Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Weatherford International (WFT)

Q1 2008 Earnings Call

April 21, 2008 10:30 am ET

Executives

Bernard Duroc-Danner – Chairman, President, CEO

Andrew Becnel – CFO, SVP

Analysts

Jim Crandell – Lehman Brothers

Bill Herbert – Simmons & Company

Robin Shoemaker – Bear Stearns

Byron Pope – Tudor Pickering Holt

Mike Urban – Deutsche Bank Securities

Kurt Hallead – RBC Capital Markets

Geoff Kieburtz – Citigroup

Operator

Good day ladies and gentlemen and welcome to the first quarter 2008 Weatherford International earnings conference call. (Operator instructions). And I would now like to turn the call over to your host for today’s conference, Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Please proceed.

Bernard Duroc-Danner

Good morning. As usual Andy will read prepared comments as shall I and we’ll turn the call open to questions. Andy.

Andrew Becnel

Good morning. For our first quarter of 2008 we report fully diluted earnings per share of $1.01. Our team’s collective performance in Q1 was strong, especially in light of seasonal factors and the magnitude of our organic expansion underway at Weatherford. As expected Q1 was North America’s turn to carry the load, they did. Sequentially North America posted a strong performance on the back of a seasonal improvement in Canada and a solid showing in the US despite a slightly softer rig count.

Similar to prior years, international operations worked hard in Q1, attempting to hold their own as compared to the high water mark set in Q4. Historically Q1 pullbacks in product shipments, primarily lift and completion provide a headwind to top line progress early in the year. This Q1 was no exception. Strong performances in CIS in West Africa could not overcome the seasonal decline in the North Sea and event driven moderation in our Middle East North Africa Asia Pac region and Latin America.

Before moving on to the numbers I have two housekeeping items related to events excluded from our results. First, our results of operations exclude asset write offs in connection with our exit from sanctioned countries, investigation costs and severance and restructuring cost. These totaled $74 million.

Second, during the quarter we took an after tax charge of $20 million related to our discontinued E&P operations. Recall that these went into [disco] in Q2 2007. EPS comparison, at $1.01 earnings per share grew 2% sequentially and 22% year on year. Sequentially the field contributed $0.05 of incremental EBIT. Non-operational items were flat while taxes took back $0.03 due to a 240 basis point increase in our effective rate over Q4. The net improvement was $0.02. Year on year the field contributed $0.18 all of which came out of international markets. Non-operational items and an increase share count hurt earnings by $0.07 which was offset entirely by a $0.07 contribution from taxes.

Operating performance: consolidated overview, compared to Q4 revenue was essentially flat, up $4 million on a consolidated basis. Improvements in North America were almost entirely offset internationally due to traditional Q1 declines in lift and completion. On a year on year basis revenues up 19% against a 4% increase in average rig count globally. North America which accounted for 50% of total revenue grew $37 million sequentially. Average rig count for the quarter improved 6% with declines in the US more than offset by seasonal improvement in Canada. On a year on year basis North America revenues up $84 million or 8% against a 1% rig count increase.

With measured optimism we take note than Q1 was the first time in the last seven quarters that we have seen anything resembling favorable year on year comparisons coming out of Canada both in terms of rig count and our own financial performance. International revenue was down $33 million sequentially. Consistent with our trailing six years, lift and completion product international sales slipped $40 million from the levels of Q4 when customer budget cycles lead to higher product spending.

The drop was similar last year. On a year on year basis, international revenue was up $260 million or 31% accounting for 76% of our year on year growth. This is against a backdrop of an 8% growth in international rig count. Eastern Hemisphere alone is up $230 million or 36% against a 9% increase in rig count. Consolidated EBIT before corporate and R&D was $566 [b]illion for the quarter, up $23 million sequentially with operating margins at 25.8%, up 100 basis points. Much improved job mix in Canada coupled with higher activity levels boosted North American margins as did operating efficiencies earned in the US.

Latin America and Europe West Africa CIS managed to produce 80 basis points and 40 basis points of margin improvement respectively. MENAP was the only region where the margin declined with a 140 basis point drop. Half of this delta came from a self imposed field shutdown in Australia. The remaining drop off reflects expenses associated with a large number of startups in the region. Middle East North Africa has the company’s greatest concentration of startups this time.

I’ll move on to geographic performance. Within our four geographic regions, performance is as follows: North America 50% of total revenue, revenue up $37 million or 3%. EBIT was up $35 million to $292 million, entirely on the back of Canadian mix and activity. Revenue grew across almost all product lines. Increased focus on pricing and utilization produced strong revenue and profitability performances in drilling services, wire line, fishing and reentry and drilling tools. Improved mix in artificial lift was also a contributor. These positive moves more than offset declines in US stimulation. Middle East North Africa Asia Pacific, 24% of total revenue. Revenue dropped $16 million or 3%.

This was almost identical to the $15 million decline in Q1 2007. Completion and lift product sales pulled back $25 million and integrated drilling fell by $6 million due to the Australia shutdown. Considerable improvements in drilling services, well construction and stimulation and chemicals helped offset these declines. EBIT was $121 million, down $11 million. Margins were 23.1%. The shutdown issue noted earlier as well as increased intensity of startups accounted for the drop. Year on year revenue was up $127 million or 32%. EBIT was up $37 million with incrementals of 29%. Europe CIS West Africa 16% of total revenue.

Revenue grew $3 million or 1%. Russia and the Caspian posted their strongest quarterly performance to date, compensating for weather and activity based declines in Europe. The strongest gainers by product line were well construction, reentry and fishing and drilling tools. EBIT was $93 million, up $2 million. Margins grew to 26.8%, a 40 basis point improvement and a historical high. Year on year revenue was up $103 million or 42% and EBIT was up $38 million on incrementals of 37%.

Latin America, 11% of total revenue. Revenue declined $20 million or 8% following a long stride forward in Q4. Strong showings in Brazil, Argentina and Venezuela were not enough to offset delays in Mexico, Ecuador and Peru. Wire line remained a particularly strong standout performer. EBIT was $60 million, down $3 million with margins at 25.6%, an 80 basis point improvement and a historical high. Year on year revenue was up $30 million or 15% and EBIT was up $12 million on incrementals of 40%. Cash and capital. Cash flow. During Q1 we generated EBITDA of $659 million with D&A running at $169 million.

