Weatherford International PLC (WFRD) 2014 Q3 法說會逐字稿

Good morning. My name is Lori and I will be your conference operator today. At this time I would like to welcome everyone to the Weatherford International third-quarter 2014 earnings conference call. (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, there will be some prepared comments from Krishna, Dharmesh, and then myself; then will go to Q&A. Krishna, please.

Thank you, Bernard, and good morning, everyone. I would like to remind our audience that some of today's comments may include forward-looking statements and non-GAAP financial measures. Please refer to our third-quarter press release for the customary caution on forward-looking statements and a reconciliation of non-GAAP to GAAP financial measures.

My comments are going to address the third quarter of 2014 and then the outlook for the fourth quarter. Earnings per share for the third quarter, before charges and credits, were $0.32.

These earnings were negatively impacted by $0.02: $0.01 due to the North Iraq geopolitical situation and $0.01 due to the intra-quarter divestiture of the rigs business in Russia and Venezuela, and the pipeline and specialty services business. Adjusting for these items, our normalized earnings per share were $0.34.

Revenue of $3.9 billion for the quarter increased 4% sequentially, and 8% excluding the impact of the divested businesses in both quarters. Operating income margins before R&D and corporate expenses improved 145 basis points sequentially to 15.4%, and rose 228 basis points versus the third quarter of last year. Incremental operating income on the sequential revenue increase was 48%, and on a year-over-year basis it was 169%.

North America revenue grew 9.3% sequentially, with margins increasing by 92 basis points to 16.1%, reflecting the seasonal rebound in Canada and strong growth on US line more than offsetting cost headwinds in the US pressure pumping business.

The Europe/Caspian/sub-Sahara Africa/Russia revenue, excluding the revenue of the divested businesses in both quarters, was basically flat, while margins increased by 497 basis points to 21.8%, reflecting the strong seasonal recovery in Russia activity, coupled with the beneficial impact of divesting the marginally profitable land rigs business with a large reduction of revenue.

Europe continued its strong activity. And in West Africa, increased market share with margins contributed positively.

Latin America revenue grew 11.3% sequentially, while margins improved by 235 basis points to 14.7%, with improvements principally in Argentina, Brazil, and Venezuela more than offsetting continued muted activity levels in Mexico.

Middle East/North Africa/Asia revenue grew 7.2% sequentially, with essentially flat margins at 9.4%, reflecting the impact of the geopolitical headwinds in North Iraq, offsetting improvements in China, Malaysia, and Saudi Arabia.

The beneficial impact of cost reductions on the results for the third quarter was $0.09, which is an incremental $0.02 sequentially. The tax rate in the third quarter was 26%.

Moving on to the core/non-core analysis now, our core business revenue of $3.2 billion grew 8% both sequentially and year-over-year. Our non-core business revenue of $634 million decreased 12% sequentially and was 21% lower year-over-year. Excluding the impact of the divested businesses, our non-core business revenue grew 9% sequentially.

Our core business margins increased 141 basis points to 17.9%, while our non-core business margins declined by 70 basis points to 2.8%. Formation Evaluation margins improved 272 basis points to 11.2%. Well Construction margins improved 172 basis points to 27.1%.

Completion margins surged by 534 basis points to 27.5%. Artificial lift margins were essentially flat at 17.1%, while stimulation margins declined by 120 basis points to 1.6%.

Moving on to net debt and cash flow now, net debt reduced by $717 million during the third quarter, reflecting the receipt of $746 million of divestiture proceeds during the quarter. This was slightly offset by a negative $33 million of free cash flow from operations.

Cash severance and restructuring costs associated with our downsizing program was $41 million during the quarter. Working capital balances increased by $121 million, reflecting increased activity levels.

DSO and DSI reduced by 1 day and 2 days, respectively, with strong collections of $4 billion from customers. Accounts payables balances continued to decrease despite increased revenue, as we began to renegotiate our procurement terms with suppliers and also to reduce lead times for long-lead items in order to meet customer schedules.

CapEx of $349 million net of lost-in-hole reflected the investments needed for new incremental core business contract wins, principally in Latin America, sub-Sahara Africa, and Europe. These investments will show up in terms of increased revenue and profitability in 2015.

Moving on to the cost-reduction efforts, we have officially completed both the reduction in force and the location restructuring programs that were begun early this year. In total, 6,283 positions have been eliminated, which is expected to realize $462 million of pretax savings on an annualized basis.

In addition, a total of 64 underperforming operating locations have now been shut down. The combined savings from the now-concluded RIF program and the location cleanup exercise will yield $500 million in pretax annualized savings going forward.

In order to effect these cost-reduction programs, we recorded a significant level of charges this year. Third-quarter charges of $171 million included these principal items: $81 million to restructure North Africa, principally Libya, where our activity has effectively halted; and $78 million for severance and restructuring charges for the RIF and the location shutdown programs.

Going forward, these exceptional charges will be curtailed. As the RIF and location restructure programs are now officially completed, we should not have any severance and restructure charges from these programs.

The only items going forward will be any residual charges for the Iraq EPF contract and certain legal and divestiture costs, along with gains and losses on the divestiture of our non-core businesses. You have our commitment on this matter.

