Weatherford International PLC (WFRD) 2013 Q2 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 second-quarter 2013 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 period.

(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 the conference.

Thank you, thank you. Good morning. We have three sets of prepared comments, John, Dharmesh and myself. So as a little bit long, we may give you a little bit extra time for the questions. And let me turn it to John for his prepared comments.

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. A reconciliation of excluded items and non-GAAP financial measures is included in our press release, and on our website.

In the second-quarter 2013, we recorded a GAAP net loss of $118 million. Adjusted net income was $116 million or $0.15 per diluted share on a non-GAAP basis, compared to adjusted net income for the first quarter 2013 of $117 million, as detailed in the non-GAAP reconciliation table in our earnings release. Second-quarter net income was unfavorably impacted by the excluded items detailed in our press release, totaling $231 million before tax, and $234 million after tax. During the second-quarter, we recorded an accrual of $153 million with no tax benefit related to the FCPA and Oil-for-Food matters with the US government. This is in addition to the $100 million accrual we recorded for sanctioned countries in 2012. A $153 million is our best estimate of the amount of the loss we will incur, if we reach a final settlement with the US government, and is not a low end of the range of losses estimate.

During Q2 2013, discussions progressed where we believe it is probable we will incur a loss related to these matters, although no agreement has been reached and uncertainties remain. Consistent with prior quarters, we continue to isolate as an excluded item, net losses of $31 million incurred in southern Iraq, primarily related to early production facility contracts and certain lump-sum turnkey drilling projects entered into by prior hemispheric management. We have included details of the revenues related to the excluded contracts, in a footnote to our GAAP to non-GAAP reconciliation schedule in our press release.

Second-quarter revenues of $3.9 billion were up 1% sequentially, and 3% higher versus the same quarter of 2012. North American revenue was down 10% sequentially, and down 8% versus the second-quarter of 2012, and favorable to sequential declines in rig count of 16%, and an 11% decline in rig count for the second-quarter of 2012. The sequential decline in North American revenue was primarily due to a greater impact of an extended spring breakup in Canada, partially offset by increases in artificial lift and well construction revenues. International revenues were up 9% sequentially, and up 12% versus the same quarter of 2012. Sequentially, we experienced stronger than expected revenues in Europe, SSA Russia, and in MENA, AsiaPac, while Latin America trended up slightly. Drilling services, artificial lift, and well construction were the primary sequential contributors.

Adjusted segment operating income of $286 million was down 10% sequentially, and down 13% compared to Q2 2012. Segment operating income margins of 11% were down 80 basis points sequentially, while declining 130 basis points compared to second-quarter 2012. North American operating margins for the quarter were negatively impacted by the Canadian spring breakup, partially offset by improved artificial lift margins in the US on a sequential basis. International operating margins were up 50 basis points sequentially, to just over 10%. Sequential margin improvements in Europe, Asia Pacific, and Russia were partially offset by declines in Latin America. During Q2 2013, we generated EBITDA, defined as non-GAAP operating income plus depreciation and amortization of $627 million, including depreciation and amortization of $341 million, compared to EBITDA of $663 million and depreciation and amortization of $346 million in the first quarter.

We made great progress on tax during the second-quarter, and we were able to execute on more initiatives than expected, and these resulted in one-time benefits and also reduced our structural effective tax rate. The Q2 annual effective tax rate or ETR came in at 12%, and we estimate our Q3 ETR will be between 31% and 33%, and a similar range for Q4 ETR. This adjusts the 2013 full-year ETR to between 27% and 29%. Q2's rate is indicative of the progress we continue to make, and also highlights my prior and continuing caution that our tax rate will be variable from quarter to quarter, as we continue to move forward and bring our ETR down to a normal level for a non-US domiciled Company. Our tax processes are stable, continue to mature and we are making good progress on the remediation of the material weakness, but we are unable to complete the remediation before our year-end 2013 tax processes are completed.

Subject to the risks and uncertainties regarding forward-looking statements highlighted in our press release and public filings, Q3 nonoperating costs, excluding tax professional fees, are projected at about $48 million for corporate, general and administrative costs; R&D at about $72 million; other expenses net at about $18 million; depreciation and amortization at about $371 million; and interest at $129 million. Our guidance on capital expenditures remains unchanged at 8% to 10% of 2013 revenues. Our tax accounting and remediation costs of $5 million after-tax in Q2 2013 declined faster than expected, but these costs will increase in Q3 and Q4 to above Q2 levels as we move to our year-end remediation efforts. We expect to file our second-quarter 10Q later today, and it includes additional disclosures on our quarter results and outlook. I will now turn the call over to Dharmesh.

Thank you, John, and good morning, everyone. Our second-quarter 2013 results clearly demonstrate the impact of our capital efficiency program. Free cash flow improved by $200 million, compared to the first quarter of 2013. The improvement in cash flow was driven entirely by improvements in working capital. Our accounts receivable, in absolute dollar terms has decreased for three consecutive quarters, and we saw the first sequential reduction in our inventory balance in over three years to a level below that of September 2012.

Inventory decreased by $100 million in the second-quarter, resulting in a DSI of 85 days. DSO decreased to 89 days. This reduction was achieved, despite the significant seasonal decline in revenue that occurred in Canada during the second quarter, which represents one of our lowest DSO locations. The decrease is DSO is therefore significant, when one considers the structurally higher DSO in international countries.

While the second-quarter cash flow was positively impacted by customer payments that were deferred from the first quarter, it was also negatively impacted by about $[90] million of cash that was expected to be received before quarter-end, but was received immediately after the end of the quarter. Capital expenditures, net of loss-in-hole, totaled $409 million in the second-quarter, a 26% decrease over the second-quarter of 2012. Our internal metrics continue to demonstrate significant improvement in capital discipline in three key areas -- amount of new capital accrued; allocation of capital; and last but not least, the improved focus on asset utilization. We expect the benefits of the improvement in our capital program will be seen in the second half of 2013 and beyond.