Operating working capital consumer $222 million of cash. At the end of the quarter we stood at 130 days of working capital, up 7 days over Q4 due to seasonal payments by customers in Q4 and aggressive build in inventory including raw materials in Q1 to fuel 08 growth plans. After deducting interest expense and cash taxes, operating cash flow was $343 million for the quarter. Capital expenditures. Capital expenditures were $560 million for the quarter net of lost in hole revenue.

Spending this quarter included more than $160 million in integrated drilling, largely in connection with rigs to be delivered to North Africa. We still budget $1.8 billion of cap ex for 2008. Approximately 85% of all cap ex investment went to markets outside of North America. Capital structure. As of quarter end our ratio of net debt to net capitalization stood at 35% with total net debt at $4.1 billion.

Cash balances totaled $627 [b]illion at quarter end. We did not immediately apply the cash received from our bond offering to short term debt in those instances where breakage costs made in uneconomic to do so. Guidance. While Bernard will cover our operational outlook in his comments I have the following updates for you for 2008 non-operational items. Corporate expense $125 million.

Net interest expense $250 million, up due to our bond offering. Tax rate, now that we have finalized our tax planning for 08 we feel comfortable guiding you to a full year effective rate of between 18-19%, identical to Q1. Share count, we exited the quarter at 340.3 million basic shares outstanding and 349.5 million fully diluted shares outstanding. I’ll now hand the call over to Bernard.

Bernard Duroc-Danner

Q1 was a good quarter and typical of our Q1s in terms of dynamics of work. Q1 was also a major building quarter, characterized by a heavier rate of startups in international markets and intense efforts on preparing our business for the next leg of growth. During the quarter we also witnessed a change in the tone of our North American markets. The sequential rise in revenues, operating income and earnings per share was earned in North America which is predictably the case in Q1.

The year on year rise in revenues, operating income and earnings per share was earned in international markets, both Eastern Hemisphere and Latin America. This has become and will continue to be a recurring event for Weatherford as the average [per ram] growth rate in international markets expected to outpace that of North America by a factor of at least three if not four over the next five years.

Overall top line was flat [can modest] former year increase of 0.2% sequentially as growth was largely offset by our customary pullbacks in lift, completion and also well construction sales to international markets. Operating income margins of 22.3% matched the highest in the company’s history. All regions showed improved margins except MENAP. MENAP, a usual seasonal event. MENAP is in the most intense [fall] out mode of all international markets.

Margins in MENAP though finished 200 basis points higher than in Q1 07 and you should expect Middle East Asia Pac margins to finish 08 with comfortably higher margins than those achieved last year. Earnings per share was up $0.02 or 2% sequentially. [It’s due to an] increase in the tax rate over Q4, the sequential increase in earnings was $0.05 or 5% sequentially.

Sequentially the quarter’s growth was North America, the international segment was down, the Eastern Hemisphere was essentially flat while Latin America had a decrease of $20 million. Delay on a number of projects in Mexico in particular both on land and in our case offshore were the primary culprits. US did well in light of the quarter’s uninspiring market. There wasn’t a discernable trend in pricing up or down albeit price increases in selected markets and specific product lines met with good success. Despite increases we put in late in the quarter.

The [reason] booked substantial added contracts in the deep water markets on and around new technology offerings in cementation, liner hangers and tubular running services. Canada did well, both in revenues and margins considering the market. Recall that last year’s Q1 had a stronger underlying market and better pricing from the outset. Indeed, Canada’s rig season had a short quarter with an early onset of breakup, early days of March actually.

Furthermore, Q1 had a full 90 day impact, what amounts to about a 10% lower pricing structure reached at different times during the second half of last year. Despite of this Canada managed to pull a good operating margin, testimony to effective cost control and an increasingly high margin product mix. Entering the traditionally low new activity quarter in Q2, we will try hard to further increase productivity but without hampering our ability to respond to upward moves in market activity later in the year.

Two comments on international performance. Q1’s international performance although essentially flat is the best we’ve seen in our history for a first quarter. For each of the last six years, our Q1 typically drops off seasonally from Q4. The predictable cause is a one quarter deferral in product shipments driven primarily by customer spending patterns, particularly for products, well construction, completion and lift. International services are unaffected. Second, the international regions are in the midst of intensive startups. All are drilling related and cover a wide breadth of application ranging from coral tubing, horizontal reentry in existing oil fields to high pressure high temperature new gas fields drilling.

We have major startups underway in Algeria, Libya, Russia, Mexico, China and Saudi Arabia, there are others too, these are just the major ones. In Algeria, Libya and China, the startups IPM type assignments where rigs and down hole services are blended in an integrated effort. The mobilizations worth the price, they were obviously expected. Activity in the quarter was intense in training, infrastructure, expansion, equipment, inventory build and field mobilization. Similarly Q2 will be intensely busy. Q3 will have most of the various contracts on the startup in operations.

Mobilization as a process though will be unrelenting through year end. The quarter also saw soft conditions internationally because or rig shortages in the North Sea, tough weather passes in China and the ubiquitous delays in client programs, particularly in Latin America. But you know every quarter is likely to have a cocktail of issues like that. My last comment is specific to Australia where it could be characterized as a tragic event. We experienced a fatality in late January. Operations in the field where this occurred were shut down for the entire month of February a systemic review of operating procedures and safety guidelines.

We have a zero tolerance for any shortcomings on safety procedures and performance. The shutdown was our own volition. The rough costs for the quarter was over $6 million in negative EBIT or about $0.015 per share. Eastern Hemisphere year on year growth was 36% Q1 on Q1 probably our industry’s highest growth rate. For the balance of 08, our international segment will proceed with increasingly strong growth and end up with year on year growth rates at the 40 and 25% level for Eastern Hemisphere and Latin America respectively.

