Weatherford International CEO Discusses Q4 2010 Results - Earnings Call Transcript

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Weatherford International (NYSE:WFT) Q4 2010 Earnings Call January 25, 2011 9:00 AM ET


Bernard Duroc-Danner - Chairman, President, CEO

Andy Becnel - SVP, CFO


Ole Slorer - Morgan Stanely

Bill Herbert - Simmons & Company

Brad Handler - Credit Suisse

Kurt Hallead - RBC Capital Markets

Angie Sedita - UBS

Marshall Adkins- Raymond James

Stephen Gengaro - Jefferies

Robin Shoemaker - Citigroup


Good morning. My name is [Regina] and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International fourth quarter 2010 earnings conference call. All lines have been places on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the conference over to Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Bernard Duroc-Danner

Good morning. I'll turn it first to Andy for prepared comments and then I'll have my own prepared comments afterwards, as usual. Andy?

Andy Becnel

Good morning. For the final quarter of 2010 we report EPS of $0.21 before excluded items. This is a $0.03 improvement over last quarter but below our $0.23 guidance. The reported number excludes the following items, which add up to a $210 million after tax loss.

Book tax expense of $158 million, primarily as the result of a tax restructuring to migrate our Latin America legal entities out from under our US holding structure. Of this amount, $54 million was a cash expense. We expect this move to further strengthen the efficiency of our global tax planning efforts.

$34 million after-tax charge for tender premiums on the extinguishment of a portion of our senior note that's due in 2012 and 2013 -- recall that this tender, completed in October, straddled Q3 and Q4.

A $21 million after-tax reserve taken against accounts receivable balances in Venezuela -- while we believe we are contractually entitled to the full dollar amount of our invoices and are working with our customers to recover these amounts, this decision was taken in the context of the country's economic prognosis.

$12 million in after-tax severance costs related to restructuring initiatives and a non-cash after-tax benefit of $15 million related to the settlement of the TNK put. We settled the put in November for $47 million in cash, which was $15 million lower than the fair value at which the liability was recorded in September of this year.

We incurred no net cost related to our sanctioned country in FCPA matters this quarter. A reconciliation of all these items can be found on our website at

As compared to Q3, the field contributed a $0.05 sequential step-up in earnings with internation operations flat and North America accounting for the entire increase. Included in these results are $50 million or $0.05 of write-offs globally, principally on inventory. This number was more significant than prior years in part due to our supply chain initiatives, which involve rationalizing facilities.

Increased interest expense reduced EPS by $0.02 sequentially in part as a result of the tendered bonds remaining outstanding for a portion of the quarter. Taxes came in at 16.2% compared to 16.7% in Q3.

On a consolidated basis, revenue increased $367 million sequentially or 14%, an advanced $475 million or 20% compared to the same quarter of last year. North America revenue climbed 14% sequentially and 70% compared to Q4 '09.

Artificial lift, drilling services and stimulation and chemicals posted strong results for the quarter. Oil directed and liquid rich plays continued to drive activity levels higher while reduced Gulf of Mexico operations continued to weigh negatively.

Eastern hemisphere revenue increased $107 million sequentially or 10% compared to 1% increase in rig count. Compared to the same quarter of last year, revenue increase $134 million or 13%. Algeria, Iraq and the UK had strong incremental performances as well assignments and mobilizations mark tangible progress in Algeria.

By country, improvements were the most widespread we've seen since late 2008 suggesting the very beginnings of a reawakening in this hemisphere. Drilling services, integrated drilling and completions were the top performers on a product line basis.

Latin America revenue increased 31% or $016 million on a sequential basis and declined 28% compared to Q4 '09. This increase is more modest than it sounds, though still marks the beginning of a stead improvement as last year's revenues were just -- last quarter's revenues were adjusted down by $55 million due to the events in Mexico.

Columbia continued to stand out in terms of incremental growth and Brazil completed deployment on the bulk of recently awarded contracts, which are expected to contribute notably to Q1 results.

Consolidated EBIT before corporate and R&D was $420 million, up $49 million sequentially, with operating margins at 14.5%. This is a 20-basis point decline compared to Q3. Compared to Q4 '09 consolidated EBIT before corporate and R&D was up $198 million or 89%.

In North America, operating income of $252 million stepped up 25% sequentially and margins climbed 180 basis points. Eastern hemisphere operating income was down $15 million sequentially with margins down 220 basis points.

As asset write-offs, heavy rains in Australia and mobilization expense in MENAA temporarily hampered profitability. Europe, West Africa, FSU operating income was flat sequentially with margins down 70 basis points.

Middle East Asia Pac operating income declined $15 million or 22% with margins down 340 basis points. Latin America profitability increased $12 million and margins were relatively flat versus Q3.

During Q4 we generated EBITDA of $591 million with G&A at $272 million. Capital expenditures were $209 million for the quarter, net of $50 million of lost in whole revenue.

Free cash flow from operations was strong this quarter and was deployed on several significant items: $47 million for settlement of the TNK put, $43 million paid in bond tender premiums and $38 million deployed on acquisitions. These total approximately $130 million and caused net debt to increase $23 million during the quarter.