Even though the organization showed significant improvements in working capital and demonstrated good discipline on capital expenditures, operations consumed $195 million of cash in the second-quarter. The reason for that is structural in nature. Profitability at Weatherford is significantly higher in the second half, when compared to the first half. The foundation laid in the first half of 2013, will allow us to reap the benefits in the second half of the year, as profitability improves. The difference between free cash flow and the net debt increase is financing commitments related to improvements in our IT infrastructure. In the last quarter, I indicated that more than 85% of our transaction dollars are on a single ERP system. We made major commitments this quarter, that will result in a significant upgrade of the hardware and software infrastructure of our ERP systems. While the cash outlay will be over the next three years, it does add approximately $80 million to our net debt.

Our prognosis for free cash flow for the second half of 2013 is driven by three key factors. Firstly, for the past two years in a row, cash collections in the second half are $1 billion more, than the cash collections in the first half. We are expecting a similar pattern this year. Secondly, EBITDA in the second half is expected to be over $400 million more than the first half. The increase in EBITDA is driven by improvements in activity and margins. Thirdly, as of today, we have more than half of our inventory under automated controls, and that percentage will increase as the year goes on. Our models indicate that inventory levels at the end of the year will be lower than the second-quarter by about $200 million. In other words, we are forecasting similar improvements in inventory levels in the third and fourth quarters, as those achieved in the second-quarter.

The combination of cash collections, reduction in inventory dollars and increased profitability, indicate that we will generate between $400 million and $600 million in free cash flow this year. The primary factor driving the variability is collections in the second half. During the first half of this year, we have begun material measures to focus on capital efficiency and drive change in this area. For example, we have completed capital efficiency workshops in every region of the world that were attended by over 1,000 of our most senior employees. The workshops focus on all the major aspects of the business that affect capital discipline, and the improvements achieved in the second-quarter are indicative of the commitment made by the Weatherford organization. Sustainable change typically takes a long time to achieve in a large organization, but I can say with confidence that a culture of cash and of responsible growth exist at Weatherford today, and we will continue to deliver further improvements.

During the second-quarter, we recorded a $31 million charge net of tax on our legacy contracts in Iraq. The breakdown of the $31 million is as follows -- $9 million for integrated drilling projects that were completed in the second-quarter; $10 million related to taxes; and $12 million related to the contracts which continue beyond the second-quarter. On a go-forward basis, we may have fluctuations of the profitability of our EPF contracts as they progress towards closure. Changes in our profit estimates are recognized when they are identified. But we are generally unable to recognize additional revenue amounts from change orders and claims until they are approved. The ability to get customer approval on change orders and claims typically occurs in the later stages of our contracts. As a result, we may have positive adjustments as the contracts are completed. We currently have approximately $70 million in potential revenue and cash recoveries on the EPF contracts. Profitability of the contracts will increase dollar for dollar on these recoveries that we get.

In the last call, we indicated that another major focus area besides cash, is on increasing organizational efficiency and the reduction of our operating costs. During the second-quarter of 2013, we completed an initial review of our cost structure, and completed a reduction in force of about 3,000 employees. The reductions were across the entire global organization. The reduction eliminated about $90 million of cost on an annualized basis. The second-quarter results include a $25 million severance charge, primarily related to this type of initiative.

In terms of business performance then, our focus on our core strengths, and the pull on that core by our clients continues to have a significant impact on our business. In the past 45 days, our larger artificial lift lines have indicated increased spending in the second half of 2013 on lift equipment as oil prices have improved. Increased well count in the North American shale plays will have a positive impact on our production business in the second half, allowing us to leverage our recently expanded artificial lift manufacturing capacity. We have the leading position in lift in the shale plays, and as volume increases, combined with reduced production costs will benefit our business in 2013. We continue to deploy our industry-leading managed pressure drilling capability across the globe. In the second-quarter, we won significant long-term contracts in the North Sea, and deployed new units to Saudi Arabia, Brazil, and West Africa.

Weatherford has the only subsea capable MPD system, which is proving to be a significant benefit to our clients who operate in deepwater. The application of our leading-edge technology in LWD, and its integration with our other formation evaluation capabilities, labs, well site, geoscience services and wireline, to offer new and differentiated services to our clients in North America shale plays is gaining significant momentum. This has drives our highest ever drilling services revenues in the second-quarter. In short, business performance, cost reduction efforts, and our focus on capital efficiency, all suggest a positive outlook. I will now hand the call over to Bernard.

Thank you, Dharmesh. The synthesis of Q1 on Q2 is straightforward. Canada down by $0.095, Latin America nearly flat or down by $0.01. US up by $0.03, Eastern hemisphere up by $0.045. The balance or $0.03, was made up by lower taxes, for flat quarterly progression. Q2 is shaped by two counteracting forces. Canada had a very sharp breakup in April/May, and experienced no recovery in June. Torrential rains throughout the province kept the terrain soaked, and severe flooding in southern Alberta further curtailed any activity recovery. In essence, we had 90 days of full breakup. We have historically a very large presence in Canada, and it affects us more than our peers.

US profitability improvements were broad-based. Margins rose by 180 basis points, all core product lines improved, save one. Formation evaluation rose the most, driven by expansion in shales. Well construction and completion posted the highest margins. The one exception was stimulation which did not deteriorate, but did not improve either. Eastern hemisphere margins improved by 160 basis points. Gains were strongest in Europe, Russia, and Asia-Pacific. Asia had the highest operating income in its history. SSA and MENA were essentially flat. Eastern hemisphere revenues improved by double-digits for the quarter, couldn't of been stronger. A number of product deliveries for well construction and completion were shipped in July, missing the quarter. Also, Russia was softer than expected, due to transitional issues with a large client.