This has been our history and record in 06 and 07 and we expect 08 and 09 to be no different. Our focus is on execution and our business development or sales. Setting the geographic aside I’ll take you through the quarterly performance of our ten service product lines. Product lines are ranked in size from largest to smallest: well constructions, 353 million, artificial lift also 353 million, drilling services 337 million, drilling tools 247 million, completion systems 227 million, wire line 205 million, reentry fishing 168 million, chemical and stimulation 154 million, integrated drilling 97 million and pipeline 64 million.

Chemicals and stimulation had the best performance followed by well construction and wire line. Chemicals and stimulation’s growth reflect the startup of stimulation operations in Russia, Latin America and the Middle East as well as a very strong performance out of the chemicals group. Well construction reflects gains made in and around the deep water markets. As a reminder, well construction regroups tubular drilling services, liner hangers, solid expandables and cementation. We have a number one and number two market share worldwide in all of its segments.

Wire line’s progress this quarter was largely on the shoulders of the seasonal improvement in Canada. We ran over 700 [drabs] at our compact micro imager this quarter as this technology together with the compact suite of tools continues to gain market share at an accelerating rate. Wire line is likely to overtake drilling tools and rival completions to become the fourth largest product line in late 08 or early 09. There are a considerable number of new technologies that we’re commercializing in wire line, particularly on and around the unique compact systems.

Artificial lift has exceedingly strong bookings and should be expected in the current oil price environment to do very well. This product line traditionally falls in Q1 but reaccelerates throughout the year. In fact we’ve never had a market and backlog in lift like we have today, with orders well into 09. Artificial lift is a product line directly tied to the acceleration of decline rates in oil reservoirs. It is a natural derivative to the aging of oil reservoir productivity and increased produced water.

Strong growth in drilling services which is directional and underbalanced in Middle East, North Africa, North America and Russia was more than offset by delays in the North Sea, Mexico and China, both weather related and project driven. Notwithstanding an expected very strong performance by artificial lift later this year, we do expect directional and underbalanced to overtake lift and be our largest product line sometime in 08, 09. By mid 09 while a little more than a year from now, we should expect our top five product lines ranked by size to be drilling services, meaning directional and underbalanced, artificial lift, well construction, wire line and completion.

All five will represent circa 75% of Weatherford’s business. Important events and acquisition activity. One, we spent in the quarter about $150 million on 11 small acquisitions. The acquired assets and companies were all technology and or engineering deals. The largest was V-Tech, a Norwegian engineering organizational with proprietary tubular running services technology.

You should expect our acquisition efforts to continue at a similar pace, directed towards technology throughout the year, although this does depend entirely on opportunities. We also opened two new R&D and training centers in Russia, one in St. Petersburg and one in Samara. Both our facilities are in the midst of those two city’s engineering campuses. Employee count, we ended the quarter with 40,500 employees. We added a net 2,700 new employees to Weatherford’s payroll. This is the obvious operating backdrop to the raise in intensity of the startups.

I might add also that if you look at the analysis of the payroll, the North American number of employees actually went down in the quarter by a few 100 people, so the net increase of employees in the Eastern Hemisphere and Latin America was actually more than 2,700 people. It gives you a sense a little bit of what’s going on. Forward views, we would limit our forward views of NAM to two comments.

One, in the [train] 12 months, Canada’s oil field has endured North America’s lowest spot gas price an unfavorable change in tax regime, a rise in the foreign exchange value of the Canadian currency, a circa 30% drop in activity and a concerted drive to lower oil field service pricing. It’s been a rough ride for Canada and Weatherford, the most exposed large service company to that market. The hydrocarbon pricing environments of $100 oil and $10 gas, the Canadian market has bottomed out and client tones suggest that recovery in late 08 or early 09, led by heavy oil and broad scale new gas plays.

The magnitude of planned investments directed at heavy oil projects is well no, no need to belabor the point here. Separate and distinct from heavy oil, broad trends in CBM and shale gas support a strong recovery in gas. The recent adjustments in the Alberta provincial government’s royalty regime, although not enough of a concession to the industry will help. At this time we’d expect 09 to be materially strong in Canada than the market’s expectations.

We are also constructive on the US market and our position there. That market is turning. The oil segment, [loads 48] and deep water and the gas segments are ready for a healthy volume increase. This double barreled positive will make for good margin opportunities. We’re extremely well positioned on the lift side which should be the front line beneficiary of the growth in oil drilling and production. [State replies] to directional drilling. The productivity limitations of the US gas reservoir basins imply technology requirements to directional but also managed pressure drilling, liner hangers, conveyers [constrained] to our line et cetera that we’re uniquely suited for.

Tight gas and CMB in particular. We expect further US organic growth in directional, underbalanced, wire line, sand control and chemicals. In our case, all have proprietary technology with small but growing market shares. This will accelerate our year’s growth throughout 08 and 09, we do expect a robust 09 at this point barring a more generalized recession in the rest of the OECB. Setting aside improved prospects for North America, long term growth is predominantly international.

With each quarter that passes we see more quantitative evidence of the international market’s depth, breadth and longevity. In both the Eastern Hemisphere and Latin America, growth rates will be strong and sustained. Growth process will be long, longer than any relevant timeframe for forecasting purposes. It is a necessary derivative, the condition of our reservoir space. Today’s level of activity whether drilling, rig less or production aren’t enough to arrest long term accelerating decline rates, let alone grow production rates in harmony with underling demographic trends.

Furthermore, there is a conceivable three year thrust or the equivalent that could create a surge of excess production and capacity. It isn’t real, it is impossible. Our industry has the urgent and serious need for a five to seven year build up in activity, couple with accelerated development in use and technology. We are in a long secular phase, nothing else will work. You’ve heard us say this for the past five years, we are more convinced of this today than we ever were.

A word about integrated product management, by year end we expect to have six IPM products underway, all in the Eastern Hemisphere. Two [E8] IPM projects will involve managing client rigs together with our down hole products and services. One involves combining our coiled tubing drilling units with down hole products and services and finally three or half of the total IPMs involved our own rigs and down hole products and services.