Now moving on to the outlook for the fourth quarter. The fourth quarter of 2014 will see an increase in revenue in all regions, led by North America on US land, with increasing activity for artificial lift completions, drilling services, and pressure pumping.

Canada is expected to continue to be robust. In Latin America, we expect strong Well Construction-led growth in Brazil and Argentina, while Mexico will remain subdued.

In sub-Sahara Africa, Well Construction and Formation Evaluation product lines will lead growth offshore. In Europe, Well Construction activity will increase; and in the Middle East, Saudi Arabia and the Gulf countries will continue to grow.

These advances will be partly offset by seasonal declines in Russia and Asia after the active summer season, further exacerbated by the strong US dollar and the absence of the divested businesses for the entire quarter. Based on these factors, our fourth-quarter earnings per share should range between $0.37 and $0.40.

Our previous guidance for the fourth quarter has been adjusted to reflect the following: a reduction of $0.02 for activity shortfalls due to the continuing geopolitical paralysis in Iraq. A reduction of $0.02 for the divestments of the rigs in Russia and Venezuela, and the pipeline and specialty services businesses. These businesses being more profitable in the second half of the year than in the first half, the full-year impact of these divestiture is about $0.05. A reduction of $0.01 for the impact on our earnings due to a much stronger US dollar, principally in Russia, Canada, and the eurozone.

Our tax rate for the fourth quarter of the year will average around the mid-20%s. Lastly, free cash flow from operations for the fourth quarter is expected to be just over $500 million. This will allow us to close the year with about $100 million of positive free cash flow which, while not a stellar achievement by any standards, is still a major improvement over the previous 2 years.

The principal items that weighed on our free cash flow projections for this year were the delay of the completion of the Iraq Zubair EPF project into the first quarter of 2015 due to the ongoing geopolitical situation, pushing the previously forecasted contract and collections of $250 million into next year; and $150 million of higher CapEx which is now forecast to be $1.4 billion, principally to fund growth in the core product lines, where new contract wins in Well Construction and Formation Evaluation coupled with long lead times are mandating the CapEx planned in 2014 for revenue streams beginning next year.

Finally, let me give you an update on the status of our divestiture program. During the third quarter, we successfully completed the sale of our rigs in Russia and Venezuela to Rosneft on July 31, in a record time of 2 weeks between signing and closing. We also completed the sale of the pipeline and specialty services business to Baker Hughes on August 31.

The workstreams to carve out the remaining land drilling rig business remain on track for a 2015 divestiture. We have recently appointed an experienced operating chief of the rigs business, and this is consistent with this effort.

We are also making good progress on the divestment of a number of other businesses, and we expect to be able to announce at least one additional transaction before the end of the year. In fact, we may announce one transaction imminently within the next week.

At the start of the year, we had targeted $1 billion in divestment proceeds in cash during 2014. We fully expect to achieve or exceed this target.

Accordingly, we expect net debt to reduce to between $7 billion and $7.5 billion by the end of this year. This substantial reduction in net debt significantly derisks the Company compared to the start of the year, with more to come in 2015.

With that, I will now turn the call over to Dharmesh to comment on operations.

Thank you, Krishna, and good morning, everyone. Three important milestones were accomplished during the third quarter.

Firstly, operations delivered core revenue growth of 8% sequentially. Secondly, overall our operating margins expanded to 15.4%, and core margins expanded to 18%. Thirdly, there was continuous progress demonstrated on safety, quality, and other key efficiency metrics.

Core growth. The growth is a result of the technology portfolio at Weatherford and our focus on commercialization of that technology. Key drivers behind the sequential growth are as follows.

Completions growth was driven by a 22% increase in the number of zones completed in the third quarter versus the second quarter, and a 340% increase in sales of TruFrac, our new composite bridge plug technology. Wider-scale adoption of our sand control technology was also a significant contributor and will yield a 60% growth year-over-year in 2014. Completions growth was broad-based with sequential revenue growth of 27% in land and 17% in international markets.

Artificial lift growth of 9% was driven by the broad technology applications in our production systems portfolio. There are four factors driving the growth.

First, our industry-leading platform with specific applications for sand tolerance, corrosive environments, and wells with high gas/oil ratios provides a differentiated solution set to our clients and provides the fuel for continued growth.

Second, we are able to deploy solutions that increase the well productivity of our clients. In the Bakken, we have demonstrated a 25% increase in [oil] production in horizontal wells with the use of our long-stroke pumping units. What is even more important is that the production increase appears to be a sustained increase, as opposed to a temporary rate acceleration.

Third, we are able to have an impact on the economics of shale wells. Slowing down the decline curve in the first 12 to 24 months can be a game-changer for the economics for a shale well. Customer was able to reduce the decline curve and extract higher production using jack-lift solutions from Weatherford.

Customer reported an average incremental production of 15,400 barrels for well having jet pump for 12 months or longer. This translates to net incremental cash flow of more than $1 million per well.

The number of horizontal wells continues to grow, and we have the ideal portfolio of lift solutions for maximizing production from horizontal wells. Our customers are using jack lift or gas lift in early stages of the well, followed by the long-stroke or commercial rod-pumping solutions for enhanced production throughout the life of the well.

The Weatherford production consulting organization works with our clients to not only provide life-of-well lift solutions but also ensures that the wells operate efficiently. In one instance, they were able to reduce failure rate of key wells for a customer by 50%.