Latin America did better than numbers reflect, considering the quarter's events. The region managed to hold operating profit to just a modest decline, in spite of the abrupt shutdown of all drilling operations in our large Mexico operations in Burgos and Chicontepec. The losses relation to the shutdown were kept a minimum, while growth in offshore, southern Mexico, Argentina, Colombia and Ecuador rose to recover almost all of the decline. The region managed the quarter extremely well, and continued progressing in all other markets. Q2's results marked progress in all regions, but not as strong as we had anticipated, primarily because of the scale of Canadian seasonal decline. The quarter's metrics though, confirm that operating performance is broadly improving, and the level of profitability is turning.

We almost completed in Q2, our first drive to lower our cost structure focusing on payroll. Layoffs will yield about $[90] million in annual cost savings, which are translated to $0.01 in Q3, and $0.02 in Q4 thereon. There will be further drives to lower our cost structure, and not just payroll. The capital metrics of the CapEx, DSI or DSO, all improved as expected, which will yield a strong [core] cash harvest in the second half.

Forward views, the prognosis of second half is positive. Now, we expect Canada to have a good second-half recovery. The oil segment will drive the rebound in activity. Edmonton light is trading with a few dollars off BRENT. Western Canada Select or WCS, the heavier crude, is drawing a narrow differential discount on a high base price for oil. To put it in perspective, the realized price of WCS is nearly double what it was in Q4 of last year. Assuming there is no further major weather events, the Canadian market's turn will be healthy. We expect our Canadian operations to show stronger second half this year, than second half last year.

The US market should be flat to marginally constructive. Now this is the market I am talking about, not us. The second half could see a few percentage points increase in drilling and production activity versus the first half. It strikes us as possible, based on client indications. The oil segment, would strengthened a little further from here. We do not expect greenshoots on the gas side. All in all, we don't expect anything major in US activity turns, but certainly nothing negative.

With that as a subdued market backdrop, our own US operations are expected to show higher revenues, and markedly higher margins the second half '13, driven by growing activity in our core businesses, particularly production and formation evaluation. The US will also benefit from a lower operating cost structure. We anticipate a rise in US margins, Q2 on Q4 of almost 400 basis points. Rise in margin for Canada will be, of course, much larger, though the sequential comparison is not statistically meaningful. We had no Canadian operating income in Q2.

Latin America. Latin America is likely to be flat to marginally up in Q3, but improved markedly in Q4 in both revenues and margins. Mexico will not be the driver in either quarters. Mexico is more likely to be a constructive factor in 2014, rather than second half '13. But the turn in '14, should be significant and lasting. We have a very large operation in Mexico, and turns in Mexico matters disproportionately. The driver in the second half of '13 for Latin America will be about broad-based of other operations, such as Argentina, Brazil, Ecuador, et cetera, which should all show progression in revenues and margins. Cost structure gains will also affect our results positively.

The European, Caspian, Russian and SSA region are expected to rise in both revenues and margins. Norway, UK, Azerbaijan have a significant number of incremental contracts, overwhelmingly well production or construction that begin in the second half of the year. For example, and just an example, our incremental contracts in Norway alone, add up to about $700 million over three to five years. These are long-term contracts at very good margins. Russia, will do well in Western and Eastern Siberia, with expansion in both operations.

The Middle East is expected to show gradual, but significant improvements. We are gradually deemphasizing our Iraqi business. The old contracts are finally closing down one after the other. We are likely to take equipment out of the country for redeployment in markets with much higher profitability and returns. The objective is to make southern Iraq into a smaller operation, one with good margins and returns. With respect to the existing Iraqi contracts, two of the drilling contracts are completed and demobilized. One of the EPF, Early Production Facilities contracts will become completed within this quarter, Q3. This will leave us with just one remaining EPF contract to be completed by Q3 of next year.

As Dharmesh has expressed, the project's final profit and loss will fluctuate between now and their respective completion. Only after full completion, clear of all change orders, will the final prognosis be done. Regardless of final numbers, it will not change our direction. We should not invest time, capital and talents on a line of business which isn't our core. We will not engage in EPF contracts after the completion of the existing commitments. The rest of the region is turning around. Saudi Arabia, Kuwait, Abu Dhabi and Oman are expected to rise throughout the second half, well construction, formation evaluation, and production are the main drivers. That, in combination with the fast diminishing weight of unfavorable Iraqi economics, the region is expected to turn around its performance in Q3, and even more so in Q4.

Finally, Asia is growing from strength to strength, with gains of broadening from the core in Australia and China, to Indonesia Thailand and Malaysia. Asia is expected to improve further in both revenues and margins in Q3 and Q4. The Eastern hemisphere will improve in the second half. We are rebuilding our profitability and margins around our core. Our second-quarter operating income margins of 9.3% was 160 basis points higher than Q1, which is a welcome improvement. It is a far cry from what we have to deliver. It was less than four years ago, that our Eastern hemisphere margins were 22%. We are planning for our Eastern hemisphere margins to rise in the second half of the year, with Q4 about 300 basis points higher than Q2 rates.

I won't elaborate further on capital plans and free cash flow metrics, which Dharmesh detailed. I would urge you to take the metrics and assessment of progress at face value. We are fast getting results, while the culture and value of the Company are changing. Our first half of '13 is materially better than first half '12, our seasonality in our cash flow swings for the harvests time of the year. We also expect much stronger performance in second half '13 than second half '12. We are comfortable with our objective of $400 million to $600 million free cash flow for the full calendar year 2013.

We are working diligently on preparing assets and product lines for divestment, and in some instances, engage in advanced negotiations. It is always uncertain what we will be able to achieve in the process of divestment. Our best guess is that we will have completed two transactions in fourth quarter. On non-operating issues, we are making steady progress on our management for tax planning and execution. The Company is on overdrive to improve all aspects of its performance. Taxes are no exception. With respect to remediation and material weakness at tax accounting, in light of good work in progress to date, we fully expect to complete remediation at year-end.