As a matter of policy, we will combine rigs and oil [conserving] drilling [units] with our down hole products and services whenever and wherever a client expresses interest in doing so. Our experience with pricing and operating condition suggests this is an excellent margin business for all constituents and components of the IPM chain and the opportunity for good long term volume growth. We also believe it can result in better operating productivity for the client, a view many clients share. In fact, the demand for land based IPM is very strong. Given the above prognoses, it shouldn’t be a surprise that we engaged in an intense process of recruitment and training.

Our 2,700 new hires this quarter are going into immediate training in our facilities. And of course it shouldn’t be a surprise that inventory and cap ex have also been accelerating. Also consistent with the outlook, the Board has authorized a split of two shares for one which will be made effective for the record day of May 8th and a pay date of May 23rd. This is our fifth share split in our 21 year history, the most recent being December 2005.

Summarizing Q1, it was a good intense and productive quarter, planning and building for growth. All signs point to it, inventory up, cap ex up, headcount up et cetera. Despite the substantial cost of growth, margins are up in all regions with no exception other than Middle East, North Africa, Asia Pac which is a traditional occurrence in Q1. For the first time, the prognosis in both NAM and international markets are favorable, making the next 21 months a good time to both build aggressively and optimize.

We’re intensely focused on execution of organic growth, we’re confident that the potential for organic growth is unparalleled in our history, given the breadth and depth of our portfolio and the scale of our client’s plans. We believe that the potential for financial performance has never been as good as it appears to be, not only for the industry but more importantly for Weatherford. These are my prepared comments, I will now turn the call back to questions. Operator, if you might start the Q&A process.

Question-and-Answer Session

Operator

(Operator instructions). And your first question comes from the line of Jim Crandell of Lehman Brothers, please proceed.

Jim Crandell – Lehman Brothers

Good morning Bernard, Andy. First question Bernard is about Russia and Algeria. With Russia, where do you expect to be in terms of a run rate in Russia by let’s say Q4 and how do you see growth sort of the next two to three years beyond that?

Bernard Duroc-Danner

Do you want the run rate as an idea of where the revenues Russia will be by the end of the year?

Jim Crandell – Lehman Brothers

Yeah, Q4 08 and then growth subsequent to that through let’s say 010, 011.

Bernard Duroc-Danner

By the end of the year, of course there are some ups and downs depending on how things work but Russia should be around somewhere between $400-$500 million by the end of the year in terms of run rates. But Russia, that’s not the performance of [8] Union which is a higher number, another words they are not including the sands.

Jim Crandell – Lehman Brothers

And what would you see likely growth on a two to three year time horizon on that level?

Bernard Duroc-Danner

It is likely to match any of the other countries that have also very high rates of growth. I would say that it’s as, the growth rate will be as high as we can manage from an operating standpoint. So I’m almost reluctant to put a percentage on it.

But there’s only a handful of countries that can compete with Russia in terms of growth rates and I’m talking about important countries, not just countries that go from zero to a few million dollars or the growth rate is extravagant. I’m talking about countries already sizable who also have the high growth rate. It’s hard to compete with Russia.

Jim Crandell – Lehman Brothers

Okay and Bernard I know you just came back from Algeria, can you comment a little bit about that market, what’s going on now and the prospects there?

Bernard Duroc-Danner

It is probably best described as a coiled spring. It is a market where there is a lot of activity which is about to get started up. Activity covers both the traditional which is reentering existing oil fields. It covers drilling of new oil plays and what could be best described as a very stout level of gas drilling to increase the volume of gas produced. There’s a lot of upfront work that has been gone into the preparing for the activity increase and the upfront work is not only with us but with some of our peers.

It is also an infrastructure intensive type work, so much of what’s being down is in the middle of the desert, so you have in essence no infrastructure support to be expected, other than large bases like [Haseen Nasoud] but the drilling itself will be a distance from places like [Hasey]. So as a consequence, rich in infrastructure, very large volume work to be done. It is for us one of the countries that will rival Russia in terms of growth, not the only one though.

Jim Crandell – Lehman Brothers

Okay and then last question, Bernard I was recently at a National Oil Well’s [Belina] Park facility and they had a number of rigs that were being built for you, in fact more built for you than any other company there and they were going to some places that were at least surprising to me and you alluded to this in your comments and that you’re willing to take rigs to any area in the world in terms of integrated projects.

Can you talk about this in terms of where you have contacts? I believe, I won’t repeat the countries but there were a number of different countries in different areas that they said the rigs were destined for.

Bernard Duroc-Danner

I don’t know what National Oil Well told you but it’s absolutely true that I think we’ve ordered something like eight rigs from National Oil Well, or something like that, maybe six, I can’t quite remember. But it is a fact that we will engage in IPM contracts where we’ll combined rigs and down hole services where it makes sense and when it makes sense. Let’s define makes sense, one, it has to make industrial sense, in other words, we must show for ourselves and also to the client that combining rig operation, designing rigs already ahead of time and combining rig operations with down hole services and equipment will provide an operating logistics for the client and for ourselves.

So first is that the case must be strong. Second is the contractual [terms] must be strong also. And that means that the margins overall, rigs and services and equipment must make it worth our while. And the length of time in the contract also must be worth our while. Typically we will not commit to equipment such as rigs without a full cash payback on the contract. Full cash payback on contractual terms in international markets for land rigs is four years. Could be three, could be four and a half but four years is a nice conservative number.

In other words, commitments have to be above and beyond four years in full cash payback. If all those terms are met, meaning it is a legitimate industrial case, one. Two, the margins are good across the board, not just one side subsidizing the other, that’s utter nonsense. And three, the duration on the contract involved with full cash payback yes. Yes we not only are interested, we are very happy to engage in as much IPM projects along those lines as we can responsibly manage.

This applies too by the way to [calls we’ve been] drilling, which is a smaller sub-segment of the same. With respect to how many rigs does that involve, it’s not a great many. I think we have right now altogether between, [unintelligible] has been ordered about a dozen rigs that are being on order and probably another six right behind it. So you’re looking about 18 altogether. We sold about 12 about a year ago, so we shrank the fleet, getting out of markets. My interest in rigs is purely as a component of an IPM chain not as a [unintelligible] service per se.