DSOs finished the year at 81 days, a 12-day improvement compared to the end of 2009 and one day lower than our targeted performance for 2010. Days working capital declined to 120 days from 139 in Q4 of '09. This has been an area of intense focus for us and we're very proud of the team's results.

For the full year of 2010 we generated free cash flow to find [those] changes in net debt of $115 million. At quarter-end, our ratio of net debt to net capitalization stood at 38.9% with total net debt at $6.3 billion. At December 31, 2010, we had cash in amounts available under our committed credit facilities of $2.1 billion.

Guidance for 2011 includes the following below-the-line items: G&A $1.15 billion; corporate expenses $170 million; R&D expense $255 million; net interest expense $450 million; other expense $40 million; minority interest expense $20 million; capital expenditures up 40% at $1.4 billion; and a tax rate of 20%. Finally, we expect Q1 earnings per share of $0.27.

Bernard Duroc-Danner

Thank you, Andy. Looking at Q4, we had areas of satisfaction and areas of disappointment this quarter. We had satisfaction in growth and capital efficiency. Top line growth was excellent in areas of over-performance.

The fourth quarter has showed very strong revenue growth at $2.9 billion, which is the highest quarter revenues in our company's history. Furthermore, the 14.5 to Q3 on Q4 percentage increase is also the highest quarterly growth rate in the company's history. The growth was organic, not acquired revenues and consistent with our historical record.

The growth was evenly split between North America and international at roughly the same rate. In spite of over $360 million of organic growth to finance, we generated in the quarter about $110 million of free cash flow from operations.

As Andy pointed out, use of proceeds went to finance acquisitions, the closing of TNK put and refinancing costs associated with our bond tenders. Capital discipline operations remains a priority.

We're also disappointed in margin expansion. Incremental margins were seriously held back by asset write-offs, particularly in the eastern hemisphere. Write-offs amounted to over $0.05, almost entirely inventory related, and made more material by our supply chain initiatives rationalizing facilities.

In addition, Australia, and more specifically, Queensland, torrential rains and related shutdowns suppress margins by about $0.01. Australia is historically our largest operation in Asia Pacific, typically about 20% larger than the next runner up in that part of the world, which is China.

The third factor holding back margins in the eastern hemisphere are continued delays in finalizing the mobilization of a number of operations, primarily Algeria, Bangladesh, Iraq, Libya and Turkmenistan. We are seeing progress now being made in the course of Q1.

Geographically, NAM, again, [being] much of the quarter. Both the US and Canada were very strong. NAM showed the best incrementals at just under 33% and 180-basis point improvement quarter-on-quarter, which is better than expected.

Margins have room for further improvement in NAM. NAM's peak EBIT margins were close to 30%. It reverses to Q4 levels of 20%. We do no, in NAM, have the stimulation intensity of our peers. Improvements are, therefore, more gradual in price and volume. It takes more time.

Latin America, Columbia stood out with the highest quarter growth rate complemented by improvements in other countries including Mexico. Russia was flattish, settling in its seasonal decline, while North Sea carried most of the quarterly growth.

MENAA and Asia Pacific was driven essentially by MENAA with broad based growth in Algeria, Iraq, Libya, Oman, Saudi and Qatar, offset by severe conditions in Australia.

For all of the product line summary for the quarter in millions of dollars, I'll go quickly there. Drilling services $482 million; artificial lift $471 million; chemical and stimulation $396 million; well construction $363 million; integrated drilling $357 million; completion systems $235 million; drilling tools $212 million; re-entry fishing $165 million; wireline $159 million; and, finally, pipeline $61 million.

Forward views, North America -- in US land activity will flatten out. We don't expect the market to provide significant volume gains. There is likely to be substitution of conventional gas segments and further strengths in oil and gas of condensate shales.

Given our specific business mix, which is a little different than our peers, we do expect further gains in volume and pricing. It will be selective depending on the product line. We believe that even though the offshore band is lifted we will see subdued offshore drilling activity in the US through the near term. In other words, the US Gulf of Mexico will not do well in 2011.

Canada has a distinctly positive outlook and so far the oil segment is a far greater percentage of the overall market. Heavy oil activity has been suppressed over the past few years, so there is catch up activity underway. Expect Canada as a whole to be particularly well-behaved. [Inaudible] strengthen into 2011 and even more so in 2012.

Canadian shale plays will be very important [inaudible]. There is infrastructure buildup that is needed to turn the Canadian market. It is essentially an oil play until then.

International, our assessment of the international outlook for 2011 is now squarely positive. What I mean is that both the quantum of market growth and our own market share carry a higher degree of certainty. The market will strengthen as 2011 progresses. This will lead from 2012 thereon to a period reminiscent of 2005 through 2007.

In Latin America, Brazil, Columbia, Argentina, Peru, should have robust growth in 2011. Based on existing contractual commitments, Brazil and Columbia should top the list in growth rates. Prognosis for Mexico is cautiously positive. We expect a slow recovery but a recovery nonetheless. The offshore segment in the southern market of Villahermosa should be the first to gradually strengthen.

