Weatherford International Q3 2007 Earnings Call Transcript

Weatherford International Ltd.(NYSE:WFT)

Q3 2007 Earnings Call

October 22, 2007 9:00 am ET

Executives

Bernard Duroc-Danner - Chairman,President and CEO

Andy Becnel - CFO and Sr. VP

Analysts

Bill Herbert - Simmons &Company

Jim Crandell - Lehman Brothers

Ole Slorer - Morgan Stanley

Ken Sill - Credit Suisse

Kurt Hallead - RBC CapitalMarkets

Brad Handler - Wachovia CapitalMarkets

Mike Urban - Deutsche Bank

Robert Mackenzie - Friedman,Billings Ramsey

Operator

Good day, ladies and gentlemen,and welcome to the Third Quarter 2007, Weatherford International Earnings Call.My name is Latasha, and I will be your coordinator for today. At this time, allparticipants are in a listen-only mode. We will be facilitating aquestion-and-answer session towards the end of this conference. (OperatorInstructions).

I would now like to turn the callover to Mr. Bernard Duroc-Danner. Please proceed, sir.

Bernard Duroc-Danner

Thank you and good morning. Andy,we will start off with your comments, and I'll follow up with mine.

Andy Becnel

Okay. Good morning. For our thirdquarter of 2007, we report fully diluted earnings of $0.85 per share. Thecombination of a strong US performance and a seasonally driven improvement inCanada bolstered North American results, while strong international growthcontinued to pace. The ongoing uptake of our younger technologies fueled ourgrowth in both North America and in international markets.

EPS comparison. At $0.85,earnings per share grew 25% sequentially from $0.68 in Q2. Our sequentialimprovement of $0.17 represents the largest quarter-on-quarter growth posted byWeatherford in the current up-cycle.

The field contributed $0.19 ofincremental EBIT, while non-operational items took back $0.03. R&D,corporate and interest expense were up meaningfully over Q2 levels. A lower taxrate helped earnings by $0.01 as our effective rate for the quarter settled at19% or 100 basis points below Q2's rate.

Operating performance. On aconsolidated basis, revenue grew $156 million sequentially or 9%. Year-to-daterevenue is up 18% over the prior year against a 3% increase in average rigcount globally.

North America, which accountedfor 50% of total revenue, grew $110 million. Average rig count for the quarterimproved by 235 rigs compared to Q2 with the bulk of the improvement takingplace in Canada,following an exceptionally low level of activity during Q2. Still, Canadian rigcount was down close to 30% compared to year ago levels. On a year-to-datebasis, North American revenue is up $168 million or 6% compared to the firstthree quarters of '06, while average rig count is flat over these two periods.

International revenue grew $46million or 5%. Middle East, North Africa and Asia led the way in dollar growthwith Europe and CIS also posting strong gains.Latin America's sequential growth was a modest 3% as equipment moves forpending projects in Venezuelaproduced a temporary flattening.

On a year-to-date basis,international revenue is up more than $700 million or 34% compared to the firstthree quarters of '06. On the same basis, Eastern Hemisphere revenue is up $590million or 38%.

Consolidated EBIT beforecorporate, equity and earnings and R&D was $487 million, up $83 millionwith operating margins at 24.7%. Eastern Hemisphere incrementals of 31% wassteady and as predicted. North American incrementals were an exceptionallystrong 65% due to a partial reversal of Q2's detrimentals in Canada andaccelerating traction of new technologies in the US. In Latin America, a $4million negative impact on equipment moves resulted in flat EBIT for the region.

Operating margins in the Eastincreased 40 basis points to 23.2%. These are the highest margins reported outof the East in the last seven quarters. North American margins recovered to26.6% on the back of a modest recovery in Canada and cost structureimprovements.

Geographic performance. Financialperformance within our four geographic regions was as follows. North America,50% of total revenue. Revenue up $110 million or 12.5% on a 12.4% improvementin rig count. For perspective, last year revenue grew 13.6 % sequentially on a14.7% rig count improvement. EBIT was $264 million, up $72 million. Margins were26.6%.

Revenue grew across all productlines. Artificial lift, wireline, and directional underbalanced accounted formore than 70% of the top line growth. Middle East, North Africa, Asia Pacific, 23%of total revenue. Revenue rose $21 million or 5% to a new historical high. EBITwas a $104 million, up $7 million. This is also a high watermark. Margins rose40 basis points to 22.7% on incrementals of 33%.

Year-on-year, incrementals were32%. Countries that showed particular strength included Oman, India,Qatar, Egypt, Australiaand China.Directional and underbalanced, wireline, well construction and lift, all postedsubstantial improvements.

Europe, CIS, West Africa, 16% oftotal revenue. Revenues up $18 million or 6%, and up 43% compared to the yearago quarter. EBIT was $74 million, up $5 million. Margins grew to 23.9%, a 20basis point improvement on incrementals of 28%. Year-on-year, incrementalsstood at 30%. Russia and Eastern Europe showed the strongest activityimprovements. The strongest gainers by product line were directional andunderbalanced, well construction, completion systems and lift.

Latin America, 11% of totalrevenue. Revenues up $7 million or 3%. EBIT was flat at $45 million withmargins at 21.3%. Equipment moves related to projects expected to commence inlate Q4 had a $4 million negative impact. Year-on-year, incrementals stood at44%. Brazil, Argentina and Columbia improved the most. Directional andunderbalanced, lift, well construction, all performed well similar to Q2.

Cash flow. During Q3, wegenerated EBITDA of $579 million with D&A running at $159 million, asexpected. Operating working capital, A/R plus inventory less AP consumed $223million of cash with inventories up $123 million. Foreign currency fluctuationsalone increased inventories and receivables by $49 million. At the end of thequarter, we stood at 137 days working capital. Our goal remains 110 days by theend of Q4. After deducting interest expense and cash taxes, operating cash flowwas $268 million for the quarter, an increase of $121 million over Q2.

Capital expenditures. CapEx was$403 million for the quarter net of lost and whole revenue. We project totalCapEx for 2007 at approximately $1.4 billion, which is an increase of $200million from our most recent estimate.

Latin America, CIS, West Africaand North Africa have all acceleratedinvestment in conjunction with planned growth in these markets. Thisincremental investment will be concentrated in those products and serviceofferings, anticipating the greatest growth over the next 18 months, as well asthe incremental addition of training facilities.

Capital structure. As ofSeptember 30, our ratio of net debt to net cap stood at 32.2%, a decline of 60basis points with total net debt at $3.4 billion. Cash balances totaled $132million at quarter end.

Guidance. Bernard will cover ouroperational outlook in his comments. I have the following updates for you for2007, non-operational items.

2007 net interest expense, $175million for the year, up $15 million from prior quarter's guidance. We wouldexpect Q4 interest to come in at $55 million or $5 million higher than Q3. Theincreases in both Q3 and Q4 are due to higher debt balances and increasedinterest rates.