So we sold 12, we’re building 18 more, that’s over the next 12 months or so. They’re all going to IPM contracts. But you should also know that I would say only half of the IPM projects that we run, we use our own equipment and the other half we use client equipment. So it’s not a prerequisite either for us to be using our own equipment in terms of rigs. We just like the combination when it is well thought through from an engineering standpoint, operating management standpoint and financial standpoint.

Jim Crandell – Lehman Brothers

Okay and Bernard one quick final question and then I’ll get off, in order to fully participate in this offshore cycle that seems likely to accelerate here with all the new rig deliveries over the next two to three years, on the LWD and let’s say the rotary steerable side, do you need the sonic, the formation tester, advance resistivity measurements or can you do very well with a very rugged, very capable tool that you have now?

Bernard Duroc-Danner

I’ll say yes to everything. First you can do very well without it but then as it turns out, sonic, et cetera, et cetera, et cetera is coming and formation testing et cetera are all coming out in the marketplace in a matter of months. So on the one hand the fact that we are unrivaled in high pressure high temperature in the industry and this is a fact, we hold all the world records for high pressure high temperature, that’s one sort of area LWD performance where we are without any peers. On the other, so just based on that we would do very well.

With the coming on the market of the three competencies you described which are add ons to the basic [other beauty] technologies which are coming on the market in a matter of months, I think it becomes a closed issue whether we would need them or not in order to fully exploit et cetera, et cetera.

Jim Crandell – Lehman Brothers

Okay, great, thank you Bernard.

Operator

And your next question comes from the line of Bill Herbert of Simmons & Company, please proceed.

Bill Herbert – Simmons & Company

Thanks, good morning. Drilling down a little bit more deeply here with regard to IPM, you know I think the only one that we’ve really had any light shed on is the T&K engagement which I think is five years $500 million for the rigs and $500 million for you know directional to their running services underbalanced et cetera so if memory serves about $1 billion over five years.

With regard to the other IPM or [bottling] arrangements that you have, can you just give us a rough sense of scale please in timing in terms of when they reach sort of a cruising speed in terms of revenue generation?

Bernard Duroc-Danner

Alright, probably the best, typically we and I think many of our peers do the same, we tend to be coy about too much contractual discussion not because of Wall Street but because of the competitive reasons. But on the other hand to try to help, we have today we’re working on six different IPMs. Two of the IPMs we actually are just running things. Sometimes we’re running a large cross section of other people’s parts and services as well as other people’s rigs and some of ours.

The other four IPMs are very much entirely our parts and services from soup to nut and in one instance you have [close] units and two [close] units, they’re drilling large ones, if you come in my conference room you’ll see a picture of one. And in the other three instances you have our rigs. Okay, so far so good. When all six will be running Bill I would suspect that the run rate will be about, this is a reasonable number, $750 million per annum. Okay, $800 million per annum. That should happen Bill on and around Q4 if you will please give us some flexibility, we could be a bit early we could be, talking about a month or two, this is not surgery.

The run rate, $750-$800 million for those six IPM projects I think is an honest and reasonable number. Obviously its multiyear, the commitments. I mean different IPMs have different longevities. The ones with our rigs obviously long, four to five years. Others are shorter, so the blended average is probably like a bit over three years maybe. So that gives you an idea of the overall sort of commitment on the part of the clients. I would also add Bill that we are negotiating right now a number of other IPMs for startups in 09 and [unintelligible]. This is not an endpoint.

Bill Herbert – Simmons & Company

Right and I didn’t think that it was. Which, actually segways into my next query, can you give us a sense as to the visibility in terms of number of projects that you’re bidding on and dollar magnitude? Above and beyond what you’ve already won.

Bernard Duroc-Danner

[Unintelligible] speculative because as I mentioned in my comments that this is execution for us now, it’s not a business development and sales. Now you’re talking about things that we’re working on for startups in you know in 09 and so on and so on. So take my comments into context. It is at least as large as we have, it is actually larger.

Bill Herbert – Simmons & Company

And thirdly you know we’ve been on a hiring spree here for very good reasons because you’ve got you know more growth than you can really embrace at the moment but from a resource capability standpoint, Bernard, you’re comfortable that you’re able to prosecute all this stuff relatively seamlessly?

Bernard Duroc-Danner

No. I think I’m not. What I mean by that is one of the reasons why we’ve been for the time being very quiet on the acquisition front is because it requires every hour in the day of the week, every week in the month. The organic path is hot, so the best one. So we do not take any execution for granted and you know there is definitely a high level of stress, operating stress here that I think we like to keep in order to ensure that we grow with a minimal amount of problems and disappointments, particularly [time] disappointments.

Because if we do have good operating quality, I think the market in my judgment and our judgment, the market is not an issue, barring a large recession in the OECD. The market is not an issue. My opinion, sales and business development is not an issue. I think it is of course an issue but it is not the issue. The issue as far as I’m concerned is operating quality and execution quality, end of story. Therefore, all the focus, all the stress, all the attention is on that and we take nothing for granted.

Bill Herbert – Simmons & Company

Right. Last one from me, Russia is one of the countries clearly, I presume Mexico is another, perhaps Algeria, where are the remaining countries where you have these bundled operations?

Bernard Duroc-Danner

I’ll just, they are in the neighborhood but I won’t answer. They’re in the neighborhood. That’s, even if I had a conversation I probably wouldn’t say it, but it’s in the neighborhood. I think you certainly have hit the obvious ones but there are others. You do not have, it’s not a small number and do not dismiss also the countries that, see are running today at $100 million a year but will steadily go and actually in the next two years, three years tops will go to $250 million, $300 million.

They are not the same scale as the ones you mentioned, obviously, but you’ve got quite a few of those and it’s a combination of both that makes them very strong growth. So tensions in even the smaller markets also makes a difference.

Bill Herbert – Simmons & Company

Thank you very much.

Operator

Your next question comes from the line of Robin Shoemaker with Bear Stearns, please proceed.