We are not in the position to comment much on the decision to accrue settlement amounts over the DOJ. It is obviously a sign we are nearing a point of final settlement, but it isn't done, until it is done. The fact we are nearing settlement time, highlights our drive to end noise at Weatherford. We will end all noise at our Company, whether poor legacy contracts, material weakness remediation, or US government processes. We will focus exclusively on profitability, free cash flow and disciplined growth. And we will focus on our core.

I use the word core a number of times. Weatherford has four core areas, well construction, formation evaluation, completion, and production. That is it. We can carve out a path of high-growth, much better margins, and high returns around our core. This is where we will focus on, with the support of our vast infrastructure, and a deep inventory of technology, both base and applied. Separating the non-core from our Company is just a question of time and methodical execution.

Lastly, we are raising our guidance for the second half of 2013 to a range of $0.58 to $0.62 at a tax rate of 31% to 33% for the second half. Full-year earnings would be $0.88 to $0.92 at a tax rate for the full year of 27% to 29%. With that, I will turn the call back to the operator for Q&A.

(Operator Instructions)

Our first question will come from the line of Jim Wicklund with Credit Suisse.

Good morning.

Good morning, Jim.

Bernard, if I could ask a question, what is the magnitude of what is now considered non-core?

Look, we have approximately -- look, round numbers, have approximately $16 billion of revenues this year, look, it is not a -- plus or minus, okay? We consider about $11 billion of the $16 billion to be core, if that helps you.

That's great. A follow-up, if I could. We know that well construction generates good margins, because Franks is in the business, and you are in a duopoly with them. We know that artificial lift generates good margins, because we just got to see [Wellcom]'s skirts completely raised. In your product lines, you --with those kinds of margins, you have got some other stuff that must be generating, with no offense, pretty lousy margins. (Multiple Speakers). What are your product lines? Not regions, not -- but what are your product lines that are right now your lowest margin product lines?

Okay. So the $11 billion breaks down into these four categories. The highest margins are definitely well construction, which would be approximately $4.5 billion out of the $11 billion. And completion, they both have margins at the EBITDA line which are north of 30% on a full-year absorbed basis. And, of course, the runner ups, artificial lift and formation evaluation which on a fully absorbed basis, have EBITDA which are north of 20%.

The Company's EBITDA is on a fully absorbed basis, meaning absorbing all the costs, so a clean EBITDA, is something like 19%. So if I have got a bunch above 30%, and a bunch above 20%, and an average of 19%, you are absolutely right. The balance must not be terribly good. And so, the balance, which will be the $5 billion, have basically not much of an EBITDA to speak of. If that, so -- first of all, your diagnosis is correct. With respect to the, what is in the $5 billion? You have a combination of a number of smaller product lines, which in and of itself are interesting, but we are probably the wrong owners. And then you also have the rigs, and then you have things like EPF, the early production facility business, especially engineering. And all of these businesses, which are legitimate and have strengths in and of their own, we are probably the wrong owner. And our core, on the contrary, we are the right owner.

Thank you very much. That's very helpful. I appreciate it. Thanks.

Your next question comes from the line of Jim Crandell with Cowen and Company.

Hi, Bernard.

Good morning, Jim.

Bernard, is the improvement that you expect in margins over the course of the year in the, particularly in the Eastern hemisphere and Latin America, should we consider it linear? And then, what percentage of that improvement would you think is due to margins on increased activity? And how much is due to self-help measures?

Linear, I think the breakdown in Q3 and Q4, I will really let both John and Dharmesh help, when it comes to the modeling question. Frankly, I look at it on a six month basis, far more than, whether the Q3 will be like this, and Q4 will be like that. But I think that will be done in a sort of modeling sessions. Clearly, Q2 will be up on Q2. That is obvious, pretty obvious. So linear, I don't know that the progression will be exactly assigned to both quarters. That is number one.

And number two, it is -- there is some activity. And there is some -- if you go one step further inside the product lines, some of the product Iines are just doing very well. So it is activity within the product lines. For example, some of the completion on product lines that we have are doing extremely well. MPD, which was identified by Dharmesh as doing extremely well. TRS, tubular running services is doing extremely well. Artificial lift, I think everyone knows is doing extremely well. So you have some very positive trends within the product lines. Activity overall, internationally is healthy, and that also helps.

Okay. Good. And second question has to do with Mexico. Bernard, can you comment on the magnitude of the work on the table in northern Mexico? Either for Q4 start or Q1 start up?

I -- if you are referring, really, to the two fields which are in northern Mexico. It is the Burgos in the gas field, and a large heavy oil field in Chicontepec. So really, Chicontepec is the elephant, far more than in the room, far more than Burgos I think you have to think 2014, not Q4. You have to expect a number of tenders to come out in the summer, and therefore work being assigned in the course of Q4. For commencement, I would presume in the very first days of 2014, could have a little bit start in December, for example, but I wouldn't speculate on that.

The magnitude will be back to where they were. And understand there is zero activity going on in Chicontepec today, except for a bit of lab work, and some very, very, very minor production work. So essentially, nothing on the drilling, zero. So expect it to go back to where it was. Now different oilfield service companies will have different market shares, but expect it to go back to where it was, and may actually go back with an increased level of activity. So it is a very, very, very major shift. So again, think 2014, not Q4.

Okay. Thank you.

Your next question come from the line of Ole Slorer with Morgan Stanley.

Thank you. Bernard, after the $400 million to $600 million of free cash flow, any asset sales in that number?

No. As I mentioned in my comments, and we hope to announce two completed transactions in Q4, which will provide some cash. Now, that is assuming that they happen, and we are reasonably comfortable that they will, the free cash flow, the free cash flow is from operations. No, it has nothing to do with sale of assets.