Two, investigation cost. During Q3,we incurred approximately $4 million of expenses related to ongoing investigations.We expect these costs to continue at a similar rate until the investigationsare concluded.

Third, share count. We exited thequarter at 339.2 million basic shares and 349.1 million fully diluted sharesoutstanding.

I'll now hand the call over toBernard.

Bernard Duroc-Danner

Thank you. Q3 was a strongquarter in both hemispheres. We posted $0.85, which equates to 25% improvementsequentially and 27% year-on-year. The East continued its strong progression,building on what we expect to be a multiyear high-growth process. North Americadid well. Canada recovered some ground, while the US posted another strongquarter.

Western Hemisphere revenues rose$118 million. The growth was driven by North America, which accounted for 110of sequential improvement alone or 12.5% and year-on-year 4.2% in spite ofCanada's decline. The East added $39 million of revenues in the quarter,growing sequentially by 5.3% and year-on-year by 34.4%. Companywide, the EBIToperating income incrementals were 51%.

Canadian market recovered fromthe extreme trough of Q2. Rig count increased seasonally to an average of 347rigs, but was 29% below Q3 '06 levels. Basically the market showed signs oflife but remains subdued.

Pricing weakened throughout theCanadian oil field hitting the rigs, tubulars and pressure pumping, hard.Pricing for our product service lines was down more modestly, with the dropoccurring essentially in Q2 and Q3. This was in part, in a large part actually,offset by cost and productivity gains. We substantially changed our operating structurein Canada, management, people and equipment. The country leadership was alsochanged early in the quarter, paid dividends. We grew revenues per rig to thehighest level in our Canadian history to $262,000. Our productivity indices showedsome of the highest performance levels in the company.

We are running Canada at muchhigher people and equipment productivity than throughout '06. And as a resultand in spite of lower pricing, Canada's EBIT incrementals were sequentiallyvery strong. Our operating structure and portfolio breadth in Canada are real assets.

The USdid remarkably well, posting another quarter of good sequential growth, inspite of unfavorable weather patterns in Texas,Oklahoma, aweak Gulf and a meager 1.8% sequential rig count increase.

We gained traction in anotherproduct line primarily directional, wireline, ESP and chemicals, all of whichhave small Weatherford market shares in the United States. We also had strongsales in well construction for the deepwater market. Deepwater, it is today oneof our fastest-growing market segments in the US. For us, incidentally, it overwhelmsthe Gulf of Mexico, our shelf by a factor, atleast two to one.

As to technology in general, witness,for example, the fact that seven out of 10 of our directional jobs offshore USare using other [bigger] systems in temperatures about 310 degrees Fahrenheit.We routinely replace competitive systems on those wells. I would remind youthat we hold a number of industry records in pressure and temperature of the directionalsystems.

All of these factors help tocounterbalance the flattish US market environment. The related shift in productmix, kept US incrementals strong sequentially. Product service mix shift is agradual process that has been underway in the US for the past 18 months.

The top three growing product linesin North America were wireline, directional and artificial lift. A year-on-yearcomparison also shows a strong performance, NAM managed to grow 4%, 4.2% in Q3'07 compared to Q3 '06 and 6.2% year-to-date '07 versus year-to-date '06. Theseare modest numbers, but truly remarkable if one remembers a concurrent declinein Canadian activity in our prior high Canadian presence, as a percentage of North America, a legacy of our Precision acquisition. Isay, our prior high Canadian presence, because by way of reference, Canada'spercentage of our geographic mix has been cut in half, since the Precisionacquisition. The US is to be credited for shouldering strong growth, whileCanada was shrinking hard in absolute and relative terms. Canada is to be credited formanaging it’s cost structure and revenue generating capabilities so well andwithout delay in a poor market environment.

Latin America was modestly up, while operating income was flat. Latin America is gearing up for a step-up in businessvolume in '08 and '09. Latin America grewyear-on-year 22.8% and 21.7% on a year-to-date basis. The prognosis of Latin America is very strong. I will touch upon it later.

The strongest performances inLatin America have been Argentina, Brazil and Columbia. All have been growingin '07 this quarter at maturity above this region's average annual growth rate.Mexico and Venezuela were expected to be big movers in '08 and '09, and weredown sequentially year-on-year.

You may recall last year, we soldall of our rig assets that we are operating in Mexico, which makes for unevenyear-on-year comparison, as to Venezuela, it reflects the decline in Orinoco,where Weatherford has a large market share, substantial business. That declineis temporary, and will reverse itself powerfully in '08.

Eastern Hemisphere was strong across the board. The sequential 5.3% wassplit evenly between 6.2 after European/West African market and 4.7 out ofMiddle East/Asia. Product line growth was broad-based. But here again, directionalunderbalanced was the fastest growing product line. Artificial lift andwireline showed the next greatest improvements in the hemisphere. Forcoincidental reasons, these are the same top three performances in NorthAmerica.

The strongest performance thisquarter by country in absolute and relative terms, were Angola, Australia,Azerbaijan, China, Egypt, India, Oman, Qatar, Russia, Saudi Arabia and Romania.All have been growing at maturity above the 40% annual growth rate. EasternHemisphere year-on-year growth was 34.4%, while on year-to-date growth was38.3% probably the industry's highest growth rate.

I'll give you now the numbers onthe product lines for the quarter, starting from the largest to the smallest. Artificiallift was $347 million up 38.4%. Drilling services $313 million, up 32%. Well construction$312 million, up 19%. Drilling tools $223 million, up 6 completion $202 millionup 7%. Wireline $158 million, up 29%. Re-entry fishing $147 million, up 3%. Chemicalsand stimulation $127 million, up 3%. Intimidated drilling $90 million, up 2%. Pipelineand specialty services $50 million, up 14%.

All product lines grew. The relativeranking is changing. The highest dollar growth was experienced by artificiallift, directional and underbalanced, which we call drilling services andwireline. Directional and underbalanced is now our second largest product linein the company, closing in on artificial lift. We expect directional andunderbalanced to be our largest product line and cross artificial lift, sometime in the course of '08. This is not a negative view on artificial lift. Itis actually just a disproportionately positive view on directional andunderbalanced.

Wireline is now our sixth largestproduct line, overtaking re-entry fishing. We actually expect both wireline andcompletion to overtake drilling tools in terms of size and ranking alsosometimes in the course of '08. Much of our growth results from intensive fearsof ceding and technology testing with clients country by country. Once aparticular technology is approved, commercialization can start with the supportof our infrastructure. Growth occurs a few quarters later. This process, whichinvolves time and investment, is at the core of our organic growth. Two recentexamples illustrate this process, and they are not unique.

At the close of the quarter, fourcountries' clients tested repeatedly and successfully opened a wireline and compacttechnology, not just compact. Some of the new technologies that are beingintroduced as part of compact.