Robin Shoemaker – Bear Stearns

Bernard I wanted to ask you if you could give us an update on some of your newer technologies that may become much more substantially commercial in the coming year or two. I’m thinking of drilling with casing, solid expandables, I think your metal skin product and just give us an update on that if you would.

Bernard Duroc-Danner

It’s too long Robin, I’ll go quickly.

Robin Shoemaker – Bear Stearns

Well you used to talk about a lot of this on conference calls but you’re so busy now that it kind of gets pushed aside.

Bernard Duroc-Danner

I understand, I think there are, you’ve got new technology which is coming in directional and wire line, in extensions and casing well drilling, solid is moving along, in traditional service lines, tubular running services, there’s a lot of technology coming out which I think is wonderful. If you back up for a minute and give you some examples on the directional.

One of your peers asked me before when are you going to come up with [unintelligible], are you going to be hampered by the lack of sonic and formation testing and so forth and so on. And you know the answer was no it is coming out now, you’ve got that sort of scenario which is completing what is a core technology which has superior attributes. In the case of LWD it’s temperature and pressure and in the case of wire line which is the same phenomenon, it’s conveyance, it’s small.

In both directional and wire line we are completing by adding all the various measurements that we did not have to our core technology which we believe either because of temperature and pressure or because of conveyance is superior to anything else in the marketplace. Got that phenomenon going on. Separately in the case of directional there is technology coming out on, well I’ll just leave it at, there’s technology coming out by year end which we think is really interesting and one of the critical components of the directional process. I’ll leave it at that.

Casing well drilling, we’re extending its capabilities. We’ve done very well on the vertical section of casing well drilling or drilling with casing, same thing. We’re now extending it to the directional horizon which is obviously where it needs to go.

Robin Shoemaker – Bear Stearns

Does that involve a retrievable bit or is that a different…

Bernard Duroc-Danner

I wouldn’t tell you this on the phone. There is technology that’s coming out on and around solids further applications, so zonal isolation on the one hand, on the other hand it’s the elimination of hole string, hole size of our casing. It’s not the amount of bore yet but we are inching our way towards that sort of a application and I’ll stop here. It is true, there is a whole section in my notes I did not read because my notes are too long.

But there’s a whole section in my notes which some of you can have access to which essentially describes how much money we spend on technology. And we spend approximately $400 million, $450 million per annum on technology. Over $200 ourselves within our R&D centers and we buy a lot of intellectual property because you can’t develop everything yourself, it’s not possible. So obviously [I believe that] and I thank you for the question. I’m a bit reluctant to tell you any more in a public forum.

Robin Shoemaker – Bear Stearns

Okay, that’s all for me, thank you.

Operator

And your n ext question comes from the line of Dan Pickering of Tudor Pickering Holt.

Byron Pope – Tudor Pickering Holt

Actually Byron Pope here, good morning guys. With regard to the North American market, Bernard I think on the last quarter call heading into winter when the outlook for North American natural gas was a little more uncertain than it is now, I think you guys talked about potentially being able to keep your North America op margins kind of flattish year over year. Given the outlook it looks more constructive now, how do you think about operating margin enhancements as we step through this year given that you’re continuing to gain market share in some high margin areas?

Bernard Duroc-Danner

Higher, I think the margins will be. Obviously Byron this is a [starter] in 08 versus what is was a few months ago. It will also [start] in 09. Margin move will be a function of volume which is economies of scale, it will be a function also of volume coming on an operations. So I mean in Canada which is far more efficient than it used to be. It’s also pricing, it’s also a move to higher margin parts and telespine. A lot of the parts and telespines we’re growing the best in North America have the higher margins. So to combine all three should be very good Byron.

Andrew Becnel

And Byron I would keep in mind that I’ll say something that should be quite obvious, we’ll see what we get in Q2 out of Canada running at 111 rigs right now versus 107 last year. Q2 Q4 will dictate a lot of that ability to improve margins year on year. So too will pricing in terms of the magnitude of jump up in rig count in the United States. We think that as a fundamental matter it’s probably pricing that needs to move before additional capacity and people are added. Because you can’t add those things as quickly as you might have been able to in the past.

Byron Pope – Tudor Pickering Holt

Okay, fair enough. And then one additional question, in the MENAP region, Bernard you mentioned that mobilizations are going to be an issue kind of as you step through this year. Does it get more into net 2009 once the projects are up and running, is it fair to think about the all in margins associated with some of this IPM work greater than or at the very least equal to your stand alone?

Bernard Duroc-Danner

Yes they are and by the way, I didn’t mean, I was, back in my comment there was a phrase that I’ve been misunderstood, I don’t think the mobilization is so much an issue as it is a fact, it’s a fact of life and when you grow at the rate we’re trying to grow at I mean this is the same in 06 07, there’s nothing new. The process of growth is a disruptive process and it is what it is. It’s a good process also because it leads to ultimately greater margins, greater returns and that comes with greater scale.

So, so much for that, in terms of the margins of the IPM projects, there they are, well time will tell Byron but they are good and they should be higher than the existing margins. This doesn’t only apply to MENAP it applies really to any place where we have an IPM projects that we’re engaged in or we are likely engaged in.

Byron Pope – Tudor Pickering Holt

Okay.

Andrew Becnel

Byron, remember that Q1 on Q1 margins are up 200 basis points there. Very similar to what we were full year 07 on full year 06. You should expect it to be very much the same full year 08 on 07, up 200 basis points.

Bernard Duroc-Danner

I think probably we look back at 09 on 08 we’d like to say the same things.

Byron Pope – Tudor Pickering Holt

Okay, very helpful, thanks guys.

Operator

And your next question comes from the line of Mike Urban of Deutsche Bank, please proceed.

Mike Urban – Deutsche Bank Securities

Thanks, good morning. I wanted to follow up on a couple of the issues just raised there. I realize you don’t want to get too granular but, and I do realize mobilization is kind of an ongoing thing and will be, but it sounded like from your comments, I don’t know if I’m parsing too much but that the intensity is kind of peaking right now and more of those projects are in revenue generation mode in the second half and in the first. Is that fair?