And the second question, the (inaudible) understanding the big ramp, on getting some more clarity on the big ramp in the second half of the year. It certainly will be quite impressive if you pull that off. How big of a lever is Canada, when it comes to that recovery in context?

It is significant. In so far as, Canada, I would say, my assessment is that Q4 in Canada for us, would be roughly equivalent to what Q1 was. So that is a significant swing. On the other hand, understand that Q1 of this year which dropped precipitously in Q2 wasn't as strong as normal Q1s. So I think Canada is a major swing. Canada is not, by any means, the only swing. Think of the decline we experienced, $0.095 in -- from Q1 to Q2.

If I just -- and I am just correct, but I have just told you is that we are likely to get all that back in Q4. And just extrapolating what I have just told you, roughly. So, you can see the -- how far it helps us, and how far we have to go elsewhere. There is good improvement in margins. It's margins, really, in the United States and international, not Latin America, which will stands its ground. But in Eastern hemisphere, there is good margin and revenue improvements. Consider also where we are coming from, Ole. We have quite a bit to catch up. Not in Asia, and not in Europe, in particular, where are -- we remain very strong.

But Russia has quite a bit of catch-up in Q3, and to a degree, Q4. It is only because Q2 in Russia was not as strong as it normally is. Simply because 50% of our business, 50%, is with a very large company which went through some transition events, which is understandable. Transition events are coming to an end, and things are coming back to normal. That is one issue. And then the Middle East -- and I don't have to remind you, the Middle East, North Africa, and also SSA have a quite a bit of self-healing to do, and they are doing it. So those are the moving parts, Ole, if that helps. In addition to which, in your homeland of Norway, together with other parts of the North Sea, we have just very good expansion in volume contractually. This is not new. We just signed these contracts a while ago, we just didn't talk about it.

So what are the biggest risks there? Particularly you highlight the (inaudible) out on some of the contracts in the Middle East, there could be some moving parts as that closes out? Is that the biggest risk, or is there something else?

Well, the biggest risk for us, it was always execution, of course. But I would say the biggest risks, since we haven't been terribly lucky when it comes to what I am about to say, is mother nature. Any kind of important markets that get devastated or finds, if all of a sudden abruptly changes, contractual decisions. We had our share of that, but I don't see any major risk. Dharmesh, do you see -- anything you want to add to that?

Yes. One thing I can say is that, the forecast does not make assumptions about any significant new contracts. It is all work that we have. And it is based on activity levels that we think are realistic. You also have to factor in the improvements you are getting from the cost cuts. It is fairly significant effect in terms the second half, and John will speak about the guidance.

As Bernard mentioned, we believe we have other opportunities for cost improvements that will impact second half of the year as well.

That is correct. They are not payroll-related. This is -- we don't only focus on payroll. There are other issues It takes time, takes work, takes focus, but we have focus, and we have time. So that also will -- isn't something else we control.

And put another way, Ole, this is not the assessment made is neither high or low case. The assessment made is based on contracts that we have. We have. It is always based on execution. So execution can always be a problem. Weather can always be a problem --and first time I mentioned that as an issue, but I have noticed that we haven't been very lucky, in terms of our core markets in Canada. But other than that, Ole, it is not -- there is no -- there is no assumption, other than execution and the passing of time.

So there is no element of hope in the forecast? It is a real forecast?

There is no element of hope, no. No, not at all.

That's good then. Then is one little question to Dharmesh. There's been a lot of chatter about ESP making inroads in North America artificial lift. Could you discuss that in context with your position?

In terms of, making inroads in the shale plays. I mean there, people always drive ESPs for well cleanups in the early stages of shale wells, and they do respond there. But in terms of just the nature of the production declines in shale wells on a sustainable basis, for the life of the well. We are not seeing any significant improvement in terms of market share by ESPs in that space.

ESPs are, for which I have an excellent application on a lot of wells, they perennially suffer from a number of structural flaws. Flaw number one, they are more expensive. Flaw number two, you have downhole, the motor, the driving, so they are fragile by definition. All of the other forms of lift, anything fragile is above ground. So, boom, there you can't get around that. And they are basically power hogs. And so maintenance hogs, power hogs, reliability is always an issue. On the other hand, they will lift more fluids per unit of time. And so there, so you have got that arbitrage.

They will always have an excellent spot. You won't get a lot of shift. Historically, you have got a shift gradually, away from ESPs, as a secular basis. It takes a very long time. They will continue to have that on a very, very, very slow curve. That's it. Everything else is conversation, Ole.

And one more comment I will say, at least twice the year, if not three times a year, a shift of -- from customers moving from ESPs to rod pumps (Multiple speakers). Or rod pumps in the US market as rod pumps deliver expanding volumes. I never hear somebody about, moving from rod pumps to ESPs. That correlation typically doesn't occur as a long-term trend.

Okay. Well, that is great (inaudible) and will be hearing, so thanks for that. I just find it, sorry, but I can't help myself, both (inaudible) and you highlighted, and related services. It looks to me as that it is about half -- a little bit less than half of (inaudible) construction number, and I will just leave it out there. And we have that data points from other people in that business. Would you say that your EBITDA margins in the same ballpark?

Look, the TRS, and you have to be careful. The TRS product line is typically a co-mingled, when in terms of presentation with our cementation product line. TRS, per se, is probably around $1.2 billion pure TRS, give and take. The TRS margins are, basically a little north of 40% at the EBITDA line, 40. Again, on a fully -- you have to be careful, that the numbers have to be correct on a fully absorbed basis. Meaning not just have product lines, that don't absorb the full amount of overhead, et cetera.

Understand. Thank you for clarifying that, Bernard.

You are welcome.

Your next question comes from the line of James West with Barclays.

Hi, good morning, Bernard.

Good morning, James.