The eastern hemisphere will be driven predominantly by oil, traditional light oil plays and widespread heavy oil development. There will be the normal seasonal pullback in Russia, North Sea and China but the pace will pick up rapidly throughout the year.

Russia should have a double-digit outlook in '11, both volume and price. Activity gains will be sidetracking and production related as well as development drilling and further exploration drilling.

The North Sea and East Africa should show strength in the year. The North Sea, in particular, should be strong. Central Asia will reboot [some of its] activity in the course of the year with India, Bangladesh and Turkmenistan, particularly constructive in outlook.

We expect MENA, Middle East, North Africa, to strengthen throughout the year. It will be a slow process but should be a powerful upwards surge into 2012. We already have contractual commitments that have initiated the startups in Algeria, Bangladesh, Iraq, Kuwait, Libya, Oman and Turkmenistan. Most likely we have more to come.

Our final growth rate for 2011 will depend on the efficacy of mobilization and the timing of client startups. But the outlook looks the most constructive it has been since Q3 of 2008.

Financials emphasis, the emphasis on more efficient use of capital, whether working capital or CapEx, will continue with the same drive. We have an internal target to end the year, year '11, at the debt-to-capitalization ratio at or below 35%.

With respect to earnings performance, our assessment of '11 remains unchanged at about $1.30 reflecting a 20% top line growth and 35% incrementals year-on-year. We expect to balance top line progression across all regions, NAM and international.

Respect to margins, we expect NAM to continue with some gradual progression. International should show considerable improvements. International margin improvements are expected to be driven by fixed cost absorption and the gradual conversion of [sought out] costs into operating businesses.

With that, I will turn back the call to the operator for the Q&A session. Operator, please.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Ole Slorer - Morgan Stanley.

Ole Slorer - Morgan Stanley

Could you give us a little bit of a flavor for your talking about a gathering of the momentum of the recovery in 2011? Clearly you had very strong sequential revenue growth in the fourth quarter. So are you talking about more of a margin leverage here or could you just quantify a little bit your optimism on revenue relative to bottom line leverage?

Bernard Duroc-Danner

The comment is both a comment on market and also on what I think we may capture within that market. The comment on market is both a tone comment, better tone. It's also a specific comment in so far as a number of very specific inquiries, tenders, projects that are coming up pretty much all over the world. There are differences depending on the region.

It is about as strong as I've seen it in two years. So the comment on our own ability to capture some of it is just specific country-by-country. The most important comment of the two is the one on the market overall.

Ole Slorer - Morgan Stanley

So would you say there's been a radical change in the type of conversations that you're having with your average international customer and what is to do with the year-end budgeting season or has it been a gradual -- can you give a little bit more on just when you go into the offices now [inaudible] customers? How, if at all, has the conversation changed as of late?

Bernard Duroc-Danner

I think probably the rhythm of quarterly earnings makes it sound a bit more radical than it really is. There has been a gradual build up in the client optimism, client -- I would say stability in thinking as opposed to changing their minds. So the tone has gradually improved and the improvement in the tone has led to specific inquiries and specific projects and specific tenders and specific awards.

It's a continuous process. I wouldn't call it radical. I would just say that it's a little bit -- when does daybreak start really? You see it coming up and you see a little bit of light. At some point, it is daybreak. It's a continuous function, not a discrete one. Here is a little bit the same thing, which is that now we've reached a level, I think, in client drive and determination to where what was a better tone is becoming specific operating projects and specific commitments and so forth.

So it's not radical. I think it is the normal evolution of a gestation time and now we move to the action phase.

Ole Slorer - Morgan Stanley

Just on the North America, a little different -- you highlighted that you have a different mix than your mean competitors, therefore, you see the outlook a little differently. Can you qualify that a little bit by talking about your geographic difference in North America, Canada versus the US or are you talking about your product line differences with more artificial lift relative to pressure pumping? Could you just be a little bit more specific exactly on that comment?

Bernard Duroc-Danner

It is exactly what you said. First, we, for historical reasons, tend to be more Canadian than our peers. The balance in US and Canada is a little bit different than our fears. Fact number two, and I think it's well known, although we have a stimulation business, which is a good stimulation business, it is not comparable in size and intensity to ones of our peers.

So, therefore, the evolution of our prognosis in the US market and Canadian market is a little bit different. It beats at the drums of all the other product lines. So into 2011 I think you're likely to see for us a continued progression in all the other product lines. There's volume and pricing independently. What happens is the balance is supply and demand in a shale market.

Yes, indeed, artificial lift is our largest product line in the United States. For example, I think reasonably well known that about 25% of everything we sell in the United States is artificial lift as it has always been the case.

So, yes, it stands to reason our prognosis there would be a little bit different. Indeed, it has been a bit -- although the results have been good in North America, it's been a bit slower in terms of our progression in price and volume. That's simply because the rhythm of evolution of those product lines is not quite as vertical and [violent] as it has been in the stimulation market.