Bernard Duroc-Danner

It’s true Mike I think it was true, it was very similarly true in 06 and 07. Part of it in some of the countries involved is weather. It’s kind of hard to startup in the summer. And so we startup in the easier months. But it was the same thing as 06 and 07, very, very similar.

Mike Urban – Deutsche Bank Securities

Okay and going back to the IPM business with respect to the use of your rigs versus third party rigs, you went through some of the parameters that Weatherford looks at in terms of deciding whether to build or supply its own rigs. From a customer standpoint, what drives that?

In other words, what I mean is, if you’re getting full payback on that that’s obviously a pretty nice return and presumably if the client could help it they would use a third party rig or even a worst case scenario use their own. So what are they getting out of it, in other words is there unique efficiencies there? Are the rigs that you have or that you’re building uniquely suited or have synergies with your tools, just would be interested on some…

Bernard Duroc-Danner

No, not all clients are the same. Some clients wouldn’t dream of having their own oil field service operation. In fact some clients are liquidating, selling, giving away in many respects their existing oil field service operations. Other clients are actually building them. So you’ve first got differences from one client to the next, there is no general rule. The client is interested not so much in many cases in trying to figure out whether he can source this service or that service from the cheapest possible source.

The clients interest in getting the field drilled or re-drilled with having good quality wells on time, without any operating mishaps and minimizing downtime as much as possible so that we can get to product as soon as possible. They are so late as it is and they are so limited, many clients in terms of management capabilities because of the scale of the projects that the number one priority is not sort of shopping around for the cheapest priced and so forth and so on, sometimes that happens but for the most part what they’re interest in is efficacy. Now you sell efficacy sort of two ways.

One is to say make me responsible and I’ll guarantee everything will be there on time as opposed to having five different contractors, directional, underbalanced, a rig and a mud bit and so forth and so on. And everyone is sort of supposed to be disciplined by them which they are unable to do very effectively. Make me responsible and I’ll make sure everything is on time. And the second thing you also present an argument which is to say that make me responsible and given what I know about the field that will be drilled, we will engineer the combination of above ground and below ground in such a manner to maximize the probability of success of what you’re trying to do.

You see it in the more engineering mode than the words I just used it’s essentially what you say. Those arguments Michael carry the day with some clients, not all clients. But enough clients will it carry the day that the potential for that sort of argument is good enough to feed opportunities for us and some of our peers.

Mike Urban – Deutsche Bank Securities

Gotcha and last question would be when you are managing third party rigs, you mentioned taking responsibility for everybody showing up on time, that’s been an issue in the past with certain integrated projects. Is that what you’re doing when you have third party rigs, you’re taking responsibility for the rigs and all the third party contractors showing up on time and if so how do you manage that risk?

Bernard Duroc-Danner

That’s a very good question. In the case of the rigs we run we have two IPM projects which we’re going to run other people’s rigs, they’re actually client rigs in one instance. In the other instance its different contractors. The level of responsibility of the IPM contract will be a little bit different on someone else’s rig. In other words there is some measure of responsibility for us but there is also some measure of put back responsibility onto the governmental entity or the foreign contractor whose rigs are going to be working for us.

So it is not quite the same level of responsibility, it cannot be, at least in our case. We do distinguish between being responsible for things being there on time, functional and with as much efficacy as we can possibly organize versus relying on third parties that the client’s contracted and we have some measure of discipline but not the same.

Mike Urban – Deutsche Bank Securities

Great, thank you.

Operator

Your next question comes from the line of Kurt Hallead of RBC Capital Markets, please proceed.

Kurt Hallead – RBC Capital Markets

Good morning. I wanted to kind of follow up here, so integrated project management becoming a bigger aspect to you right and just curious as to whether or not you know, and we’ve heard from Schlumberger and some others, you know higher third party content therefore margins going to be a little bit lower than the standard business. How are you guys approaching that and do you see your margins being [overlay] different situation from your competitors?

Bernard Duroc-Danner

We’re not. I mean [unintelligible] same marketplace but one of the reasons why maybe in the end IPM will not be as large for us, percentage as a whole as it maybe some of our peers, it will be large enough but not necessarily as large is because we’re very careful that we get involved not only in circumstances I described before where there’s a legitimate case for doing what we know how to do, there’s a legitimate case for integration, the client is the sort of client who really needs and oil field service company’s help et cetera, et cetera, et cetera.

And all the rest of the things I said before. We will also not get involved in cases where there’s just not enough down hole servicing equipment density. We’re just not. And there is enough work, there is enough money to go around and we’re actually short on everything, short on time, short on people, short on equipment in the right place that we don’t need to chase other things. So that we try to be selective as we can and avoid things where there is a large ticket on and around things that we’re not particularly good at or not in altogether.

Albeit clearly because we don’t do mud and we don’t do bits, these will always be present as missing links. But it’s not a big number. Where we get more troubled is if chunks of products and services that really we think we do very well and for reasons of client preferences we would not be the ones entrusted with it, we typically pass on that.

Andrew Becnel

Right now, Kurt to be clear, of the six projects Bernard’s talking about, no material component of pass through revenue.

Bernard Duroc-Danner

I would say 90% are they, that number is made up Kurt so take it with a grain of salt, 90% of products and services are Weatherford.

Kurt Hallead – RBC Capital Markets

Okay and then you know, give you credit where credit is due, you were kind of early on on the North American call on the downside and it sounds like you’re getting more optimistic here on the upside. Do you see Canada or the US being a bigger growth component?

Bernard Duroc-Danner

That’s an interesting question, that’s a very interesting question I think my view, I have a different view. My view and I think timing will be a little bit different is that the delta may be greater in Canada than in the US. Or put another way, should be greater in Canada than the US if economic rationale comes to play, if only because they lost more. Last time I checked, the US didn’t go down by 30%, did they?

So you have more to gain out of Canada than the US and they have new plays in Canada on the gas side which I think are truly very interesting. So I would say that Canada should have more of a delta and so forth. On the other hand, US being more than two times the size of Canada, for what you care about which is how big are the numbers going to move up, obviously you know the US is a bigger ship.

Andrew Becnel

Yeah and on a percentage basis, Canada or an absolute dollar basis, US.