I know we talked last year about this, a couple times. But I wanted to dig in again on MENA margins, as we think about the repairs, the cost restructuring that has gone on there. Of course, the Iraq contracts going off are going to help. But how do you think about exit rate for MENA as we exit this year? I know last year we were hoping for a lot more than we got. We have had some sequential improvement, but we are still kind of well below historical levers.

Well, we had two problems -- three problems in the Middle East. Problem number one, is we had a very large play in North Africa. And I don't see anything about North Africa, but since you asked the question, it has stabilized, but it is not prosperous or turning around yet. North Africa, being essentially Algeria, but of course Tunisia and Libya as smaller markets. Libya, has not -- I mean, nothing is going on in Libya, very, very little, very unstable. Tunisia has rebooted, but at half the rate it was at. Algeria is -- wants to increase activity, but is still terribly slow.

So that was issue number one. And on that one, other than the fact they are stabilized, it has not turned to the prosperous, this is one. The second issue we have, was Iraq. Iraq, too many contracts, and it is entirely management's fault. That would be my fault. But Iraq, too many contracts. Also contracts and product lines -- so we are not the right owner. We are not the right operator, although we will finish our assignments, and we will do a proper job of it. We should be doing this, but too much. And we have stopped, and we are scaling down southern Iraq.

As we do so, gradually the weight of Iraq comes down. And as it comes down, the difference in margin is spectacular. And I don't think it will surprise anyone on the call to know that in southern Iraq, essentially we have had no EBITDA. So that, as we scale that down and shrink it, no more capital will be going into Iraq, it is going the other way. Eventually, it will be stabilized, an operation of a much more modest size, but a profitable operation, good returns. As that phenomenon occurs, then you have seriously improved margins, obviously.

The rest, actually, Saudi, Kuwait, Abu Dhabi, Oman, just the key ones. And Qatar and Yemen are smaller, and Bahrain are much smaller, but actually, they have very, very good margins. So you have a little bit of the same phenomenon as I highlighted overall. Which is what I highlighted on the product line side, that clearly you have $11 billion out of $16 billion, which is basically excellent. And then you have got $5 billion, which we shouldn't be owning, with very different economics. So the issue is focusing on the $11 billion, not on the $5 billion, which is really the direction. I would say within the Middle East, you have a bit of a microcosm of the same. We can't do anything about North Africa, other than what we have done, which is bring the cost down and wait. That's fine. We have done that.

And that will turn. Although the -- and the economics have improved, although they are not prosperous, but they have improved because we have stopped the hemorrhage. But given the fact that the markets identified, Saudi, Kuwait, et cetera around the Persian Gulf are really doing well, actually. To the extent we bring down Iraq to a point where it doesn't harm us anymore, in fact it helps us, the margins on the -- the (inaudible) margins will be very, very strong. Now that is all the entire context. With respect to numbers, look, numbers will be, what they will be at the end of the day. But by the end of the year, MENA, essentially has no margins right now in Q2. By the end of the year, we would expect that MENA will be start to be knocking on the door of double-digits.

Okay.

One more other comment I would add, is three to four years ago, North Africa contributed about 80% of the profitability of the region, and MENA Gulf which is another dominant part, would be at 20%. Today the tables have flipped, the MENA Gulf is back at -- is now rated of the lowest where North Africa used to be. And as we work through our cost structure in North Africa and Iraq, you actually will see MENA -- you will have a very healthy chance of MENA getting back to its profitability level, but from a different base that is much more sustainable and much more long-lasting.

Yes.

Okay. That is very helpful. Dharmesh and Bernard, you mentioned the transition, if I could skip over to Russia for a second. The transition in 2Q with I guess, with [Rosneft]. Is that transition fully over at this point, so that we will see pretty clear signs of healing in 3Q?

Well, I -- (inaudible) is probably a better able to answer that question than I can. I am sure they have a lot of transitions that they are working through, a very large organization. But with respect to activity, by both drilling and production related and with respect to us, for all intents and purposes, yes, it is over in Q3. It is not that activity, that there was no activity in Q2, it was that there was less, insofar, and understandably so. If there was any sort of project that could be enjoined, while one side assessed the details of the projects on-- coming from the other side, meaning TNK, they did. This is absolutely normal. This is no different than when company A buys company B in the United States. You always have a hiatus.

Sure.

So this is nothing dramatic. So I am sure their transition is not finished. I mean, it is more their management issue than ours. But as someone who works for them, half of our business, one-half, $500 million or so in Russia is with them. Obviously, it is significant. We have a lot of projects in the Volga Urals, and Western Siberia and Eastern Siberia. Take [DCNG] for example, in Eastern Siberia, where we performed a number of different tasks, well construction, formation evaluation will be the primary ones and some completion. So it should be -- means that Q3 will be a little bit better than it would normally be, given the market circumstances and Q2 was not as good. That's it.

Okay. If I could just slip in one more for John and then Dharmesh. Original targets for this year were decreased DSOs and DSI's I think about by about 10 days each. And we took a little step back in 1Q, took a step forward in 2Q. It sounds like you are suggesting at least second half, We should see that all play out. Any change to that guidance?

I think DSO was the same. We are not changing the guidance on DSO. DSI, I think we will do better than what we guided by a couple of days, depending on our Q4 growth.

Yes, I agree with that. I think that is where we have the opportunities. We have really made some significant progress. All areas of capital efficiency, but inventory really turned a good corner for us in the second-quarter. And was the result of a lot of hard work that has been going on for months and quarters even, that we really have seen the positive contributions there.

From a management perspective, we tend to view would be DSI's is the most important, because it is least liquid.

Right.

The DSOs -- you understand. So if we are going to progress anywhere, we have progress across the board. But our DSI is -- would be on -- very high on the list. DSO is another issue, if we have clients that have liquidity issues of their own, that is not the case. But DSI is a major, major issue for us.