Your next question comes from the line of Bill Herbert - Simmons & Company.

Bill Herbert - Simmons & Company

So, Bernard, one of the things that struck me with regard to your commentary was the fact that, if I heard you correctly, you've called for a gradual improvement in MENA and yet top line was up 13% quarter-on-quarter in the fourth quarter. Are we being a little bit subdued with regard to the outlook for MENA or how should I take your commentary?

Bernard Duroc-Danner

Probably nothing more than I think we are being subdued or we're being careful. Often in the fourth quarter you do have, and MENA in particular, delivery of products that tends to make the number a little bit higher. But having said this, I think in general we tend to be more careful if only because in the past three or four quarters our clients have been slow.

Bill Herbert - Simmons & Company

Then, I guess this is a question for both you and Andy and that is a combination of what I would call the asset right sizing, if you will, in the fourth quarter, moreover with your significant revenue growth generated in the fourth improving visibility thus likely continue traction for 2011. Andy and Bernard, how should we think about the margin progression as 2011 unfolds for eastern hemisphere?

Bernard Duroc-Danner

Look. I'll take [inaudible] let Andy provide his answer. We should expect in eastern hemisphere incrementals on and around about 35%. Now, will they be smooth and -- well, as you might have noticed, Bill, things have not been smooth. So I’m not going to promise that they'll be smooth from there on. We will try to.

In general, that's what economics of the fixed variable cost structure and volume absorption and sort of the tapering off of the mobilization costs in the numerator while the denominator, the base of business is increasing.

What all of this suggests is that 35% should be about right. Now, I'll turn it to Andy if he wants to add to this.

Andy Becnel

Yes, Bill, so look, the seasonality we have to just give a little respect for first quarter. In Russia -- .

Bernard Duroc-Danner

North Sea, actually.

Andy Becnel

-- North Sea and the continued challenges in Australia, which most of that weather stuff has continued through January. So I think those will hamper the overall incremental margins that you see in Q1 but the way we see things is then that sets up for strong incrementals sequentially in each of Q2 through Q4.

Bernard Duroc-Danner

My comment, Bill, was actually a yearly comment. I wasn't trying to slice it in quarters but when the year is over -- now, a year is a long time. If the incrementals were -- in the eastern hemisphere were less than the 35% then I think the word disappointed would be right. It was a yearly comment.

Bill Herbert - Simmons & Company

Then, finally, to the riddle, now this Mexico, on the one hand you've got yourselves and Tenaris who are longstanding Mexican hands, if you will. You're actually more optimistic about the outlook for Mexico in 2011 than some of your more prominent peers. What's the disconnect here? Why do you feel better about Mexico and seemingly a number of other parties are much more discomfited of the outlook here?

Bernard Duroc-Danner

First of all, I think probaly one would say that Tenaris, which is thumbs up in De La Cruz, they're the most constructive, at least they have been. Maybe they'll change their minds. We sort of stand a little bit in the middle. We're not raging bulls. I use the word cautiously optimistic. That's first thing.

But then I'll stand by my words. [From this] a combination of things, Bill. One has to look at the basis from which we are sort of rebooting in Mexico. It's a very low basis. It's a little bit like looking at a US market over a year, 1.5 years ago, whenever we hit the low point and being sort of cautiously optimistic about the outlook when the price of hydrocarbons was materially higher. It's got a little bit of the same phenomenon.

So it stands to reason that it ought to be better. That's one. Two, there are specific circumstances. These circumstances I think that much of the budgetary let's call it adjustment that our client had to go through is just about finished. It's a matter of weeks. In other words, the constraints they're under is just about sponged up. In other words, they have gone through the belt tightening that was required by the congressional authorities.

They've got a budgetary turnaround. That's factor number two. Factor number three, there is genuinely, best I can tell, a great interest with our client in that country to reform, bring in some foreign interest in some contractual form, not necessarily the traditional ones, and that also is constructive.

So you throw the fact that we're coming -- well, then throw the fact that we're coming from a very low base, item two, so that you almost have to be better. Item two, the issues of overspending, the [plaguedom] is pretty much behind them. Item three, the intent is to do things a little bit maybe with more creativity.

The fact, lastly, that decline rates remain what they are whether you're looking at the southern basin or the northern basin, whether [inaudible] De La Cruz, whether you're looking at [Cantarel and KMZ] and the offshore and the deporter place, all of this the intent is definitely to be more active.

You put all of that together. Where do we end up? We end up being cautiously optimistic. So I think it's the right position to have.

Bill Herbert - Simmons & Company

Yes, you also failed to mention one thing, which is $90 oil. That also helps, too.

Bernard Duroc-Danner

It does. It does, of course. It does as a back drop. As a back drop it does, obviously. The volume pursue it even more critical.

Bill Herbert - Simmons & Company

But with regard to distilling this into top line, I think you guys peaked out Q4 '08 or '09 actually at about $416 million a quarter in terms of top line and then I think you were treading water at about $100 million a quarter in Q3. What do you think we should expect for '11, Andy, in terms of top line out of Mexico?