Bernard Duroc-Danner

Amen.

Kurt Hallead – RBC Capital Markets

Okay and then lastly you know Schlumberger’s bid for Saxon here today, you know getting access to rigs, what do you think the implications are for what the global service business, is this going to be now a trend where you know others are going to start to see the value in owning rigs or [overlay] products and services down hole or what’s your take on that?

Bernard Duroc-Danner

I think to pay homage to our larger fear, they’ve seen the value of adding rigs to [unintelligible] services a long time ago. I mean they ran, I do not know the numbers but they ran close to 100 rigs on and off within the confines of the company. So they’ve understood that, both the drilling rigs and work over rigs. So I mean that’s one. There is not real implication for us. I think we do what we do at the rate we do it at. We don’t need to get involved with private equity people, we don’t need to get involved with drilling contractors.

And for what we need to do in the end we can manage our ship fine without having joint ventures and the like. So I wish them luck with both the acquisition and possibly other joint ventures to [unintelligible] on and around the rigs. For what we need I think we’re doing fine, there is no need to get more complicated or I think larger scale than what we have. I do like the notion that just as a matter of industrialized legitimacy, I like the idea that combining in some instances I repeat in some instances land rigs, I repeat land rigs, I don’t think it [unintelligible] rigs work offshore, combining land rig competency with both operating and engineering with down hole.

I thought form a reservoir development standpoint it always made engineering sense. So from an imbalance in industrial legitimacy standpoint I like what’s going on, it has no bearing on us really that I can think of.

Kurt Hallead – RBC Capital Markets

Thanks.

Bernard Duroc-Danner

I suppose one last question given the time please operator.

Operator

Your next question comes from the line of Geoff Kieburtz of Citi, please proceed.

Geoff Kieburtz – Citigroup

Thanks, good morning. I’m going to continue these questions on IPM a little bit further. Just to clarify, you’re saying that the IPM margins or the margins on the IPM work are at or above the average for the regions that those are going on in?

Bernard Duroc-Danner

In our case, yes Geoff.

Geoff Kieburtz – Citigroup

Okay. And as you look out beyond this year, would you expect the IPM revenue growth is, well how would you expect it to compare with the overall revenue growth in the Eastern Hemisphere and Latin America?

Bernard Duroc-Danner

It’ll be higher.

Geoff Kieburtz – Citigroup

Okay. And you mentioned that a lot of the growth you know you mentioned some high growth markets and that in particular Algeria, Libya and China are very heavily or at least have a strong IPM content. Are those markets in particular you know you gave us a kind of an $800 million run rate at the end of the year, call it 8-9% of the total, are those markets you know more than 10% IPM?

Bernard Duroc-Danner

You know I think I have to be careful, I mean they’re very different markets. China is experimenting with IPM, I wouldn’t say it’s necessarily going to be a big part of the Chinese market. Libya is very young, Libya is very young as a market, in other words you haven’t seen anything in Libya yet, you have to wait until 09 and even 10 for Libya to really take off and it shall. Algeria on the other hand is as I described a coiled spring. It has been sort of waiting and waiting and waiting in terms of getting things prepared and bid out and organized and I think Algeria will have a glorious year, certainly in 09.

So they’re different stages. I would never put China in the same bag as Libya and Algeria in terms of IPM potential. It just so happens that we do have IPM work there which is good and I think we could get some more. But that doesn’t necessarily make it over the next three to five years, doesn’t place it in the same league as the other countries. There are other places Geoff that have IPM opportunities which have not been mentioned. And that is a private conversation not a public one.

Geoff Kieburtz – Citigroup

Okay. More broadly than just IPM, when you talk about the, I sense an increasing level of confidence in the sort of 25% Latin America, 40% Eastern Hemisphere revenue growth in 09, how much of that would you say today has got identifiable contract commitments behind it?

Bernard Duroc-Danner

I’ll give you a heuristic answer because it is not modeled as I speak to you today. But I don’t think I’ll wrong, I’ll turn to Andy if he shakes his head when I say it, but 09 is firmly set for at least half of what we need to achieve those numbers. And there are some things that I write in my commentary which I really mean, one of them, I suppose I mean all of it but something that carries more of a personal meaning, when I expressed the fact that this is about execution not business development or sales. But it always, business development and sales is always important but I really mean it’s secondary. I do think the volume is there.

Geoff Kieburtz – Citigroup

Okay. Couple of other quick things. You know you had a big boost in working capital for the quarter, is that going to be seasonal in its nature or are you thinking that this working capital build you have [overlay].

Bernard Duroc-Danner

No, it is, alright Andy you make some comments on it but the short answer is…

Andrew Becnel

It’s definitely seasonal Geoff. This jump up in particular as we look by country and by product line is particularly tied to contracts that are in hand and opportunities that we’re highly confident we will receive. Global supply chain is still very, very strained. Some things on order are 10-12 months out. We will not put ourselves in the position where we get caught short and therefore unable to perform for our customers.

So it will be seasonal, we’re working extremely hard, especially on the receivables side as opposed to the inventory side, to improve our process there and speed up everything from billing through collection and any kind of dispute resolution. You will see program in that part of our balance sheet throughout the year. But on an inventory side, carry a let’s say smaller stick around the company because we know what it takes to grow.

Geoff Kieburtz – Citigroup

Right. Headcount question, would you be willing to give us an approximate headcount by region as you ended the quarter or average the quarter or something like that?

Bernard Duroc-Danner

I think it’s probably, this is the last question of the last analyst to be on the call, maybe we could do that, we’d be happy to do that, maybe Andy or I can give that to you. What you will notice is that the headcount in US and Canada is down, actually US is flat, totally flat, Canada is down versus what you would expect it. Even though it’s a [unintelligible] quarter than a sequential one. And the rest of the growth is all international. So about, I’ll let Andy or I can give you exact numbers.

Geoff Kieburtz – Citigroup

Okay, we’ll follow up then. Thanks very much.

Bernard Duroc-Danner

Not at all. Thank you Geoff. That concludes our conference call for Q1, thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference, this concludes the presentation, you may now disconnect, have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Weatherford International Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts