decide that all the bad contracts go in that lump because that way no one cares about them anymore. You can't do that and we are not doing that.

As a point of fact, Zubair is a good contract. As a point of fact, the contract should be profitable and you will see the lump number every quarter so you will be able to see it. Actually more than you could before. Even though it will not be included when we report our earnings per share, you will see it and so you can do with it what you think is right.

You are likely to see over the quarters as the year progresses through the middle of next year a number which is likely to be positive. Having said this, it is our last EPF contract, so even if it is a great success it is going to be our last.

This is not a business that we need to be in. It is a mistake to be in that business. It is not our natural calling. We have enough business in the product lines and the industrial positions where we are really strong. We don't need to be in that business; this is the last of it.

On the other hand, it is for a client, ENI, which is a terribly important client for Weatherford. Therefore, should we do well in that project for our client it will matter a great deal as a ripple effect in all our other product lines.

Okay, that is very helpful. Thank you very much, Bernard. Thanks, John.

Bill Herbert, Simmons & Co.

Thanks, good morning. A couple of guidance questions here, if you choose to answer them. But with regard to the Eastern Hemisphere, is it unreasonable to assume top-line growth of 15% to 20% for the year at this stage with Q1 lower for reasons that we know?

I personally would be with the lower end of that range. I would be around 15%. I don't have a model in front of me, but from memory I can tell you, Bill, I would be at 15% rather than 20%. If we surprise on the upside, bully for us.

That is fair. Then, secondly, with regard to the Q1 prophecy, we said seasonality with regard to Eastern Hemisphere for reasons we all know and yet margins should actually be higher quarter-on-quarter I would assume given the dislocations in Europe, CIS, SSA in Q4, correct?

That is correct.

We did have some challenges in SSA that we are working through. Those impacted us in Q4 and so it impacted the results as well.

He is right.

There were some minor weather impacts in Russia as well, and so you just have to take those into consideration.

But the answer to your question is you have two forces in motion, Bill. On the one hand you have the normal decline in volume and also you have a lot of maintenance expense that come through in places like Russia, in places like China, which is normal. You don't go to the field; you do the work and you expense it then.

So we have a lot of that going on. Ditto the North Sea. This is nothing new. At the same time, what you said is absolutely correct, which is whatever impacted us in Q4 in the Eastern Hemisphere was not likely to impact us in Q1 is absolutely correct. So two forces in motion.

Always remember though, that in Q1 because you don't go in the field as much simply because it is too cold or the weather is just inclement that you have higher level of maintenance expenses. View it like what happens in the Canadian breakup, which is also traditionally no volume, no business, and more maintenance expenses. You have the other force pushing on the down.

But otherwise what you said is absolutely correct.

Okay. And Latin American top line for 2013, recognizing the stasis in Colombia and Brazil, do we grow by double digits year over year or --?

I would say -- again, I don't have a model in front of me, but from memory I would say that I would be pleased if we sort of reached to 10%, but I am not sure that we will. It will be more a margin issue in Latin America than anything else.

Yes, totally agree.

Okay. And are margins up year over year?

Yes, in Latin America.

Yes, very much so.

Okay, great, guys. Thank you very much.

Thank you, Bill.

James West, Barclays.

Good morning, guys. Quick question for me on the asset rationalization strategy you have in place. You have obviously given us some color on what Weatherford wants to be in the future so we can make some assumptions on what is up for sale here.

What triggers those assets going into some type of held-for-sale line? And what I'm getting at really is when do we get to see the real margins of the core business? Because I am assuming that the assets you are divesting are lower margin businesses and so the sale would actually be accretive to the overall margin profile.

I will take the first part of that. There is specific accounting criteria related to held-for-sale. It is very specific; it is somewhat black or white and so you have to meet those specific criteria.

If I recall correctly, there is four items. You have to check all the boxes before you move into that category, so it is somewhat formulistic there. It is not conceptual; it is formulistic.

And I will let Bernard answer the rest of the question.

No, that is absolutely right. In general, James, I think I am striving to see if there is any exception. I don't think so. The businesses that we will divest of have lower margins and I think have less attractive financial attributes than our cores.

But that is only part of the answer of why we want to do this. The businesses that we want to sell are really businesses that we don't necessarily -- where we don't have a competitive advantage. We are not -- put in simple terms, we are not necessarily that good at it. Although you could say that we do an honorable job.

We have no reason to try to be really the best at it because that is not our natural calling. They were just, in my opinion, an overreach beyond where we ought to have been. We have plenty of opportunities in what we do well that we have not exploited, and that is really more the driver than anything else.

Even though the financial attributes are, indeed, as you just described them. They are not as attractive from a financial standpoint.