Andy Becnel

Cirque of $600 million. If it stays then I think the upside to that is maybe at $700 million but we'll see.


Your next question comes from the line of Brad Handler - Credit Suisse.

Brad Handler - Credit Suisse

Could you -- I guess I was trying to sort out from your commentary, so maybe I'll ask you to retrace a bit but could you update us on the status of several of those projects that I think we heard about in the last quarter call as well as being startup initiatives?

So I couldn't tell if there was some disappointment that some of those hadn't progressed more in the fourth quarter but there's not change in outlook as you're still optimistic that those translate to revenues very shortly. But if you could just hit on a couple and maybe, yes, gauge if some are moving more slowly than others or something.

Bernard Duroc-Danner

Yes, I'll probably -- what I will do, Brad, because this being a limited time call, I'll probably throw this on the largest one at the end of the day, not because it's necessarily the happiest story but it's the largest one. [So that's not escaping.] That would be Algeria.

As a reminder, in Algeria, after some delays because our client went through a reorganization, a number of different integrated project contracts were signed with four large companies. We were one of the four. Happily we had the largest commitments, which was five strings.

Our peers had four, three and two if I recall correctly. Now, of the five strings, four of the five have been in country. My goodness, they've been in country since Q3 and so you can understand the mobilization burden with the equipment and the people and everything else that it involves. It's not only rigs. It's everything else.

So it is the whole gamut of integration and it is destined for a gas field called [Bechine], which is a high-pressure, high-temperature field. So it has a lot of equipment. So all the equipment and the organization was there and we didn't have the ability to deploy a single one on well sites. Why? Let's just call it client delays and the like and these are that.

I will add it is not specific to Weatherford but it is the general situation. I will say that given the fact that we have the largest contract, having five and our peers having four, three and two, and due to the fact that we are the smaller of the four, we have the biggest contract with the smallest of the four. So you can understand it has the biggest effect on us.

We made some progress in Q4 but not in a commercial sense, in the sense that we didn't have anything deployed. We made some progress in working through all the organizational issues with our clients and now I think, Brad, I can give you a sense of progression.

I would say that by the end of the first quarter it is likely, it's not -- it is probable, it is likely, it is planned that four of the four or three of the four will be turning with the full equipment components also turning with it, the fifth one being in country also in Q1.

So put another way, I don't think we had any commercial booking of business progress in Q4. We had operational progress and I can now tell you with some degree of certainty, I hope, that by the end of Q1 we'll have three out of the four that are in country turning, probably four of the four. That gives you a sense of progression.

It's similar four things like that in the other projects, some better, some not so good but for the sake of saving time, given the fact that there's only one hour of time available, I'll leave it at Algeria. We can give you more offline.

Brad Handler

Maybe unrelated follow-up -- as it relates to some of your cost savings initiatives, maybe you can give us a broader update for targets for, I guess I'll call them sort of permanent cost savings as a function of your manufacturing initiatives and some of the personnel severance, the reallocation that's resulting in some of the asset write downs.

You know I think what I’m speaking to. You can update, Andy, maybe broadly on sort of how your targets have evolved and maybe how to think about that structurally for 2011 and beyond.

Andy Becnel

Yes, Brad, as we look at the operations, clearly we have made the decision to hold on to and maintain our cost structure in the international markets since the end of '08. We think right now that that looks like -- that that was a good thing to do as we look at the operating leverage within the company.

While we are always looking for ways to be more efficient -- and I’m talking here operations ex-supply chain -- we're not looking from that side of a cost cutting exercise. We're looking at how to deploy that and how to use it to grow more quickly and more efficiently. So the absorption affects there.

On the supply chain side one of the things that have hampered the financial performance throughout '09 and '10 was under-absorption on the manufacturing side. These swings is to give you a sense of it in high-volume times -- think back to '07, '08 when those are positive variances, meaning contributing to and you're over-absorbed on your costs.

It has a meaningful boost and improvement to a significant portion of your business. We've had the opposite effect in terms of under-absorption and it has been material. So I think that what you will see there in the absorption and the contribution to margins is a meaningful source of supporting our 35% incrementals as we look through '11.

Brad Handler

I understand. But if I may just try again, I thought there was an initiative announced a few quarters ago that related to where manufacturing locations would be placed and how to sort of -- I guess it is how to manage the supply chain. There were some back office initiatives as well. That's sort of where my question was more directed. I don't know. There were some targets I think even at that time. I didn't know if there was an update on that.

Bernard Duroc-Danner

Brad is right. I think it's got embedded in there, the overall supply chain initiative. The other way to express it when it comes to the supply chain, Brad, is that on average we have run in 2010 -- my numbers are going to -- they may not be accurate but they're close -- somewhere between $50 million to $75 million of unfavorable absorption numbers, so $50 million to $75 million, I can't remember, somewhere in between for the whole year.

We run a lot of manufacturing. I think the -- in the course of the year, 2010, we've closed out some facilities. We've moved from assets, which is not healthy absorption phenomenon either, not so much the actual closure but just the work involved in moving things around is not one that is particularly helpful when trying to optimize.