Again, so on the question, if you actually (inaudible) cash flow for the second-quarter, our payables actually went down by $60 million to $70 million. So if you actually think about cash flow from operations, you could easily -- a day or two of collections and payables gets you to future breakeven cash flow -- we are now down to calculating on days, as opposed to anything else.

I would also add that, the bringing down of payables, which is DPOs, which is not normally what you would hear, is also a calculated effort, as clearly on the cost side. And we said we have gone beyond payroll. We come back to payroll. Beyond payroll, clearly, there is a vendor play. If you have a vendor play, clearly, there is some policy that you have to think about, in terms of how predictable and so forth, and so on the quality of your DPOs. In other words, how quickly you pay people, quid pro quo on the cost side. That is sort of -- for you to think about.

Okay, great. Thanks.

(Operator Instructions)

Our next question will come from the line of Angie Sedita with UBS.

Hi, thanks. Good morning.

Good morning, Angie.

Bernard, good to hear on the potential two transactions and the asset sales in Q4. When you think through your asset sales versus where you were at the beginning of the year, are there other any assets you have had to pull off the market due to lack of interest or just movement? And when you start to think about 2014, any preliminary estimates as to where you could be on asset sales for next year for 2014?

Angie, I didn't -- I mean, I didn't really engage in any serious assets on the markets, except for three different instances, which one we are were working on did not work. So, it's not so much -- it was just a one-on-one negotiation with a particular company. The other two appear to be working. Let me remind you, that we really got the ability to focus on this, only as of the early days of March. Until the end of February, we were 100% focused on doing everything we needed to do, to complete all manners of accounting processes on around taxes, that we have a clean, restated case, going back historically. So minimize the enormity of that effort then, for the organization both financial, accounting, both financial, accounting and operations. Couldn't really go out there and engage with numbers that were going to change, also further restatements on any kind of auction and so forth and so on.

It is not that we didn't want to. Not that we knew, didn't know what we had to do, it is just we couldn't do it. So, we really only started in only March. True, you heard about it before, because the intent was there. But we just couldn't get started till then. Since then, we are on double-overtime in getting it done quickly.

So again, there were three different negotiations, of which two appeared to be progressing, and one did not. That particular class of asset did not progress in one negotiation. No, no, it is perfectly marketable. It is just that the buyer for reasons of his own did not want to complete the agreement. And that is, of course, that is always -- I have been the buyer of many things in my life, and a seller also. You can always change your mind. That's all it is, Angie.

Right. So any early thoughts on asset sales for 2014?

Well, we have four different product lines that are not very large in and of itself, which have been prepared to be put on the market. I would say, perhaps, will be put on the market by Q4, and maybe three out of four. I think -- think of product lines that would have somewhere between $300 million -- well, $200 million to $300 million of revenue. Good product lines, just not what we should be running. And they would be run parallel by auction. So I don't know, if it works, probably will be a successful resolution in Q2 of next year. But also larger assets, but again you have to wait until I announce or not, completion of transactions in Q4 this year.

That's helpful. On an unrelated follow-up. On artificial lift in both North America and international, the growth you are seeing, is that predominantly volume-driven? Are you still seeing any signs of movement in pricing, either here or abroad? And obviously, you added capacity here in Q3 of last year. What is your utilization rates on that capacity, and how much expansion potential do you have?

That's a very good question. On North America lift, and no, we are not seeing pricing. However, because we have expanded, thus substantially, the entire supply chain for lift. And remember, on lift we do just about everything you can possibly do, in four forms of lift out of five, and the software is separate. So we have massive supply chain. So we expanded our supply chain throughout last year, and we are still scaling up the utilization.

My point being, that you will see -- believe you will see margin improvements driven out of North American lift out of absorption, strong manufacturing absorption, as we now are expanding, ramping up the facilities. Because we have the volume from the plant site, so we have very, very good manufacturing absorption. That is what will drive manufacturing margins on the lift side, not pricing particularly. Internationally, we are getting good pricing, good contracts on lift. I don't know whether I could say that the pricing is rising internationally. I don't have those metrics. But maybe, Dharmesh, you do. I do not.

First, one comment on manufacturing, Angie, is what was happening last year was not sustainable. All the plants were running at three shifts, seven days a week. They were busting at the seams, (inaudible) during the expansion. So what is happened today, is we see a stabilization of load-balancing across plants. And as capacity and volumes are acquired, we have the ability to ramp up production. On the margin side, international margins are substantially better than our North American margins, and that trend continues on a go forward basis.

And then, just to clarify, so if you think through the capacity that you added and efficiency gains that you expect, is it fair to say you are running 60% to 75% of the capacity that you are now able to? And you still have room to grow, just on the volume side?

I think that's a fair statement.

That is fair.

Thanks. Great. I will turn it over.

Thank you.

Your next question comes from the line of Byron Pope with Tudor Pickering Holt.

Good morning.

Good morning, Byron.

Just one question for me, and it relates to the Middle East region. If I back out the legacy Iraq contracts, it looks like you all are still doing roughly mid-teens topline growth. And so, what I am trying to think through, as we move into 2014, it sounds like the Middle East outlook is fairly robust across the region. But is it fair to think about topline growth being sustainable, in that mid teens range for that region of the world?

Again, a very good question. So one of the answers that Dhamesh provided was very, very insightful, which is 80/20, 20/80 phenomenon, which was a better way of expressing the meat than whatever I said. Which is going back in years when margins in MENA were at the EBIT level, were between 22% and 25% as opposed to being nonexistent. 80% of what we made was essentially in North Africa, and that basically disappeared. It was an enormous phenomenon, a negative one, aside from Iraq.

But then the rise of the business in the Persian Gulf, which normally wasn't terribly strong for us, but became very, very strong. And what you have seen, which has started, this emerging Kuwait, Saudi, Abu Dhabi, and Oman being the primary drivers. So that is what you analyzed -- and what you started is absolutely, exactly what I am describing, masked by the terrible economics in North Africa, and of course, the very poor management and contractual decisions, and not local management. Contractual decisions, my own poor management in southern Iraq.