In each instance, [in thisspace], the competitor was unable to perform. The countries were Saudi Arabia,Qatar, Oman and Ecuador. All four of the current markets were our wirelineservices. Previously, they were not. Concurrently, we successfully deployed andtested our solid expandables technology in two multilateral installations for Armcoin Saudi Arabia and one for [BPD] Porter in the United States. All three were initiatedand completed in the third quarter. Further the expandables will be qualifyingin other countries over the next 12 months.

The above examples are not aloneand they're not unique. They are one of many concurrent events in the quartercovering a broad range of product lines and technology in a host of newregional markets. This commercialization process has been typical of the pastquarters and will become more intensive in subsequent quarters.

Forward view. We limit our forwardview on NAM to two comments. One, Canada, in the trailing 12 months, Canada'soil fields has endured the lowest spot gas prices in North America, anunfavorable change in tax regime, a rise in foreign exchange value of theCanadian currency, a 30% drop in activity and a concerted drive by the clients tolower oil field service pricing.

With hydrocarbon pricing hoveringabove $80 for oil and $7 to gas, the Canadian market feels very right forstrong recovery in '08 led by the heavy oil segment. There are substantialadditional capital programs close to $80 billion have been announced on andaround Alberta's heavy oil. The proposed change of Province's royalty tax ratemakes this uncertain or at least delayed. Until the government of Alberta firmsup the decision, it's difficult to make a judgment either way, our marketdirection. We expect our results in Canada to reflect our operatingimprovements, as well as our product line breadth.

We remain constructive on the USmarket and our own position there. The productivity limitations of the USreservoir base and its technology requirements support long-term a scenario oflow single-digit growth for the market, particularly for type and CBM gassupply.

Separate and distinct from gas,there is also a healthy prognosis of deepwater, lower 48 oil in Alaska. Inaddition, Weatherford-specific, we expect further US organic growth indirectional, underbalanced, wireline, ESP, sand control and chemicals, all haveproprietary technologies.

Setting aside decent prospectsfor NAM, long-term growth is all, really all international. The year 2007should close as expected with circa 40% growth '07 on '06 in Eastern Hemisphere. Beyond'07, we see a multiyear growth process of a scale and scope that isunprecedented in our history. As far as we can tell, it will be sustained throughthe next five years, and there are reasons for that.

Specifically, we expect the Eastern Hemisphere to grow a similar 40% in '08 on '07.Furthermore, although the compound numbers are daunting operationally, and inthe end for us it is essentially an operational risk we believe it is likely'09 on '08 will match the same sort of performance.

Latin America is expected to growcirca 25% range '08 on '07 and at a similar rate in '09. Latin America, in my judgment has some upside above these thresholds.

In the Eastern Hemisphere, weexpect North Africa, Russia, Middle East, sub-Sahara Africa, China and CentralEurope to show the greatest growth year-on-year. In Latin America, we expect Mexico, Venezuela,Brazil and Argentina to show the greatestgrowth year-on-year. If we zero-in on countries as opposed to regions, Algeria,Angola, India, Libya, Mexico, Qatar, Russia, Saudi Arabia and Venezuela, allthis in the case of Weatherford, will have the largest growth year-on-year.These will grow by at least $100 million per year and/or a multiple of thatnumber. Now, I'm talking about '08 on '07, now to be clear.

Due to the above prognosis, weare engaged in an intense process of recruitment and training. We hired 1,800employees net in the third quarter. This process will intensify in the next 12 months.Our recruiting and training is a key issue, completely key. There were nomaterial acquisitions in the quarter and I don't think there were anyacquisitions of any substance at all.

You should not expect Weatherfordto be particularly inquisitive. The relevance of acquisitions depends entirelyon circumstances that may not occur. I will say that the investment in Russia'sBorets, which was the only inquisitive step of significance this year, has astrategic role to play at Weatherford.

Taking an overall view of '07,we're likely to invest about $1.4 billion in CapEx, as Andy mentioned. We arealready well advanced in planning supply chain actions for our '08 CapEx, andof course financing organic growth is the priority. We estimate an after taxreturn on organic growth at between 25% to 30% per annum, and the math is verysimple to explain. This is in spite of an increase in intensity of CapEx spendper dollar of organic growth, reflecting materials cost pressure and increasingtechnological complexity of tool and equipment design.

I think we sort of think our CapExintensity is at around $0.80 CapEx per $1 of organic growth, plus or minus. Thisis noise from quarter-to-quarter.

At the end of the Q2, we bought 1million shares. We have another $200 million left under our $1 billion sharerepurchase plan. We expect to renew commitments once this program is completed.

In summary, and this has notchanged, and I don't think will change; we are completing our '07 growth planwhile actively preparing for operational performance in '08 and '09, which iswhere our focus is. We have consistently believed that [was unfolding in] theoilfield service equipment market is a very long secular growth trend thatmirrors acceleration of decline rates, that's one, non-OECD demography that'stwo, and GNP per capita wealth effects, that's three.

We are confident in our multiyeargrowth prognosis in the international market. We are constructive on ourprognosis in the US. We expect a reversal of trends to occur in the Canadianmarkets now or at a later date. But in the meantime, we rely on our operatingstrengths in that market.

Operator, I will turn the callback to you for questions.

Question-and-Answer Session

Operator

Thank you. (OperatorInstructions). And your first question comes from the line of Bill Herbert withthe Simmons & Company. Please proceed.

Bill Herbert - Simmons & Company

Thanks. Good morning.

Bernard Duroc-Danner

Good morning.

Andy Becnel

Good morning.

Bill Herbert - Simmons & Company

Not withstanding the fact thatyou have a perfectly commendable and strong outlook for Latin America in 2008,I am surprised it's not actually stronger, given the fact that Mexico for you guys is ramping pretty strongly, Venezuelarecovering, and you will highlight both of those countries as being amongst thebest growing regions or countries in 2008.

So, what's driving a similar rateof growth rate '08 versus '07? Because I would have thought that it would havebeen quite a bit bigger actually in '08 for Latin America.

Bernard Duroc-Danner

I'll tell you just two things.

Bill Herbert - Simmons & Company

Okay.

Bernard Duroc-Danner

Which is noise. Numbers fromquarter-to-quarter are not predictable.

Bill Herbert - Simmons & Company

Right.

Bernard Duroc-Danner

You've got some things that arehigher than you think and lower than you think and they have pushed back intothe next quarter. So, you have some of that.

Second, I think the region lagson what we are doing in Latin America. The region lags everywhere really. It alwayshappens. It seems to happen a bit more in Latin America. Net-net, I thinkyou'll be very happy with the performance in '08. I say this simply based onthe backlog of work we have. Andy, you want to add to that?

Andy Becnel

I don't. Bill, I would remind youin Q2, there were contract rollovers in Brazil.

Bill Herbert - Simmons & Company

Yeah.