The through process in 2011 -- I think it's reasonable -- is that at a minimum we absorbed completely, meaning there is no unfavorable absorption. Part of it has to do with volume but part of it has to do with the productivity of the supply chain.

Then the thought for the following year is that the over-absorption swings to produce as much as we under-absorbed, meaning that in 2012 we'd be looking at a 50% to 75% over-absorbed number. So we're 50% to 75% under-absorbed in 2010. We're expecting to be either over or under-absorbed in 2011 and we're planning to be over-absorbed by $50 million, $75 million in 2012.

These are simplistic numbers. I'm probably off to a degree but I give you some sense of metrics so it might be helpful.


Your next question comes from the line of Kurt Hallead - RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

Bernard and Andy and as you map out 2011 and get a peak out into 2012, obviously there's always going to be situations that are unforeseen and kind of throw a wrench in the plan. How have you guys risk assessed your outlook for 2011?

If you could walk through varying regions, where do you think there is some risk to your outlook and where do you think there is some greater opportunity than where you're currently looking for? Maybe we can start with Latin America and then specifically go talk about Russia and finish up with Iraq, if you may.

Bernard Duroc-Danner

I'd say, actually, that Latin America and Russia are probably the ones that are the least likely to surprise or disappoint. You'll say how do I know there won't be some catastrophic events? No, I don't know that, neither does anyone else.

But based on contractual information, meaning contracts that we have in hand and are executing, whether in Brazil, in Argentina, in Peru, in Columbia, the modest turn in Mexico, then you turn to Russia, which is a contractual commitment -- in my prepared comments I tried to convey that what we see as being constructive is both the production phase, the development drilling phase and the exploration phase in Russia.

I see those two markets as being about as reliable as anything you can have in my industry. I would add, also, the North Sea, now, as another market which looks also sufficiently broad based and solid in that look that it would take an actual catastrophe, like we have in Australia, to change the outlook in 2011.

Probably the outlook in those markets and our own position there is a little better than we presented to give us some measure of cushion for the other ones where I am more cautious. I'm obviously more cautious than [Melise], as one of your peers pointed out a few questions ago.

Why? Because some of the markets that are moving in the Middle East, be it Algeria or be it Iraq, are markets which are giant markets, particularly Iraq. But they're not markets where either security is something one can easily get comfortable with and/or where the development is highly predictable.

I would add that the other markets, such as Saudi Arabia and Abu Dhabi and so forth, are more subdued in outlooks probably as a reflection of the fact that markets like Iraq and Algeria are so stout.

So in those markets you have to treated with the respect they deserve because they're giant markets. At the same time, one has to cautious simply because of the operating challenge.

So I would say the Middle East in general, which will have ultimately a very large impact, not only on the industry but on Weatherford also, always has historically -- sort of our areas of great strength -- is a market that one ought to look at carefully in 2011 simply because the countries that are moving it are not -- they're not [current]. [They're known in a] situation to be terribly predictable.

That sort of sums up my views.

Kurt Hallead - RBC Capital Markets

The pricing improvement you referenced in Russia, my general understanding, that's all been agreed to as per the end of November, so that's pretty much locked and ready to go?

Bernard Duroc-Danner

Yes, it is.

Kurt Hallead - RBC Capital Markets

Then from a product line standpoint, once again focusing specifically in Russia, what product lines had the best upside in pricing going in 2011?

Bernard Duroc-Danner

For competitive reasons I wouldn't want to tell you this, Kurt. I'd rather have that commentary offline, if you don't mind.


Your next question comes from the line of Angie Sedita - UBS.

Angie Sedita - UBS

You have a pretty impressive moving of CapEx in 2011 over 2010, up 40%. Can you give us some color there on what regions that CapEx will go to, product lines, et cetera?

Bernard Duroc-Danner

It's international really overwhelmingly. It's going to be -- no surprises there. It's going to be disproportionately places like Latin America, Russia and I would say the Middle East. I've just finished saying I’m cautious on the Middle East.

If you look at the CapEx commitments you see a little bit of a different view. It simply means that we're just being careful not to overpromise, overcommit in the part of the world where it can be sometimes low. But the capital investment does reflect a commitment to the Middle East above and beyond what we did in 2010 -- Latin America, Russia, Middle East.


Bernard Duroc-Danner

It's not really drilling. It was traditionally only drilling but actually it is very broad with some significant capital investments also on the intervention and production side of the business.

Angie Sedita - UBS

Then pretty impressive move in revenues in Latin America and you mentioned some contract awards in both Brazil and Columbia. Could you give us some color there and expectations for potentially additional awards and when would you expect to hit your run rate on those contracts that have already been awarded?

Bernard Duroc-Danner

On the last question, I think by mid-year we'll be at our run rate, meaning, let's say, the end of Q2. It's simplistic of an answer but it's close enough on Brazil and Columbia.