Further innovation in production technology, coupled with our industry-leading manufacturing footprint, will continue to enhance reservoir recovery and production rates and drive growth in artificial lift.

North American Formation Evaluation revenues grew by 14% sequentially as a result of successful technology commercialization for unconventional resource plays. Our rotary-steerable technology and drilling services, compact technology in wireline, and well-site geology in our laboratory group are all seeing strong growth in the unconventional plays in North America.

Growth in Well Construction was also broad based, with every segment contributing to the gain. What is noteworthy is that the growth was achieved despite loop currents in the Gulf of Mexico and geopolitical events around the world.

During the first 9 months of the year, our tubular running services business has won contracts for an additional 26 offshore rigs. During the third quarter, we completed startups for seven rigs, with the remainder coming online over the next several quarters.

Core margins increased by 141 basis points sequentially. There are two points on core margin expansion.

Formation Evaluation margins have increased from 5% in the first quarter to 11% in the third quarter. The primary drivers are improved market penetration and higher revenues from new technologies and their successful application. We expect this trajectory to continue in the fourth quarter and beyond.

While stimulation margins showed improvements in the second quarter, they were not sustained throughout the third quarter because of steep cost increases in proppants and associated logistics costs. At the end of the third quarter, we have renegotiated pricing on 70% of our US horsepower and expect revenue and margins to show forward progress in the fourth quarter from the levels delivered in the second quarter.

More than 90% of our horsepower is now contracted, and more than 90% of all deployed horsepower is working on 24-hour operations. Our repair of the stimulation business will show progress in the fourth quarter and beyond.

Rigs had a negative impact on third-quarter performance as 13 rigs were idled due to geopolitical paralysis in Iraq. We have now signed a 3-year day rate contract for four rigs for the BP project in Iraq, and those rigs will be active starting the first quarter of 2015.

There is positive movement and activity in Northern Iraq, and we expect to have all rigs operational in the first quarter of 2015. Two rigs have exited Iraq, and we expect the others to be operational in the first quarter of 2015. There is no change in our policy of no turnkey contracts in Iraq.

Moving on to efficiencies, annual revenue per employee has improved from $225,000 at the beginning of the year to $275,000 by the end of the third quarter, a 22% increase. There is room for additional efficiencies on our fixed-cost structure, and that effort will continue into 2015.

Our goal is to target an annual revenue of $350,000 per employee through continued efficiencies coupled with core revenue growth. Revenue per headcount is one of 10 key efficiency metrics that we are tracking, and a culture of continuous improvement is now in place.

We ended the third quarter with substantially reduced risk in our operational footprint. We now have a considerably smaller footprint in geopolitically challenged areas of North Africa, Iraq, and Russia.

We are substantially completed or exited all turnkey contracts.

Our last remaining EPF project in Iraq, Zubair, is 90% complete and is currently scheduled to be completed in the first quarter of 2015.

From a contracting discipline and strategy standpoint, we continue to focus on projects and contracts where we offer technology differentiation and attractive value creation for our customers and shareholders. The entire operations organization is focused on providing our customers with products and services that help mitigate drilling risk, reduce the drilling and completions costs for our clients, while delivering increases in efficiency and productivity from their wells and reservoirs.

We have made and will continue to make progress on delivering these products and services with a disciplined and relentless focus on safety and service quality. Our internal safety and quality metrics, coupled with feedback from our clients, indicate that we have made and continue to make good progress on both fronts.

From an operational perspective, our turnaround is positive and firmly on track. I will now turn the call over to Bernard.

Thank you, Dharmesh.

Q3 was a solid quarter. North America delivered half the quarter's sequential increase, primarily Canada. International did the same, but on the 183 basis point margin increase sequentially and 191 basis point increase year-on-year for international as well.

International operating income margins at 14.8% are only 130 basis points below North American's 16.1%. International is catching up with North America, which is a long awaited beginning of a recovery.

Both have some distance left to go. The prior peak was the same for both at about 25% operating income margins; there is another 10 percentage points or so to achieve.

As both Krishna and Dharmesh mentioned, the core product lines grew [about] 8% sequentially, while the core operating income rose to 17.9% from 16.5% in Q2. I will add another consideration.

Absent US stimulation in Q3, the core product lines grew by 9% sequentially to $2.9 billion, while the core operating income rose 200 basis points to 20.1% from 18.1% in Q2. Both the rate of growth and margin increase were steep; and ex-stimulation, the core crossed the 20% line in Q3.

These are the product lines, service lines, and [cross] integration we focus on with intensity and single purpose. All of us believe we have headroom and momentum in this core to substantially increase volume of business and raise our profitability.

This will be more self-evident when we finish curtailing areas of problems and we complete our divestments. Until then, we have some measure of distractions and inefficiencies, including on the cash side, but they are fast diminishing. We have made much progress.

The current level of oil pricing is lower than it was as recently as a few months ago, to state the obvious. It remains viable for our industry, while tonic for the world economy in 2015.

We do not expect pricing to weaken for any significant period of time from current levels. We are at a relative floor, even if we may not return to the prior ceiling immediately.

In the longer run, it is absolutely true the oil supply curve is likely to be challenged even with at least subdued demand growth. In time, pricing will likely rise to higher planes.