Andy Becnel

And, obviously, Orinoco on the heavyoil. The heavy oil has not returned to full speed yet. Planning takes an exceptionallylong time in Venezuela to put projects together and what not. We had somesubstantial contract wins down there during the quarter. We will have tohighlight contract by contract what we have progressed. But we're extremelybullish both on Mexico and Venezuela for '08, and things will slowly ramp inand roll in. But we do think you'll be pleased with the performance next year.

Bill Herbert - Simmons & Company

Okay. And then switchinghemispheres with respect to the Eastern Hemisphere, another year of 40% growthin '08 sounds arresting. You highlighted some of the logistical challenges inmeeting that. Do you have the equipment and crews to actually prosecute thatgrowth?

Bernard Duroc-Danner

We have the business.

Bill Herbert - Simmons & Company

Right.

Bernard Duroc-Danner

We have the equipment. I mean,I'll put it in another way, we don't have the equipment in the right locationready now, but as you might have noticed from our CapEx line, the supply chainis on over drive. So, we have the equipment which is on its way, not tooworried about the equipment.

Now, the weak link is the peopleaspect. Recruiting and training and now reading my notes, which is alwayscumbersome, I think for everyone on the call to listen to.

I tried to add a few commentsthat are not in my prepared notes, and one of the comments I added is that therecruiting and training is extraordinarily important. Well, that's the weaklink in the whole system. How many people we bring in and how well we trainthem and how well we do it on the rig floor is my number one worry. So, when Ihighlight the fact that the growth in '08 is going to be about the same level of40% could be 42%, could be 38%, it's not surgery, but it's about right. And Iactually think '09 is shaping up most likely to be in the same order ofmagnitude. It's too early to tell.

What worries me the most is notthe availability of the business. It's not the longevity of the cycle. It's completelywrong to think that these things are about to be aborted. It's actually nonnonsensical. If you spend enough time with clients in Eastern Hemisphere, youunderstand how nonsensical a statement that is.

Bill Herbert - Simmons & Company

Right.

Bernard Duroc-Danner

What worries me the most is theability to get a minimally quality performance on the job with people that haveonly been trained for three, six, nine, 12, 15 months. That still worries me.

Bill Herbert - Simmons & Company

Yet, not withstanding thatchallenge, you must be reasonably comfortable that you are going to be able todo that, given the fact that you are prognosticating?

Bernard Duroc-Danner

Yeah. We are committing for it,not so much, not Wall Street I am worried about. It's my clients.

Bill Herbert - Simmons & Company

Sure.

Bernard Duroc-Danner

We are committing to it towardsour clients. So to the extent we don't disappoint our clients, we won't disappointWall Street.

Bill Herbert - Simmons & Company

Sure.

Bernard Duroc-Danner

The people issue is everything. There'sone thing I am worried about here, the people issue, now it's not new, Bill. Itwas true a year ago, it was true two years ago.

Bill Herbert - Simmons & Company

Right.

Bernard Duroc-Danner

It just doesn't get any easierwith time.

Bill Herbert - Simmons & Company

Last question, Andy, I thinkCanada cost you $0.25 or thereabouts in the second quarter. What did itcontribute in the third quarter-on-quarter? And can you reveal what percentageof total revs does Canada represent today and where that number stood last yearat this point in time? Thanks.

Andy Becnel

Yes, I can't go into that, since wehave got those together as one region. I think I would be running outside theboundaries of fair play here to split those out at the EBIT line. But youshould assume that, you know the Canadian numbers well for last year and thatwas at about $1.2 billion of revenue for the year, and US was about $2.5billion.

Bill Herbert - Simmons & Company

Yeah.

Andy Becnel

So, basically one-third of theNAM business was Canada.

Bill Herbert - Simmons & Company

Okay.

Andy Becnel

You can expect that thatdifferential has shifted with the very weak Canadian market, and probably forthe year you are down something on the order of 20% plus year-on-year '07 on '06 in Canada at the top lineagainst some very nice growth in the US markets.

Bernard Duroc-Danner

I think, two comments, you shouldtry to take to heart if you can that I'll try to convey is that if NAM did welland NAM with a few exceptions has always done well at our place, a lot of thecredit goes to the quality operations in Canada, more than the market. The marketis not that good, but also the US did tremendously well.

Bill Herbert - Simmons & Company

Okay. Thank you very much.

Bernard Duroc-Danner

Don't minimize the importance ofthe USin the quarter. It would just be wrong.

Bill Herbert - Simmons & Company

Okay. Thank you.

Operator

Your next question comes from theline of Jim Crandell with Lehman Brothers. Please proceed.

Jim Crandell - Lehman Brothers

Good morning, Bernard and Andy.

Andrew Becnel

Good morning.

Bernard Duroc-Danner

Good morning, Jim.

Jim Crandell - Lehman Brothers

What was the impact of the Gulfof Mexico evacuations on third quarter results?

Bernard Duroc-Danner

Technically, the exact number oflost days, since one of our larger peers gave it, it was in our case 17 days asopposed to 15. So right. So, that's that. What is the revenues of the shelf inWeatherford right now? It's about $100 million of the shelf business. Deepwateris about twice that number, in the Gulf of Mexicoalone. So, the shelf is 100. The Gulf of Mexico is about 200, 300 in total. This is theyearly number, and not a quarterly number. So, it's not that material of abusiness overall in the end. It used to be enormously material at Weatherford.That got diluted down over the years. Five or six years ago, it was, mygoodness, the Gulf of Mexico was about 10% of what we did. Now it's more like3%, 4% of what we do. So, these are all the numbers.

Jim Crandell - Lehman Brothers

Okay. Given the projected mix ofearnings out through 2008, what's a good tax rate to project for the full year?

Bernard Duroc-Danner

That's always a hard one. Andy,have an [idea]?

Andy Becnel

Difficult, I would keep 21% to22% for '08.

Jim Crandell - Lehman Brothers

Why not 20% or less?

Andy Becnel

Believe me, I have challenged ourfolks to get there. So, we'll give updates if we can. Very structure intensive.

Bernard Duroc-Danner

It really depends on the flow ofbusiness in a particular quarter.

Andy Becnel

Absolutely. 19% this quarter wasexceptionally good. I would say better than we would have even expected giventhe up tick in NAM operating income.

Jim Crandell - Lehman Brothers

Okay. Bernard, CapEx is runningat $1.6 billion annual rate now based on the most recent quarter. My sense isnumbers are building faster than you projected. What do you look at CapEx for'08 now and where do you see the biggest areas of incremental change versus whatyou might have thought [in 2007].

Bernard Duroc-Danner

Yeah. Actually, we do everythingwe can to get the numbers to be as high as possible, as early as possible. Not outof a desire to spend, but because I've got three challenges, one businessdevelopment and sales. Okay. That one, I think, is well covered. The secondchallenge was the supply chain equipment, and the third challenge was people.