And so just to make sure the work you have identified is absolutely correct, understand what you are looking at, yes. In answer your question is, first of all, yes to your analysis, and, yes, it is sustainable, most definitely based on contractual commitments that we have today and market position. Absolutely yes. And as true in Kuwait as it is in Saudi Arabia and Abu Dhabi and Oman, yes.

Okay. That is all I had.

In 2014.

Thank you.

Your next question will come from the line of Robin Shoemaker with Citi.

Yes, good morning, Bernard.

Good morning, Robin.

I wanted to ask another question on artificial lift, which seems to be one of your best businesses now, as it has been. But back in -- when you gave us, when you used to give us artificial lift kind of revenues broken out, I think 2011 you are at about $2.2 billion in sales. And I have to believe it's like $3 billion sort of ballpark today. Is that roughly correct?

So, first of all, Robin, it is not one of our best businesses. I love artificial, it is my first baby. But the best business we have is well construction, in terms of margins and returns. Just so that you know.

Yes.

Having said this, it is in our core which makes it one of our very good businesses. And I have probably offended a few people who are Artificial Lift listening to this call. But just to make -- to correct it. Second, in terms of revenues in 2013, think $3 billion to $3.2 billion artificial lift.

Yes, okay. And then, just in terms of -- we know how rod lift is being propelled by the North America oil shale plays. And we have talked a lot about that. But in terms of other technologies, the PCP gas lift, plunger, hydraulic, et cetera, is there anything happening? In other words, is there any kind of like a newer lift technologies that Weatherford has, that are potentially strong growers, contributors to the growth of this product line?

I will let Dharmesh will answer that question, because he is anxious to do so.

S new technologies in lift fall into three broad buckets. First and by far, the most nearest and dearest to my heart, is the entire production optimization platform, software sensors that help you optimize the entire production of an asset. It is a growing business, it is a fast-growing business with good margins and good returns. It (inaudible) optimized artificial lift was. The second one that we are focusing, the second area we are focusing on is unloading of those wells. So you have the liquid plays.

But there is a very large well count that is really going to need new technologies is the gas wells, that are drilled over the last three to five years. You got liquid loading in them. There is no good, natural way to unload the wells. That is a second area of focus for us. And third, what you obviously have in gas lift is a very strong deepwater play. So you continue to push that level up, in terms of what deepwater applications for gas lift. Those are the three broad areas.

As far as PCP s is concerned, there were very nice (inaudible) as heavier -- as reservoirs are found, heavier reservoirs are found around the world, PCP becomes a natural extension and growth. So PCP will rise in the growth of heavy oil plays around the world.

So the first 10% roughly, it used to be 6%. It is up to 8% to 10% now of heavy oil reservoirs, over the life of the heavy oil reservoir gets produced -- cold produced if you will with PCP's. The most efficient, the cheapest, the most reliable, et cetera. Remember, the heavy oil does -- is typically not deep, and PCPs don't operate real well deep. Okay?

And obviously, beyond that, you start using typically heat and a variety of injections of steam and so forth and so on, in heavy oil, and PCPs play less there. Because the elastomer does not do well with heat. And that is a big, big (inaudible) application of PCPs that Dharmesh described. 10% of the reservoir business doesn't sound like much. And remember, it used to be actually less than that, 6% originally. Moved up to about 10% co-produced, depending on the reservoir. But given the size of the heavy oil reservoir, it is actually many, many years, if that helps.

Yes. That's good explanation. Thanks a lot.

I think we probably have to close down the call. We will probably ask -- there is one last call, just to be -- to -- and then we will close down the call, because we are nine minutes beyond our time. So one last call -- one last question, if there is one. And then we will close down.

Your final question will come from the line of Mike Urban with Deutsche Bank.

Thanks, good morning.

Michael, good morning.

So in Iraq, good to hear the folks there, on the profitability and returns. And you did single out southern Iraq, presumably northern Iraq and Kurdistan are markets. Northern Iraq and Kurdistan are markets, where you do have good margins, good returns and are in the core, and will continue to be?

Yes. And I -- if I -- I should have made that clear, if I did not. All my comments on Iraq were southern Iraq. Kurdistan is an entirely different population. The operations there are, scale-wise smaller. We - but they are entirely different economics, different type of contracts, different type of clients. Just different. And the prognosis is also favorable, entirely different, yes.

Right. Okay. And as you look to redeploy the equipment, and presumably people from southern Iraq into other markets in the region, are we at a point, in terms of market tightness where that equipment should be readily absorbed? And just more broadly, I guess a question on that region. Have we kind of reached that tipping point, where there is really not a lot of excess capacity or equipment floating around, and you are seeing some competition emerge for that equipment, for that work?

The equipment that will come out of southern Iraq will find contracts and a home without much difficulty. The only negative is, is that it takes time to demobilize, recondition and redeploy. Recondition is not a big capital proposition, it is just labor, but takes time. It takes anywhere from three to nine months. That is the only issue.

But the other -- but once you have deployed it, it typically doesn't move out of those countries, unless a major, major, major swings in the market. Those countries are, think again, Kuwait, Saudi and so forth. Abu Dhabi and Oman are the primary ones, have a great deal of stability in the work they do. And they have been -- and they are on an up trend, in terms of quantity of work, as much gas space is oil-based. And so, the equipment tends to stay. Just a transition, that is the only issue.

Okay. So definitely a market for them. Just we should be patient in terms of our expectations on when those are generating earnings elsewhere?

I think they will -- you will start a seeing good expansion in the Persian Gulf, and yet no capital intensity in large measure, because the equipment is moving from southern Iraq to there.

Right. Thanks. That's all for me. Thank you.

That should conclude our Q&A session, and we will conclude the call. Thank you very much for your time and attention.

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