For now, we assume current Brent trading is a prevailing environment for near planning purposes. If we prove to be a little conservative in our assumptions, all the better.

We will grow our industrial core and extract further efficiencies in how we run the Company. This will serve us well regardless of market environments.

We expect 2015 will be as constructive of a progression for Weatherford as 2014 has been. The turnaround of Weatherford should be completed by end of 2015, leading to what we plan to be long-term industrial and financial harvest.

The emergence of unconventionals, the fulfillment of deepwater, and the unrelenting acceleration of production decline rates all add up to strong secular increases for more oilfield service and equipment applications and technology. Long term, we are in the best of industries; there is room for many to prosper.

I mentioned 2015 being as constructive as 2014. There is an implicit calibration in my comment. To put the progression from 2013 to 2014 into perspective and using estimates and/or probable outcome between now and year-end, 2014 will have been very constructive for Weatherford.

2013 on 2014 earnings will have risen from $0.60 in 2013 to about $1.10 or something like that this year. Free cash flow from operations will have gone from just about $0.5 billion use of cash in 2013 to about $100 million positive cash generation in 2014.

Net debt will move from $8.3 billion at the end of 2013 to $7 billion, $7.5 billion at the end of this year. That is after settling all penalties with the US government and funding both the very large severance cash payment we have to fund and the Zubair project, which we have basically self-financed until completion.

We will have also achieved a much leaner cost structure. Finally, this year, much of what ailed us -- be it poor turnkey exposures or geopolitical disruptions in places like Iraq and North Africa -- will have been closed down, scaled down, or near completed.

2014 will have been very constructive. 2015 is likely to be equally, if differently, constructive on all financial metrics. This is what we plan for.

Perennially, the Achilles' heel for Weatherford has been free cash flow or lack thereof. The commentary is fair; but we are making progress. Historical perspective may help calibrate our progress.

The rough $500 million to $600 million improvement in free cash flow this year versus 2013 is about the same as what we achieved in 2013 versus 2012. I'll remind you, we consumed about $1.2 billion in negative free cash flow in 2012 and just about $0.5 billion in 2013, which is a year-on-year improvement of about $700 million one year to the next. So we have been progressing by leaps of $0.5 billion to $700 million per annum from 2012 to date, and we expect to continue to progressing at a similar rate in 2015.

The definitions of free cash flow are rigorous. We exclude only divestitures and acquisitions, the US government penalty payment, and debt movements as in principal payback and the like. Nothing else.

It is too early to provide specific guidance on our operating plans in 2015 and likely financial parameters. But this much we can say and feel on responsible grounds for both market, revenues progression, and main operating priorities.

We believe core revenues and margins in Latin America and the Eastern hemisphere will improve markedly and deliver in 2015 positive margin incrementals over 2014. Revenue growth will be solidly double-digit.

This assessment isn't hopeful sentiment. It is based on existing contracts for Well Construction, Artificial Lift, Completion, and Formation Evaluation in a number of specific regional markets.

North America will improve modestly, essentially with gains from a lower cost structure and particulars of some of our product lines which are underrepresented in the US market. The underlying market in our view is likely to be roughly flat year-on-year, both US and Canada.

One note of caution: the gas segment is the unknown, depending on what sort of winter we experience. Gas may be the unexpected upside, depending on the evolution of heating days.

as I mentioned, our operating income margins for the core, excluding US stimulation, crossed the 20% threshold in Q3. We expect our core margins including US stimulation to rise further and average about 20% for the whole year 2015.

Our direction in 2015 will remain core, cost, cash, but we will increase intensity behind each. We will focus on operating quality for our core; quality and reliability and execution are paramount.

Safety was always a critical objective of the Weatherford on ethical as much as business grounds. Quality perhaps was not, as an unintended casualty of the exuberant pursuit of growth in our development years. This is a cultural sea change underway at Weatherford.

We will continue our commitment to core technology. R&D will be reformed to increase strategic focus on targeted deliverables. But R&D expenditures will stay at the same dollar level or possibly rise depending on promised returns, even though it will apply to reduced overall scale with the divestments of the non-core.

R&D is a single overhead cost which will now be compressed. Other overhead will be methodically lowered.

We will take down our cost structure further. It will not concern field or direct costs; that was dealt with earlier in the year, just completed.

The focus will be twofold: Company overhead, inclusive of corporate; and rationalizing our procurement. On that particular issue, we spent a substantial amount of time on understanding our variable costs, and we have a structured program underway to optimize our variable spend.

Total variable spend -- our way of calling procurement -- in 17 categories is right now approximately $7 billion. That is what we will address.

Year to date we have paid down our accounts payables by almost $200 million. Our DPO, days payable outstanding, stand at an all-time low.

The early paydown of payables isn't a random event. It is part and parcel of the ongoing thrust and detailed negotiations for procurement savings.

Overhead and procurement are targeted deliver, combined, about $300 million in cost savings over the next 2 years. Overhead and procurement will be our two major cost drives in 2015, building on the work done in 2014.

Lastly, cash. I am going to echo what Krishna said here. We expect the same sort of progress on free cash flow 2014 on 2015 that we will have had 2013 on 2014. We will provide detailed calibration in the January call of how much and when, the quarterly numbers.