As for the answer I gave to Billearly on, the people is the one that worries me. The equipment we've doneeverything in our power to bring up in time equipment on the food supply chainas early as we can. Reason being, that these might actually have on and aroundnon-magnetic materials for example. Some of the more sophisticated form ofmanufacturing for high precision tools is extremely long. And so, it worries ustremendously that then we might not get the equipment we need on time. So,there's a purpose for it. It is a purposeful action, is number one. Withrespect to where we are going numbers wise, Andy thinks we would still end upthe year around $1.4 billion even though you are absolutely right. In Q3, itwas closer to $1.6 billion.

I would think, my guess is thatwe will run '08 probably closer to $1.6 billion where we are right now to $1.4 millionplus or minus $50 million to $100 million. It depends again on how muchbusiness can we cram into '08 responsibly, as opposed to slipping into '09. Thereis a ratio between the CapEx we spend now and '08. This says, there will be aratio between the CapEx we spend in '08 and '09. Well, that's issue number one.And issue number two is, how well can a supply chain system at Weatherford,which we tend to be very proud of, how well can it function at a higher rate? So,net-net all of this is to say the level of CapEx is purposeful. Actually, itreflects the expectations of volume increase in '08. I mean, there is a directcorrelation. I think it still has a bit further to go out but not much in '08. Thenagain, it depends a little bit on how well we do on the supply chain side.

Jim Crandell - Lehman Brothers

Okay. Well, one final question.You have a real good durable LWD tool that seems to be able to work where noothers can and you have replaced [Schlumberger] as I think you said on a largenumber of wells in the last bottom of the well. Is this a short-term or alonger-term advantage and then separately, when do you see supply catching upwith demand for LWD and rotary steerables?

Bernard Duroc-Danner

First, I did not mention that itwas Schlumberger, and I probably would not for a variety of reasons, some of ithaving to do with being polite, that's one. How durable is the advantage? TheIP we have on and around LWD continues to expand. We filed probably morepatents than any of our -- well, not more than any of our competitors as muchas -- we filed as many patents on and around technology than our larger peers. So,I would have to say that the IP and the technology core advantage on and aroundhigh pressure and high temperature is one that I think you should expect to besustained over the long-term, which is over the next three years. I don't seehow we could not be sustained. These are very difficult things from a designstandpoint to catch up, that's one thing.

With respect to supply and demandbalance on LWD and RSS, well the rate of growth of horizontal wells anddirectional wells particularly on land is extremely high. I don't know of a singleIOC or NOC that isn't planning it’s new campaign, be it re-entry or be itfurther development or be it step-out/exploration, which is not doing itprimarily or overwhelmingly horizontal and multilateral. So, remember the factthat the land market traditionally has a little over a third of its businessdirectional and the offshore market a little over 80% of its businessdirectional or horizontal. I think the line is moving to the offshore level. Ihave said this two years ago. I think it’s happening right now and it is goingto happen over the next five to ten years. It's that powerful. So, I am notsure the LWD/RSS supply chain will ever catch up with the market.

Ultimately, what will happen isthat we will only be able to do the amount of work we can do and so it will be spacedout over a longer period of time.

Jim Crandell - Lehman Brothers

Okay. I'll stop there. Thank you.

Operator

Your next question comes from theline of Ole Slorer with Morgan Stanley. Please proceed.

Ole Slorer - Morgan Stanley

Thank you very much. Bernard, yousound a little less concerned about North Americathan I think what other people on the call are expecting. So, again, could yougo back and revisit how Weatherford specific is this particularly on Canada?What have you done to take your cost structure down and how much more is thereto do?

Bernard Duroc-Danner

Well, there's just two things inCanada. One, I guess, genetically, if I may say that, we are very heavy oilbased. We always have been. And so, we are more heavy oil based as a percentageof what we do than any of our peers. And now, heavy oil is not immune to upsand downs in Canada.But the production side of heavy oil, just maintaining the wells in production,that one is really completely immune to the ups and downs in Canada. Youwill not shut down a heavy oil well. You will not. It doesn't matter what Canadadoes because the economics just are compelling.

So, there is that aspect. Theother aspect is, I guess, one of the attributes of being very Canadian twoyears ago, much less today, is that, it's a little bit like a cold shower. Whenthings go bad on you, it wakes you up and you take action early. We took actionvery early on the operating side. We didn't say anything to anyone. And as oftoday, they were pretty drastic. Simplify the organizational structure, movethe equipment, move people. We actually moved a lot of people that are on loan,as it were, to the rest of the operations acting as trainers and/or as cedingmanagement for deepwater applications around the world. And then we just tooksome people out.

On the cost side alone, I thinkit's a moving target. But more recently, I think the best thing I can give youis that we took out about $40 million of cash costs out of Canada. It'sactually a higher number than that. I'm not including the loans and all thatsort of thing, meaning people would be on loan to other regions, becausethey're still on the payroll. And the number that I just gave you just happenedvery recently. And we will take out some more as needed. It's more of aquestion of being proactive early than anything else.

Now, the reason I am confident onNorth America is because I don't also expect too much out of North America. I think I said it a long time ago, about a year ago, thatthe USwas in the tunnel. It's not going to go up too much or go down too much.

When you enter that kind of anenvironment, two things matter. Your operating cost structure, item one. Itemtwo, how good you are differentiating yourself from a technology standpointand/or if you have new technologies, where you don't have any market shares, whichis our case.

So, we are working on the costside and working also on the technology side, particularly in youngtechnologies. What are young technologies? You know them; directional,wireline, ESPs, chemicals, etcetera. And on those particular markets, we havetraction. On the rest, we fight on the operating cost side. And net-net, theregion continues to do well. But it is not where you are going to make yourmoney. You are making money internationally. You just shouldn't worry about North America.

Ole Slorer - Morgan Stanley

I am not worried about it,Bernard, but I'm just trying to understand how far into this process you are onthe cost side. Are you almost as far as you can push it now?

Bernard Duroc-Danner

No. In US, we've got ways to go, whichis actually very good news for us. In Canada, obviously, we have done alot already. The latest number I gave you is just the recent number. We will dosome more as needed. In Canada,it doesn't seem to be needed right now. There is no point in doing things whereit is not needed. Right now, the focus will be more on the US. But the USis a combination of cost, true? Also a combination of growth, which is thoseproducts and service lines where we are gaining traction. It's a combination ofboth.

Ole Slorer - Morgan Stanley

And how much more do you thinkthere is to go in terms of driving margins higher, because your mix change inthe US?

Bernard Duroc-Danner

That I'll let Andy answer.

Andy Becnel

Just due to mix change, Ole?

Ole Slorer - Morgan Stanley

Yeah. Obviously, you are talkingabout solid expandable, compact wireline type pressure, high temperature, MLWD,I mean all of those are (inaudible) higher margins?

Andy Becnel

That's absolutely true, a muchhigher margin. Remember, we are starting-off with very small base with those.I'd like to think of it as something in the 100 to 150 basis points ofimprovement over the next 18 months, just coming out of those growthopportunities and being very reasonable for North America.

Ole Slorer - Morgan Stanley

So, you could take North America back to a margin of somewhere towards whereyou were a year ago?

Andy Becnel

That is certainly what our goalis.

Bernard Duroc-Danner

That is specifically our internalgrowth.

Ole Slorer - MorganStanley

Okay. And then finally on thephenomenal growth targets that you are outlining of 40% Eastern Hemisphere, 25%Latin America. You hired, if I heard you correctly 1,800 people in the quarter.Was that right?

Bernard Duroc-Danner

That's right, net. There arealways some people coming in and out. But net of any -- well, net, okay. Yes,that's correct.

Ole Slorer - Morgan Stanley

I mean that's 7,000 annualizedmore or less? So, what is your current headcount now as compared to the gains?

Andy Becnel

35,500, is where we stand at theend of the quarter.

Ole Slorer - MorganStanley

Okay. So, you are growing yourheadcount at a clip of about 20%?

Andy Becnel

Right. And remember, it's notgrowing in North America in general.

Bernard Duroc-Danner

No, it's not. You shouldn'tpresume that. It is lopsided. In other words, it's growing at twice that ratebecause the international market represents 50% of what we do.

Ole Slorer - Morgan Stanley

If I might try my luck, how muchof that hiring is for people that have very high skills sets and be applied inthese faster growing product lines, but also product lines that --?

Bernard Duroc-Danner

No. If you break it down betweena high technical skill, medium technical skills, low technical skills. The hightechnical skills, is only about 10% of that number. The middle technical skillsis the overwhelming, something like 60% of that number. And the balance is thelow technical skills. And it has everything to do with two things, one,academic degrees and second training, prior training. These are rough numbers,but you are close.

Ole Slorer - Morgan Stanley

Okay. Well, thank you very much.

Andy Becnel

Thanks, Ole.

Operator

Your next question comes from theline of Ken Sill with Credit Suisse. Please proceed.

Ken Sill - Credit Suisse

Yeah. Good morning, guys.

Andrew Becnel

Good Morning, Ken

Bernard Duroc-Danner

Good Morning, Ken

Ken Sill - Credit Suisse

Glad to be back on your callagain. Bernard, looking at your growth or your optimism for North America, itseems to me that what you are looking at is, there is growth in the serviceside of things, because of the type of wells and new technology which is ex-rigcount. Is that a fair assumption?

Bernard Duroc-Danner

That's absolutely right, Ken. AndI will also say that I wouldn't compare the optimism on NAM with theoptimism of the international market. They are two different skills. You'vedescribed it very well, though. It is exactly what you said.

Ken Sill - Credit Suisse

And how much of this is just likeyou are saying internationally, the growth in directional drilling, logging andmeasurement well drilling is just -- the market is growing faster than there isthe ability to supply. So, is most of this growth, it’s just growing, it's notnecessarily taking share from people?

Bernard Duroc-Danner

I think that's also very fair,Ken. That would also be very correct.

Ken Sill - Credit Suisse

Okay.

Bernard Duroc-Danner

I mean, I will put it in anotherway, their share is not what we are after particularly, and nor do I think itwould be as easy for us to do so if the market was not growing the way it is.

Ken Sill - Credit Suisse

Okay. Well, I think that's veryimportant to get, because you are in a market where people are focusing on fearnot opportunities.

Bernard Duroc-Danner

I was flying from overseas onFriday. So, I wasn't really exposed to the events on Friday. By the time Ilanded, I got quite surprised. So, I understand what you mean.

Ken Sill - Credit Suisse

Okay. And then another question,I mean something that's kind of conspicuous by it’s absence, is the talk aboutpressure pumping and stimulation. I know that, isn't actually that big a businessat Weatherford. But I was wondering if you have any long-term strategic goalthere. Obviously, in North America, it's a very commodity-oriented business,but gas production worldwide has probably grown faster than oil. So, do youguys have plans?

Bernard Duroc-Danner

Yeah. We do. I mean we actuallydo. There is only so much I can say on a conference call, but offline I cantell you more. We are doing exactly what we thought we would be doing, whichis, we learned the skill and the trade in the United States. It's a great placeto do that. We have a certain amount of business there. It's not a bigbusiness, and it's not likely to grow.

We did see early on two things,which is the fact that barriers to entry are quite low in the United States.And second, there was a number of people who thought their economics were verygood for new equipment at the existing prevailing pricing structure. So, we sawthat the supply curve was basically shifting pretty aggressively upwards, whichwas never a good time. Now, we still went on with our plans to build up ourcapabilities and we did. Together with our R&D center, that supports ourstimulation. And all of this for one purpose, which is the use of thatparticular skill in international markets, which is why we are deploying ourtime and energy, and completely joined at the hip with the other things we aredoing internationally.

Now, where are we doing this? Forthe sake of competitive reasons, I would rather not say too much, except to saythat it covers three regions. Yeah, we have three regions internationally. It'sabsolutely nothing actually. Sorry. But I was trying to be more helpful thanthat. We cover three regions of the international markets. We are completely joinedat the hip with the other work we are doing, we are using our skills inpressure pumping. And your assessment of the future of pressure pumping from agas reservoir standpoint and to a lesser degree oil in some markets, you areabsolutely right. It's an important competency, even though the prognosis inthe USis not terribly good for it, because of the supply curve.

Ken Sill - Credit Suisse

Yeah. And one then final question,I mean, you guys are leaving some of the countries under US sanctions, it doesn'tseem like that's having much of an impact on your revenue outlook. Is thatbecause --?

Bernard Duroc-Danner

I am terribly constrained of whatI can and cannot say. I will only say that, the size of the business there wasmodest. It didn't grow over the past, whatever, in a couple of years. And Idon't think it ever factored in, in our plans in terms of the growth. It wasjust there and evidently, it won't be there anymore.

Ken Sill - Credit Suisse

Yeah. But in terms of replacingthat revenue, it just doesn't seem like there's much issue given the stronggrowth elsewhere internationally?

Bernard Duroc-Danner

It's not a big number, Ken. So,the answer is that, you are absolutely correct.

Ken Sill - Credit Suisse

Okay. Thank you.

Bernard Duroc-Danner

Thank you very much.

Operator

Your next question comes from theline Kurt Hallead with RBC Capital Markets. Please proceed.

Kurt Hallead - RBC Capital Markets

Hey. Good morning.

Bernard Duroc-Danner

Good morning, Kurt.

Kurt Hallead - RBC Capital Markets

Hey, Bernard, a lot of timesinvestors look at the comments that you make regarding market share and theinitial reaction would be, well, they have got to be doing it on price. Couldyou provide us some color as to what the key driver is to your market sharegains and it looks like they're fairly broad in nature not just client based.There were specific --?

Bernard Duroc-Danner

I think the comments to investorswould be very fair if the markets we are selling into were not growing. Becauseif the markets are not growing, even if we, you a fit-for-purpose technologywhich may do a better job than your peers and there is no growth. It's justhard to get traction. But when you have a particular technological edge on theone hand, on the other hand the markets are growing and they're rationed.

The international markets, notall of them, there is a sequence, but meaning that they are not growing at thesame time, not at the same stage of growth. But the international market Itraveled to and I travel a lot, they are rationed. There's a shortage. There'sscarcity. And as a consequence, if you have; one, infrastructure and the availabilityof people and equipment; two, your technology not only can do what the clientwants but would be able to do it better.

Growth is really what you canfundamentally organize for and do effectively. It is not constrained bycompetitive pressures. And, Kurt, I don't have a single example that I can thinkof. And I said, I do travel a lot, I see and I like it. I don't know of a singleexample of a situation where we have to fight our way pricing wise in theinternational market. Not a single one. Now, maybe the day will come and itwill happen, but certainly for looking into '08 and the part of '09, it wasalready committed to, I don't see no evidence [I can draw]. And pricing isdifferent with every country and so forth and so on. Each country has it’s ownlogic. The pricing is strong in international market. It is not period.

Andrew Becnel

Kurt, I would add one thing. Infact, what we are seeing and I can talk probably more specifically to Latin America, is we ourselves expect certain returns outof assets. I don't have enough equipment in some of my fastest growing productlines to supply everything that everybody wants to do today in both the Westand the East. So, we have got to make intelligent decisions in balancing thatportfolio. We've actually stepped back from some work in a specific market inLatin America, where folks are loading up on backlog in what we believe will bea rising price environment. So, given the amount of capital that we can committo that market, we wait. We wait.

So, it would actually be a littlebit different for us. I can understand comments from competitors that aremaking the point that you are making right now. But it's a bit different for uscoming in new to new markets with less capacity than we wish we had. But we areworking hard on getting that.

Kurt Hallead - RBC Capital Markets

Now, I hear your comments.Bernard, they are a rationed shortage scarcity that describe the internationalenvironment. So, clearly, you are in a position, where in these markets you'rereally not seeing any influx of tools or equipment from, say, North America, wherethere is a --?

Bernard Duroc-Danner

God, no. The only people whocould do that would be the largest three companies and ourselves. And you heardme say, we moved some equipment out of Canada and we moved some people out ofCanada on loan. Presumably, our three largest competitors have done the samething, but it ends up being a drop in the bucket. It's a drop in the bucket inwhat is required in the international markets. The notion that the EasternHemisphere and Latin America are seeing -- [to now the] equipment is fantasy.

Kurt Hallead - RBC Capital Markets

And then finally, I believe youreferenced an $80 billion number for investment in heavy oil.

Bernard Duroc-Danner

Yeah. The numbers go from $70billion to $110 billion or $120 billion. I mean, it's in the press. Those arenot my numbers. And you have to be careful, much of it is upstream costs inengineering and so forth. When you get down to the drilling in heavy oil, it'sa smaller part of the cost. And the point is not to say there is going to be$70 billion or $80 billion being spent in heavy oil in Canada to beginwith until the Province determines the change in royalty. Nothing will happenin terms of the expansion.

The issue is that there are notthat many places around the world left for IOCs and independents to get accessto reservoirs. There just aren't particularly large companies. Okay? There arejust not. Go around the world, every single government has been raising taxes,changing the royalty régimes, etcetera. Start with Algeria and you go around theworld. Those countries that control the reservoirs, don't feel they need IOCsand so forth and so on. So, they are behaving in a very rational way by basicallykeeping the economic rent.

Canada is just doing a mildversion, the best I can tell of what the other countries are doing. So, thequestion really is, what are the choices for the IOCs, etcetera and the largeindependents? What are their choices? Can they turn their back on the heavy oilmarket in Canada, which is one of the few places you can have access to lots ofbarrels, albeit there are big [plumbing] challenges. And the answer is, therearen't many choices.

And on that basis, I think theindications of expansion of heavy oil are interesting insofar as no doubt theywill be delayed by changes in the decisions of the Province. Of course, they'llbe delayed. But at the same time, I would have to say that a degree of thosecapital investments are almost inevitable. Simply because if not there, Kurt,where will the oil and gas companies go? You tell me? You give me one countrythat has been generous with their tax régimes and royalty régimes in an $80 oilenvironment. No country is. They keep the economic rent.

Kurt Hallead - RBC Capital Markets

All right, great. Thanks.

Operator

Your next question comes from theline of Brad Handler with Wachovia Capital Markets.

Brad Handler - Wachovia Capital Markets

Thanks. Good morning.

Bernard Duroc-Danner

Good morning.

Andy Becnel

I think your name changed a bit.

Brad Handler - Wachovia Capital Markets

Yeah. A little bit. A couple ofunrelateds, please. First, could you offer some thoughts on US pricing, justacross a few of -- perhaps lesser technology product lines?

Bernard Duroc-Danner

We have two things going on. Let'scall it, I think the term commodity products is always popular. So, I'll useit. In low barriers to entry, more commodity products and services, there havebeen some instances of pricing weakness in the US, and it depends where. On orround the Gulf Coast, definitely. You know all about pressure pumping and coiltubing, although, in the case of pressure pumping, it is more an issue ofsupply curve than anything else, meaning expansion. But there are others. Yes,in the rental tools business, you've had also instances of pricing weakness onand around a number of different districts in the US.

It's not monothematic, meaningthat there are other parts of the United States where pricing actually isgetting stronger. It really depends on the dynamics of the local market. Andlet's call it, middle of the pact and higher technology content, products andservices, there has been instances where pricing has gotten higher also.

Net-net on a weighted averagebasis in the US looking at the quarter, there is not much of a pricing moveeither way, which is exactly what I would expect. I think, as you move forwardnext two or three or four quarters, you will hear some companies talk aboutpricing weaknesses. It will not be a major issue. It will be a minor issue. Andin the end, you should expect that it should lower your cost structure. And in anon-growing market or low growth market, this is normal. But it's not acrossthe board. It's a few. It's regionally based, and it's on certain products and servicelines, and you should not ignore it, should not make too much of it either. Itis to be expected.

You have to move the quality of theservices up. When you stabilize, you can do that. When you grow, you can't. Andsecond, you have got to lower your cost structure and focus on the higher end.But still live with a lower end and lower cost structure and you will be fine.It is not a revolution in the US.It's a normal healthy evolution of a market that has stopped growing is nowgoing to evolve at a very low growth.

Brad Handler - Wachovia Capital Markets

Okay. That's very helpful color.I appreciate that. In an unrelated follow up, Andy, your comments on workingcapital, you've commented for awhile now about goals towards reducing theworking capital investment and you've still got a pretty aggressive target forQ4. Can you just speak to the challenges there and some of the steps that youhave put in place recently to help you get there by the end of the year?