In Brazil it's very broad based. It goes from your traditional drilling product lines, such as liner hangars [into] the running services and directional all the way to the production site. I think I mentioned at another time that -- just a few weeks ago I commissioned a brand new artificial manufacturing facility just outside of Rio De Janeiro, very large and brand new and that facility is entirely booked up.

Not only the Brazilian business but a big chunk of it is the Brazilian market. That's [because it exists]. It is a rather large facility. So it is very broad based in case of Brazil. It is, of course, offshore. There is some land market or some business a [kilometer] offshore.

With respect to Columbia, Columbia is far more drilling in terms of exposure. It is your traditional integrated projects with strings together with all the other products and service lines all the way through the completion and stimulation phases in that market. So that's -- those are the differences between the two markets.

There will be further -- well, we hope there will be further contractual commitments in both markets but those commitments would basically impact the second half of this year as the existing contractual commitments are the ones building up volume the first half of this year.

Angie Sedita - UBS

Then, finally, on Iraq, similar kind of commentary; your pace of revenue growth in 2011 when you would expect to hit your run rate based on current awards. Also, any color on margin expectations as we go through the year and are you seeing any additional awards specifically in discrete sales, et cetera?

Bernard Duroc-Danner

We are. We're seeing a lot of direct awards and direct sales. There are the contracts that make the news and there are the rest. So we're getting a lot of direct awards both in the south and in the north.

We are going to move from the eight to nine strings that we are right now to about a 12-string level in the course of this year. I would say that we probably will reach the first level having all the contracts that we presently have executed on will reach that first level of maturity sometime in I would say late Q2, early Q3.

In Iraq there will be further contracts given out I suspect simply because this is a market which is moving very rapidly. In fact, the market is moving at times faster than the operating infrastructure would allow it to move. It's a very, very fast unfolding situation.

Margins in Iraq, Angie, for us are really quite good. I just said the mobilization expenses aside but you can isolate that quite well to be honest with yourself. When you look at the overall business, the margins are really quite good.

Once mobilization expenses are fully absorbed, which in our case they will be certainly by Q2, by the end of Q2, I think you'll find that Iraq is a good market understanding, also, that we've been very careful in the contractual commitments that we have taken up.

There are many, many contractual commitments available in Iraq, not necessarily that you can pick and choose. No, it's very competitive. But there are battles you may wish to fight and battles you may not wish to fight. So we've been very careful.

Remember, Angie, we've been the first ones back in Iraq back in 2006. So this is a market and operation that we tend to know reasonably well.

Angie Sedita - UBS

Then the discrete sales, are you seeing that with the NOCs or are you seeing it with the IOCs as far as additional awards.

Bernard Duroc-Danner

Really IOCs predominantly, although some of the IOCs in Iraq are NOCs, INOCs, too many acronyms. Remember, some of the players are not the IOCs that you typically know. Some of the players would be NOCs that are right in their home countries but they're playing there in the international arena. But these are the types of clients that are providing discrete sales. This is not really [SOC, MOC] or subsidiaries of the national Iraqi Oil Company. It is not.


Your next question comes from the line of Marshall Adkins - Raymond James.

Marshall Adkins - Raymond James

Andy, could you walk me through in a little more detail the inventory write offs? What products were they in and kind of give us a little more detail on the regions?

Andy Becnel

Yes, so as Bernard mentioned, of the $50 million of asset write offs were $0.05. About $30 million of that fell in the east. A tiny piece fell in Latin America and the balance are about -- a bit less than $20 million fell into North America.

Where we see this is -- well, just think easily about what product lines of ours carry inventory, the product based businesses, artificial lift, completions and a component of well construction.

Marshall Adkins - Raymond James

So if we had a breakdown, mainly artificial lift, does that make sense?

Andy Becnel

No, more in completion and well construction.

Bernard Duroc-Danner

Artificial lift would not have been more than 20%, 25%, about 20%, 25% on it.

Marshall Adkins - Raymond James

Along those lines, a lot of your competitors that sell products have extreme seasonality and they're all looking for a down quarter next quarter. It seems to me like you're not looking for as big of a seasonal impact maybe as your peers. Is that a fair assumption? I guess, should we be looking for a significant downturn in Q1 due to seasonality in the product sales.

Andy Becnel

Nothing beyond what's already covered in our guidance but I'd remind you that we don't have a lot of -- software sales are not large component at year-end for us like they might be for some of our peers.

Bernard Duroc-Danner

I would say one thing, Marshall, which is not seasonal per se, but it's climactic. Australia was what it was. Australia will continue to be equally bad for us in Q1. So that's that. Australia obviously will dry up just as soon as it stops raining and that market will turn. That will be probably the only thing in Q1 that will be sort of similar to Q4.

Marshall Adkins - Raymond James

Was that full Q4? Didn't it kind of hit in December.

Bernard Duroc-Danner

It hit really late November and in December. It did. So the impact was a little -- I call it $0.01. It was a little under $0.01. I expect it in Q1 it will be a little above $0.01. These are -- Marshall, they are too fine of a distinction to be worthy of your time.