With the end of past problems and distractions, which again have been a cash drain, we expect free cash flow to become very significant. As Krishna mentioned, we are likely to announce at least one other transaction before year-end, possibly very soon; and we will meet or exceed our original 2014 target of $1 billion in cash proceeds for non-core asset sales.

The drive to divest non-core assets will continue throughout 2015. With the hire of a leader for rigs, we are preparing for a 2015 public offering, whether IPO or spin, of our international contract drilling business. Given market conditions, we would expect an effective issuance in the second half of next year.

With a combination of divestment and robust free cash flow in 2015 and years ahead, our objective remains to lower our net debt to about $4 billion. We want to reach a 25% debt/capitalization ratio and permanently derisk the Company.

We are anxious to focus only on our core, as soon as possible, in part because of the high secular growth trends many of them benefit from, and the high-margin and returns attributes they have. But in part also we feel this way because of our strong competitive position.

Within our core, roughly 60% of our revenues do not really compete with the three larger integrated service companies. And we have clear technological and market share leadership in those products and service lines.

On the other 40% that will compete, we purposefully developed technological focus with unique proprietary solutions in very specific applications. And we have the technological depth and intellectual property position to effectively position ourselves as such.

In summary, Weatherford's direction remains steadfast. With early progress, we are now increasing the intensity.

The awareness of a possibly less generous market environment, if only for the very near term, makes us more focused with a leaner cost structure and tighter organization. We are executing on our financial and operating objectives of returns, driven growth of our core, and the de-risking of the enterprise.

I will turn the call over to the operator for Q&A now, please.

(Operator Instructions) James West, ISI.

Hey, good morning, gentlemen. As we think about the divestiture program -- and great color there on we will see another divestiture in the near term, maybe the next week, be announced. I know you have stated you are in progress on testing and production and the drilling fluids; so I'm assuming that's one of those.

But where do you stand with the wellheads business at this point, and then the other of those two that you are in progress on that may not be announced here shortly?

James, this is Krishna. Yes, we have a number of divestiture projects ongoing right now. There is about three going on right now.

One we should be imminently announcing hopefully within the next week, and the other two will -- it depends on how they progress. Now, the wellheads is not part of these three. The wellheads we announced earlier that we are going to defer it into 2015.

Okay, okay, got it. Then in addition to that, or I guess a separate question for me maybe. Bernard or Krishna, for the core business, if we exclude market share gains, which it does seem like you've picked up recently in your core businesses, what is the secular -- the normalized growth rate, do you think, of those businesses?

That is a difficult question, James, because there are some markets where it is -- many of those cores are underrepresented. So you have to slice it.

But I would say that it is not unreasonable to expect, if we do a proper job of it, very focused on the cores, for the growth rate of the cores to exceed the underlying market rates by a factor of 5% or 10% per annum for a few years. Something like that.

5% or 10%? Okay, great. Thanks, Bernard.

Jim Wicklund, Credit Suisse.

Good morning, guys. There is no question you have made a great deal of progress. And more importantly, the pre-open indication for your stock has moved up through the entire conference call. That is always positive.

The biggest issue, though, that everybody is looking at is your generation of free cash flow. And, Krishna, I am not very smart, so I need some help here.

I have got you showing about negative $665 million; and you say you're going to generate $500 million in Q4. If you could just reconcile that for me.

I understand the Zubair billing issue, but Zubair was delayed for a while. Is that the primary reason for the shortfall in Q3?

Whether to -- Krishna, answer first, then I'll add some comments to it.

Right. First, the GAAP free cash flow is $665 million negative; $666 million, actually, negative year-to-date. But that includes $253 million, which was the payment for the US government fine. So when you exclude that, you're much closer to the low $400 million, which is what we are referencing in our calls.

We don't consider the US government payments to be part of operations at all. Right?

In my comments, I reminded everyone that we don't exclude much of anything in free cash flow. It is a very pure definition.

The only thing we do exclude is acquisitions, divestitures, the US government, and principal payback. That's it. Okay, go on, Krishna, please.

That is why, year-to-date September we are like negative $400 million and a bit, and we are targeting to generate $500 million in Q4 alone; and that will get us to about $100 million positive for the year.

Which like we said on the call is not stellar. We are getting our act together on the free cash flow gradually over the years. But the year-over-year performance is impressive, and it is moving directionally in the right place.

Let me add something to help you calibrate how life will be for us next year. What is the difference between this year and next year, aside from the market?

The difference is there will not be cash severance payments of about $200 million and some change year-to-date. They were for a good cause, but they just won't happening again. This is item 1.

Item 2, I hate to load up just one project, because at the end of the day operationally that project is doing well, which is Zubair. But it cost us something like $0.25 billion in self-funding cash, which we will get back when we actually deliver the project late in Q1 to our clients. This is the way the contract was set.

So $200 million of severance or something like that; $250 million on Zubair, something like that. It is very, very simple, the math.

If everything else remains equal, you have about close to $0.5 billion in cash payments for a good cause, which simply won't be there next year. So you put these things together and you get a very, very simple picture, a very simple picture on what -- on how the future looks like for us.

This is why we feel very safe when we talk about a progression similar in 2015 versus 2014, like we've had 2014 versus 2013. It is actually quite linear, and we hope to do actually a little bit better than that. I'm [not] sure that helps.