Andy Becnel

Absolutely. High-growthenvironment, very, very difficult to walk around with a big stick on thingslike inventory. With lead times, the capital supply chain, if you will globallyis extremely strained. There is no doubt about it. When I look at folks in thefield who I expect to perform at a very high level and they have 10 to 12 monthlead times on certain items of inventory it is very, very difficult for me tothink that carrying that numbers of days of inventory is consistent with thegrowth. You have got to let people do that.

Receivables is a very, very keyfocus area for us, both through software enhancement of our credit function andpushing that responsibility all the way down into the sales force for collections.We have noticed those things in certain regions to be helping out. In the East,okay, again, you have to be realistic with people. Some customers pay a lotless frequently than others. Some of those happened to be customers that youare growing exceptionally quickly with, so this is the cost of growth, not onethat we will sit down and complain about at all. We still expect to performconsiderably better on the working capital side despite those challenges. So, Ithink you will start to see improvement. It takes a while to turn the ship, Ithink we have it turned and I expect substantial improvement in Q4 and thengoing on forward to reach quarter of '08.

Brad Handler - Wachovia Capital Markets

I guess, just following-up on thecomment, it sounds like with some of those twice a year payers you will getthat in Q4, right, so that should bring down the receivables a fair amount bythe end of the year?

Andy Becnel

We certainly are pushing forthat.

Brad Handler - Wachovia Capital Markets

That's the point. Okay. Alright,makes sense. Thanks guys.

Andy Becnel

Sure.

Operator

Your next question comes from theline of Mike Urban with Deutsche Bank. Please proceed.

Mike Urban - Deutsche Bank

Thanks. Good morning.

Bernard Duroc-Danner

Mike, good morning.

Mike Urban - Deutsche Bank

I think, I had just a couple ofthings left. One, I think you've kind of indirectly addressed this but, youmentioned the Borets acquisition or taking a stake there as part of thestrategic and part of a broader strategy for Russia. I was wondering if youcould within the bounds of competitive information tell us a little more aboutwhat that strategy entails and how we should expect the grow the play out inthat market?

Bernard Duroc-Danner

I can't. What I can tell you itis not really much -- I mean it's not Russia, it is more ESPs. Put another way,the strategic dimension of Borets for us is more ESP-related specifically thanit is Russia-related. On the other hand, Russia in of itself is an area ofgreat focus, okay. So, but that doesn't necessarily involve Borets.

Mike Urban - Deutsche Bank

Well, one is not necessarily --

Bernard Duroc-Danner

Borets, the strategic comment,which in retrospect I regret I made, has everything to do with ESPs, notparticularly Russia, albeit they are the largest Russian player and so forthand so on, but the comment has to do with ESPs.

Mike Urban - Deutsche Bank

Okay, fair enough and anunrelated question but a popular one on the CapEx side, how much to the extentyou can calibrate it, how much of the increment that we have seen -- I guess ayear ago we were looking at $1 billion kind of now $1.4 billion for this yearand going to $1.6 billion. How much of the increase there is based on visible contractsversus a speculative attempt to get--?

Bernard Duroc-Danner

100%. So, 100% on visible contracts.

Mike Urban - Deutsche Bank

Okay, 100% at that kind of 30%--?

Bernard Duroc-Danner

Yeah, 100%, I say 110%, yeah.

Mike Urban - Deutsche Bank

Very good. That's all from me. Thankyou.

Bernard Duroc-Danner

Okay.

Operator

Your next question comes from…

Bernard Duroc-Danner

I think this has to be the lastquestion, whomever it is, the last question because there is another call afterus and we don't want to keep people on too long. One last call, whomever thisis.

Operator

Alright, your final questioncomes from the line of Robert Mackenzie with Friedman, Billings Ramsey. Pleaseproceed.

Robert Mackenzie - Friedman, BillingsRamsey

Good Morning, guys.

Bernard Duroc-Danner

Good Morning.

Andrew Becnel

Good morning.

Robert Mackenzie - Friedman, BillingsRamsey

Bernard, I wanted to understandsome of the thought process in your guidance a little clear. First, you laidout some aggressive guidance region-by-region, can you lay out for us kind ofin order of importance, the bottlenecks or the risks to not be in the guidance,i.e., people, equipment deliveries, project delays? And on the flip side, whatkind of events would lead you to be more optimistic that you would exceed yourguidance there?

Bernard Duroc-Danner

Well, the guidance is actuallythe same that it has always been. We have had the same guidance now on aforward-looking basis for the past two years. So, that's one. Two, I think therisk that we have, is not the business being there. I don't think we really seeequipment at this point. I mean there still is always the risk of matchingequipment at the right spec to the project. I think the quintessential risk wehave is having the people side ready and also that the people side willperform. That is, it's significant risk. It was always a risk. It hasn't gottenany easier.

Project delays, you areabsolutely right. There are always project delays. That is, if there is onething you can rely upon, in the Eastern Hemisphere and in Latin America, it isproject delays. It is the absence of project delays that should surprise you.There is your upside right there. The numbers that we gave tries, tries thebest we can. And if we are wrong, then we are wrong in good faith. But it triesthe best we can to lay out some sense of cautious, estimate of project delayswithin the per chart of what we have to do. In other words, we try to allow forsome measure of project delays. And if it is worse than we think, then okay. Wewill not be as high. If it is better than we think, then on the contrary wewill be above what we said.

So, it is a combination ofwhether we are sufficiently pessimistic on project delays, which alwayshappens. Or put another way, we have got more business, put another way, thatwe could theoretically do in '08 that we are putting forth. As a sort ofaggressive statement as it sounds, it all depends on how late people are andwhether our estimates of how the people are going to be is a reasonableestimate. And the second thing is how decent of a job we continue to do inrecruiting and training which is very, very difficult. That's it.

Robert Mackenzie - Friedman, BillingsRamsey

And my follow-up question wasexactly on that point Bernard, recruiting and training, with the pace ofpersonnel growth in your international markets, how are you managing to keepyour safety record up, keep the operational a success rate up given the very,very rapid growth of almost any historical period in the past if you look atit, service quality suffers when you grow the people that fast.

Bernard Duroc-Danner

That's very, very difficult. Andthe answer is that we struggle. When I talk about operational risk, this iswhat I am referring to specifically. We struggled, probably, the way we found tobe the most helpful for us at least is to break down the recruiting and hiringin lots of different efforts.

We don't hire 1,000 people out ofone country, two universities or three different sources of labor. We break itdown into 10 different small resources of people and it makes the training andthe exposure to operations to get filled -- it is immediately spreadsthroughout our operations and close to where we hire people. It appeals to makeit more effective in bringing people's talents up a little bit faster asopposed to big numbers out of one place. That's actually a long conversation onthe operational side, probably, best kept to our side of the conference call.

Robert Mackenzie - Friedman, BillingsRamsey

Fair enough. Thanks guys.

Bernard Duroc-Danner

Thank you. Thank you very much. Ithink that will be the end of the conference call for us. Thank you all foryour time.

Operator

That concludes the presentation.You may all now disconnect. Good day.

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