It is true as I mentioned in my comments, Australia is our largest geographic market just before China and Asia Pacific and we're very big in CBM play. [Inaudible], it shouldn't be a surprise to anyone simply because we tend to be very large in all land unconventional, not of heavy oil, of course, CBM and shale. This is true around the world. This is one of our specialties, land unconventional. So this is normal that [inaudible] is one of our places. Having said this, it will not go on forever. The rains will subside and so forth.


Your next question comes from the line of Stephen Gengaro -- Jefferies.

Stephen Gengaro - Jefferies

Sort of following up on the prior question, when we sort of look at the first quarter numbers that you provided, how would you sort of walk through the pluses and minuses? I imagine North America is a positive but can you sort of put a little more detail around that?

Andy Becnel

Yes, I don't want to get too specific on each of those pieces, Stephen, but look, North America, on Canadian seasonality up and also sequential improvement in the United States. We expect an improvement at the operating income line in terms of the dollars there in Latin America.

In the east I think that the things you have going against you, again, are China/Australia, which Bernard just spoke about, North Sea, Norway, in particular, and Russia.

Bernard Duroc-Danner


Andy Becnel

Seasonality only. So the question is can the remaining operations make up for that, again, without the inventory write offs? Yes, we think they can but I think that a good effort at the operating income line in the eastern hemisphere from Q4 to Q1 is flat to slightly up.

Stephen Gengaro - Jefferies

Then just the other question I would ask as it pertains to the North America markets and maybe the world, too, but particularly North America, are there any product lines or anything that you'd like to add? Are there any things out there that kind of excite you at this point from a sort of product line perspective that maybe Weatherford doesn't have right now?

Bernard Duroc-Danner

We wouldn't want to add any product lines, Stephen, particularly. The only one that is glaring by its absence is bits and, in all due respect, in a prior life I was responsible at the end of the day for bit [inaudible] which ended up a national oil well today.

It is not something that we view as necessary. Let me be very direct in my answer. So I think we do not have any particular interest in any new product lines. We always have interest in deepening what we have in our existing product lines. That's a different story. But I don't see the need to add product lines.

We're happy with the breadth we have which absent of bits and also [inaudible] is about as broad as anyone could possible want. So I'd rather do what we do better and deepen also our exposure to the product lines that we presently have organically or there are some acquisitions, of course. We're very content with that.

One last question because there is another call after us. One last question, Operator, please.


Your next question comes from the line of Robin Shoemaker - Citigroup.

Robin Shoemaker - Citigroup

I wanted to ask you -- we're hearing a lot in the US the laterals are getting longer, more frac stages per well, more oil, less gas. I wanted to ask how Weatherford, specifically, in terms of new incubating technologies or recently launched technologies, captures that trend in the market given your small footprint in pressure pumping.

I noticed a recent article in one of your publications about the application of rotary-steerable in the shale play. Could you update us on that?

Bernard Duroc-Danner

Too long of an answer would be deserved. I would say first of all that it is true. We have a smaller footprint in stimulation, materially smaller. It is also true that by luck or by craft we've deployed that footprint entirely, not only on shales. There is nothing in dry gas but also on wet gas or gas with condensate plays. We have almost exclusive presence there, nowhere else. There is just one.

Second, yes, we have the full complement of product line as applicable to the shales and to the long laterals and so forth from the directional to micro seismic. In a different setting I would argue we probably have the industry's best and I will refrain from saying that now because it is not the place or the time.

But there are some developments on and around directional that would be particularly useful for those plays. I'm grateful for the question, Robin, but, again, for competitive reasons I'd rather not discuss it in a public setting.

Robin Shoemaker - Citigroup

Look at the international shale plays. You mentioned your Australian business but we keep hearing about other shale, either shale plays, tight sands, coal bed. Where are you most optimistic that the international market will develop into a meaningful opportunity for -- .

Bernard Duroc-Danner

Let me just -- I think it's a very important thing and so far it's gotten the attention of IOCs. I think second there will be a lot of geophysical poking around, if there is a proper term, of shale around the world by the same IOCs.

I think what will result from the poking around will probably be encouraging. But I do think that the next issue is the political issue of how you put up with the infrastructure acquired for shale development. Quantity is not only a province in [Siam]. Quantity is a water and the enormous footprint that is implied.

So net-net, when you put everything together -- and, Robin, this is, again, a question deserving much more time -- I would look at Asia as more potential for development in shale rather than Central Europe in near term. I'm not suggesting Central Europe won't happen, no, no. I think it will. I just think that the infrastructure implications will be such that it'll take quite a bit longer.

Having been myself in European extraction, I have a sense of how difficult sometimes things can be in those particular markets. So I think shale is terribly important internationally, absolutely. Lots and lots of work being done on the coring side, if you will, on and around both sides.

I think that at the end of the day it becomes something important for all of us. I would look at Asia probably as a place which will have the first meaningful impact on Iran international shale.

Thank you, Robin, and thank you, everyone, for listening and I will turn down the conference call. Thank you. Bye-bye.


Ladies and gentlemen, this concludes today's conference call. Thank you all for participating and you may now disconnect.

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