No, that's (multiple speakers)

One last follow-up, Jim, for you. The paralysis in Iraq is what caused Zubair cash to move into Q1.

That is very fair.

It was supposed to come in Q4, and it had moved from Q4 into Q1 because of the paralysis.

Yes, that is very fair; thank you for that, Dharmesh. Yes, we couldn't get -- our client is operating, but our client needs to get everything approved by Baghdad. To the extent there is no Baghdad at the time, nothing happens.

Very, very fair also. That is correct.

It wasn't an operating mishap as much as it was essentially the fact you had no clients for a period of time. Or rather, our clients didn't have a partner for a period of time. But hopeful that that helps, Jim.

No, that's very helpful, because again I think that has been one of the critical issues. My follow-up if I could, Formation Evaluation has been the lowest-margin part of your core; and a 500 basis point improvement sequentially is fabulous. How did you do that?

Dharmesh may want to address it.

Sure. [I'll touch on] the lowest part of our core is stimulation, but I'll address Formation Evaluation.

I wasn't counting that; that is in (inaudible).

No, I think that is very -- two key factors driving it. One is, we have very low market share by any definition.

And what we have been able to do really is on the back of the technology portfolio we have, enter into new markets that we were not existing in. So we are seeing some traction in parts, for example the US shale plays, where we did not exist before.

And second is really market share growth, which is we are able to deliver wells in a faster time, in record time, in harsh environments, and we are getting rewarded for that.

I will add something else also, which is the flip for what Dharmesh said, meaning it is complementary. We also have -- you know this -- we also have been -- started presence in markets where we probably didn't have a future. And with very poor utilization, we were the lowest ring on the ladder, with poor pricing. We got out of those markets.

So you have a very, very simple maneuver, which is we don't push where we have no business pushing. We get out of it, so we don't have negatives. Avoidance of negative does wonders for you.

And then on the other hand, we push in markets where we actually have natural applications to what we do. What we do is not a me-too. What we do is partly a me-too and partly very specific sensing capabilities, which we are rather unique in having; but they only are applicable in certain markets. In other words, they are only useful in certain markets.

So that is -- we have a combination of getting out of the bad and pushing in the good. This is why you are likely to see a little bit of momentum around Formation Evaluation on the margins until they cross the 15% mark, at which point they at least become honorable in terms of returns. Okay?

I will throw the party at that point. Congratulations, guys. Thanks very much. That's helpful.

Ole Slorer, Morgan Stanley.

Yes, thank you. Bernard, did I hear you correct? You mentioned that [$]2.9 billion of the $3.8 billion were the core. Is that right?

Core without US stimulation. Without US stimulation. International stimulation is capped; I was just trying to make a point.

So $2.9 billion without US stimulation, that is correct.

And the total core is $3.2 billion, Ole.

Okay, so without. And that $2.9 billion core you said generated in excess of 20% EBITDA margin.

20.01%, to be specific.

Okay; well, that is in excess of 20%, isn't it? Thanks for clarifying that.

You mentioned, I think, that pressure pumping was -- was it 1.6%?

Yes, that's correct. So the only noise in what we just said, to be specific, that I excluded US stimulation, which is 75% of stimulation. And what you are referring to has the whole stimulation in it, including the international, which does much better than US.

Net-net, US is not doing well.

Okay. And stimulation will be about 10% of the total revenue, something like that?

Something like that.

Okay, fair. So it is all looking very good. The one number that stands out is the Middle East/Asia margins at 10.4%, which is way off what I would imagine that you would feel happy about.

So could you explain a roadmap, assuming that there is no material improvement in pricing or the business environment? What would be a realistic scenario to get that to a, call it, a mid-teens margin in line with our the rest? What needs to happen?

It is depressingly predictable. If you look within [MENAP], if you look at MENA's margins, operating income margins of the core in the third quarter, it is actually a little over 20%.

And how much of the revenue percentage will be core out of the MENAP?

I would say approximately somewhere around 70%, 75% of MENA is core. The balance is a negative number.

Now, what is the balance? A lot of it is rigs in the Middle East, and they had been -- as they were recovering, they have been stopped in the recovery in Q3. Q2 too, by the way, also.

They have been stopped in their recovery. I do not want to harp on that theme too much, but it happens to be a fact.

As Dharmesh mentioned, we have, right or wrong, more than a dozen rigs in Iraq; make that 13, we did, and they were 100% idle. They were idle throughout Q3; they were actually idled part of Q2. They will be idle probably most of Q4, albeit there is movement.

Now, whether we should have as many rigs in Iraq as we do is a very, very, I think, legitimate question. In a perfect world the answer is no.

Can we have them turn around and become -- and be either usefully employed and/or leave the country? Yes, and yes. But if you look at the negatives that they represented, right, versus the -- peel out positive, I will tell you again the core product line -- this is just a fact -- in MENA today, in the Q3, had an operating income margin identical [know]. It is what it is; numbers are what they are: a little over 20%.

And the issue is simply, one, making rigs do well; two, peeling it off so that they have their own future.

Again, the notion that -- and I tried to convey it in my comments; not sure I did a good job of it -- that the non-cores have a future outside of Weatherford, but they are today not only a cash drain in some instances -- Zubair of course -- but also a distraction, is absolutely true. And the pace and the manner in which we can divest of them intelligently is terribly important for the blossoming of the core.

That is really -- you summarize the situation here not in all respects, but in a lot of respects.

Excluding stimulation, is there any reason why you shouldn't exit the first quarter with 20% plus/minus EBIT margin?

Other than seasonality, the answer is no. I haven't -- I don't know about -- I have to look at seasonality. We have to look at seasonality.

But the answer is no. There is no reason.

If there is no improvement --

Krishna, you want to comment on that?

-- in the pressure pumping, Bernard, would you consider doing a neighbor-style deal where you take this -- where maybe you can get access by having this as a minority ownership rather than majority?

I will probably let Krishna answer that question. I would simply say that our team is already extremely busy with the, let's call it, the three transactions that we are working on. Of which one I think will be announced -- and maybe two, I don't know -- before year-end; we don't know.

So the issue of what we could or could not do with US stimulation I don't think has been defined yet. And rather not do it now.

Thank you very much, Bernard.

It is not defined, Ole. But I can tell you that there is a lot of interest on this business, and we have been getting inbounds on that. And, you know, creative solutions are always better going forward.

So we haven't really paid much attention to it or given it much bandwidth. But we will take it as it comes, once we get some more bandwidth to do this.

Sounds good. Thank you.

Angie Sedita, UBS.

Thanks. Good morning, guys. A little bit of a follow-up to Ole's questions on -- you have already dug in a little bit, Bernard, on the land rigs and how it is affecting MENA margins, etc. So can you guys walk us through the land rig IPO or spin?

What do you need to see? I would assume you need to see most of those rigs working under some kind of term contract before that could be done. What do you need to see as far as the assets and underlying operations for you to be ready to get the transaction done?

I think first of all, you are completely right that ideally we would have -- not the whole fleet utilized, probably the ideal; but just a high utilization rate in places that have no geopolitical overwhelming issues, good day rates, and that sort of thing, good operations also.

This is one set of issues. This is why we are strengthening the management there. That we are announcing the joining a gentleman to run the rigs this morning as well as our results, that is just part of the process.

But we are doing that, including the financial side. So this is one set of issues, the operating side.

The second set of issues is letting the whole year go by so we have audited numbers, so this year and the prior year's. We have got to be coherent in terms of the financial path for what you are going to issue to the public.

So presumably, the offering would have audited numbers for 2014, 2013, and 2012 so you have that sort of a frame. Also, cleaning up the legal structure to make sure that everything is the way it should be as a standalone entity.

Happily, from an information systems standpoint, that is the only part of Weatherford which is essentially on a different platform. And the rest of Weatherford, for historical reasons, we don't have to work too much on that.

There is the tax aspect also. Want to make sure the company, which will be a multinational company, meaning not a US-domiciled company, also has a proper structure and tax talents and tax planning in place.

All of this is really what is going on today, beyond just making sure that we get out of markets we have no business being in because we don't have the mass and the presence and so forth; build where we are strong; make sure the equipment is in fine shape; strengthen the management. Because this should be a very good company ultimately.

We are not getting rid of it. We are setting them free so they can have a very good future. That is the whole point.

The fact it doesn't belong with Weatherford doesn't mean when they go forward they can't have a good future. So we're working on all of that, which means that some time, let's say in March, April, we finish our preparation, then it becomes a market issue, Angie. Depends how to market is.

We are saying second half because we don't know any better. But the reality is we're going to be ready essentially in all respects, let's say March of next year; and then we will see.

Market. Market will be the answer. Hope this is helpful.

No, that is helpful. Then I guess, I mean, given market conditions and Brent and etc., what we just talked about on the land rigs, has anything changed on the interest in the -- obviously you're going to get a deal done soon -- but on the other assets that are up for sale? Where buyers that were there are seemingly pulling back a little bit.

No, we haven't seen much of that yet, because the fundamentals, Angie, are pretty good in these businesses. So the odd buyer, yes; but not in general.

We have three processes, like I said, going on right now, and they are all at various advanced stages. One, like I said, is imminent; and the other two are halfway done. So no real impact of that yet.

The other two, do you still think that they will be completed in the first half of 2015, or could be unclear?

No, I think that is a fair estimate. If everything goes perfect, we might even be able to announce one of them this quarter and close in the first quarter of 2015. Only time will tell about the other one.

What he is suggesting, Angie, is that you could have two announced between now and year-end is what he is suggesting.

Yes. One, like I said, is imminent and may be closed before year-end. The other one is announced this quarter and closing probably in Q1, most likely.

So what he is trying to tell you, Angie, is that we don't know for sure, of course; but two out of three might be either closed or announced as in agreement signed before year-end.

All right, okay. That's perfect; that helps. Then finally, I mean, just to go back to your comments in your opening remarks, Krishna, Weatherford historically has always had quite a bit of charges and after-tax charges and burning through cash.

But I mean, to go back to your remark, it sounds to me as if you are saying clearly Q3 is, as should be, the last quarter that we are seeing all this noise on the severance side, etc.

That's right.

And then Q4 will be a clean number. The only thing you have outstanding, of course, is Zubair; but this is the last quarter of it.

Like I said, Zubair and the divestiture costs, and any gains and losses on divestitures: that's it. Just want to be very clear about this. We are very conscious of this issue, and we are calling a halt to all of these programs now.

We have finished the program, so that's it.

Great. Thanks. I'll turn it over, guys. Thanks.

Brad Handler, Jefferies.

Thanks. Good morning, guys. If you could please specifically -- my first question -- specifically speak to Russia, your position there. Obviously exiting the rigs and so now it is a service exposure, but could you lay out a bit of a roadmap for what you think your opportunity set there is over the next year or so?

Sure. Subsequent to the rigs leaving Weatherford in Russia, we have calibrated for you a much smaller presence, which is this year something like $450 million to $500 million worth of service business. Pure service -- service or products business.

That service or products business is quite different from the rigs business that left, insofar as it has good margins. It always had good margins.

So we're left with a much smaller region with much higher margin. This is fact number one.

Now, fact number two, I am not going to tell you something you don't know already, which is a combination of a ruble that went from 32, 33 to 40, 41: item 1. Item 2: the sanctions. Item 3: oil basically down by $20, $25, which is very relevant for Russia.

All of this put together means that there is no doubt the market in Russia is not as exuberant as it perhaps wanted to be some time ago. You know this already.

What does it mean for us? Because I think of -- I'm very respectful of the sanctions, of course. But because, I think, of a very good working relationship that we have with a number of clients we are -- notwithstanding what I just described, we are likely to add as we speak approximately I would say $100 million per annum there, give and take, but approximately $100 million per annum on a, say, $500 million base of incremental service and products business, which should be signed and commenced sometime late this year. So make it a Fall 2015 event.

So for us, Russia in 2015 will not be so much a down market; it just won't be, I think, as strong of an increase as we had once anticipated. But going from $500 million to $600 million on high-margin products -- and I say high-margin products; they are all cores, with Well Construction and Formation Evaluation and some Completion being basically the essence of it. There is not much artificial lift for us in Russia.

So, that is the prognosis. Could it be more than that? I think -- I don't know. I think today I would say I would be rather content with what I just described.

And it is coming out of essentially three accounts, of which two in particular in Russia.

Okay. That's very helpful color; I appreciate that. Actually maybe so helpful that maybe I'll just ask about a different country.

If you could speak to Brazil, please, and your prospects for next year, you obviously -- you have picked up a lot of managed pressure drilling work. Kudos to your technologies for that.

But there are various -- potentially there is a stabilizing here of offshore rig count, and I guess I am curious for your perspective on your opportunity for next year there.

Well, I think Brazil and in general the deepwater segment are markets where, ever since we have been able to redirect the Company after the end of the great turbulence of 2011 and 2012, we have started scoring. And it is not only what you referred to; it is just well construction in general. Tubule running services, liner hangers, cementation, expandables -- yes, and some managed pressure drilling. You're absolutely right.

So Brazil is a case in point. Brazil was never much of a market for us. It was a decent market, but it wasn't a large market.

We stayed away from Formation Evaluation completely in that market simply because it was crowded, with low margins. So we focus on the things we could be useful at.

It just so happens we have more things that are useful for the other client, Petrobras primarily, than we used to have. So without giving you too many details on what the rate of expansion is likely to be for us in Brazil, let us just say that the largest play today we have in Latin America is actually Argentina. We're close to $0.5 billion.

Mexico is much smaller. Mexico is not the largest player anymore. Mexico is sitting on [hard] idle.

So Argentina is about $0.5 billion, and I would say Brazil is roughly $300 million. I think you are likely to see sometime over the next 12 months Brazil challenge Argentina in terms of leadership for Latin America.

It is all Well Construction. All Well Construction, and not only what you referred to. That is -- and I probably don't want to give you any more color than that. Krishna, you want to add something?

Yes, I would also like to add that in terms of margins, we're helping ourselves quite a lot in Brazil. In our quest for growth in the past we were trying to maintain our business presence in all product lines, despite the market already being -- in drilling services, for example being distributed among our peers.

And we had no market share but we had a pretty large operating base. So we have shut down all of those things, so that has helped the margins significantly along with the Well Construction growth. So we are now much more focused.

That would be very fair.

Got you. Thank you, guys. Appreciate it.

I think we are going to -- apologies in case we are cutting off any further questions, but we will have one more question, because we are now a minute past the half-hour and there are other calls, other reporting companies. So maybe one last question then we will stop the call, if there is one last question.

Byron Pope, Tudor Pickering Holt.

Good morning. Just quickly, you provided some useful color on the core business and I think you framed 2015 nicely in terms of the revenue growth prospects for the core businesses by your geographic regions. I was just wondering if you could frame for us how you think about that 2015 growth in terms of which ones lead the charge among your five core businesses, in terms of 2015 top-line growth drivers.

It is pretty easy, because it is just -- the dollars are the largest there. Well Construction will have the biggest, biggest growth in terms of dollars.

Percentagewise, it might actually be challenged by artificial lift, which should have an extremely strong year in 2015 also. So I would say in dollars it would be Well Construction simply because it is so big for us, the division as a whole. But in terms of percentage growth other than the dollars, lift might actually be neck and neck, the number one.

Okay.

Lift has a very, very strong backlog going into 2015 and widespread.

Okay, thank you. Appreciate it.

Thank you very much. We will just -- we thank you for your time. We will just close the call now.

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.