Okay, makes sense. Then just a follow up for me. Specific to China, we have seen obviously announcements from some of your peers on what their strategy is going to be getting into that market in unconventionals there. What is Weatherford's strategy to attack what could be a very large opportunity in China shale?

Well, we try to be useful. Now you have lots of -- what does that mean? That means that we have honed our offering in China to what we can offer to our clients that the local companies cannot offer that are relevant to the pursuit, particularly of unconventionals, whether heavy oil or shales or tight oil.

You have to remember, James, you may not know this, but we had our very first supply chain presence and installation around lift. I know, I did it myself back in 1991 in Shengmi in China. So we have a very long history of presence in China.

We just, I think, kicked it up in volume and intensity about two years ago, because we realized that our offering, whether formation and valuation or completion and production optimization, was ideally suited in terms of technology to what the Chinese would need just in general to develop their unconventionals, particularly gas. And also oil, but particularly gas.

So the answer is by being useful. Being useful means doing things on our own. Being useful means also going in partnership with some of our clients in a very selective manner.

In my judgment what matters the most in China is not so much whether you make alliances here or you buy a company there. The real issue is, very much like in Russia, is whether you have the infrastructure to support your business. That is item one.

Item two, do you have something to sell that is useful, that your clients cannot get from local sources or cannot get equivalently good from foreign sources? End of story. And you have to keep that be useful cycle going ahead of everyone else, because the time of being effective with that strategy in China is short. It is a treadmill. You have got to keep on being more and more useful.

Okay. Thanks, Bernard.

Nigel Browne, Macquarie Capital.

Good morning, all. I would just like to step back and look at a few product lines globally, and probably get a bit more color from you. So in particular well construction and drilling services; what is the outlook from an enterprise-level regarding pricing and activity over 2013?

Nigel, with your permission I will really focus on well construction. Drilling services is part of formation evaluation. It is a much broader question. And so I will just stay with well construction, which is the largest product line we have and service line we have in the Company and one we never, never talk about.

It is a paradox because it has the highest margins of the other three today. Even though I am very enamored of a lift, it being the first line we developed, the well construction has the highest margins.

So the prognosis is good in so far as, whether you are looking at the classic play we engage in which is unconventionals, how you design a well construction, and I would include completion in that, is terribly material in how you ultimately will exploit the reservoir. That is item one.

Item two, all the developments offshore, particularly deepwater -- and in this respect we really have a play, which I very seldom talk about. You must have heard that as a byproduct of the events around Macondo etc., etc., the intensity of well bores in deepwater on and around cementation tools, on and around the manner in which the casing string will be made up, all of that has been -- has changed, has become much more intense, far more use of technology and of products. All of which play in our favor because we are number one market leader worldwide in those product lines, all those being well construction, by far.

So the prognosis of well construction is one which is solid and the margins are the best in the Company, driven by both, in this instance, the play in unconventionals and also in deepwater.

Right. And looking at drilling services, you mentioned that there is formation evaluation in there, directional drilling. Are you guys more landlocked than some of the larger peers out there? What is the outlook for that sort of, if you want to call it, global land market producers as well?

The formation evaluation play that we have, which is around core evaluation, mud logging or surface logging, LWD, and in wireline, and also cased-hole wireline with new technology, in our particular case is entirely honed on and around the needs of tight reservoirs and/or shale reservoirs. That is our entire play.

True, we participate offshore here and there. That is not our calling particularly, but we do, particularly in the high temperature/high pressure plays where we excel for historical reasons. But really our play is what I just described.

And with respect to tight oil and shale gas and those types of reservoirs, this is our natural calling. To the extent that those reservoirs do well, our formation evaluation competency will excel.

To the extent those reservoirs developments don't do well, then we will not do so well. So it is not just a land play; it is a play as I just described.

If I could just sneak one more in, you spent a fair bit of capital building out a global footprint and infrastructure. Do you feel that you organization right now is well equipped to handle the volume of work that we probably will see over the next couple of years, or are there specific pockets where you probably have to build out a footprint as well?

Nigel, you always want more infrastructure as a matter of course, but I would say that today our infrastructure around the world, both real estate and also people, can accommodate somewhere along, I would say, between 20% to 40% more volume than we presently have. And without any strain.

This is a general statement. It is not true -- in some areas that is not true, but generally that is correct. So I think infrastructure is a strength at Weatherford. It is not something we have to catch up.

All right, thank you very much. Appreciate it.

Thank you. With that, because we ran our time a little bit beyond where we were supposed to, I think we will finish the call here.

Thank you all for your time and attention. Operator, you may want to close the call.

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