Weatherford International Plc (WFT) Q4 2016 Results - Earnings Call Transcript

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Weatherford International Plc (NYSE:WFT) Q4 2016 Earnings Call February 2, 2017 8:30 AM ET

Executives

Karen David-Green - Weatherford International Plc

Krishna Shivram - Weatherford International Plc

Christoph Bausch - Weatherford International Plc

Analysts

James Wicklund - Credit Suisse Securities (NYSE:USA) LLC

William A. Herbert - Simmons & Company International

Ole H. Slorer - Morgan Stanley & Co. LLC

Angie M. Sedita - UBS Securities LLC

Marc Bianchi - Cowen & Co. LLC

Ken Sill - SunTrust Robinson Humphrey, Inc.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.

Operator

Good morning. My name is Kim and I'll be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International fourth quarter 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

As a reminder, ladies and gentlemen, today's call is being recorded. Thank you. I would now like to turn the conference over to Karen David-Green, Vice President-Investor Relations and Marketing and Communications. You may begin your conference.

Karen David-Green - Weatherford International Plc

Thank you, Kimberly. Good morning and welcome to the Weatherford International fourth quarter conference call. With me on today's call we have Krishna Shivram, Chief Executive Officer and Christoph Bausch, Executive Vice President and Chief Financial Officer. Today's call is being webcast and a replay will be available on Weatherford's website for ten days. Before we begin with our opening comments, I'd like to remind our audience that some of today's comments may include forward-looking statements and non-GAAP financial measures. These matters may involve risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

Please refer to our Form 10-K for the period ended December 31, 2015; Form 10-Q for the quarter ended September 30th, 2016; and recent current reports on Form 8-K for risk factors and the customary caution on forward-looking statements. A reconciliation of GAAP to non-GAAP financial measures is included in our fourth quarter press release, which can be found on our website. We welcome your questions after the prepared comments. And now, I'd like to hand over the call to Krishna.

Krishna Shivram - Weatherford International Plc

Thank you, Karen. Ladies and gentlemen, Weatherford is back. We have a new team, a fresh outlook, a new strategy which I will describe later, and a high level of energy within the company, not seen in recent years. We have just been through the most brutal down cycle in our industry's history, and we have not only survived, we have transformed the company internally and positioned it well for the multiyear upcycle that is just about beginning.

Let me start by reflecting on several of our 2016 achievements. During the past year, we reduced costs by an annualized $601 million, exceeding the targets we set for ourselves at the beginning of the year. Our support ratio was rationalized down to 35% at year end, which signifies a much leaner fixed cost support structure, setting us up for strong incrementals.

In addition, we upgraded our leadership team and now we have a talented, experienced group that can run seamless global operations, combined with strong regional customer relationships. We also successfully termed out our debt maturities to 2019 and beyond. This financial runway, including covenant management, is now clear for the next few years. And we did all of this with the best safety record in the company's history and a 24% reduction in non-productive time in our core businesses. We are proud of these achievements and I would like to thank our investors, employees and our customers for their unwavering support during this difficult period.

During the fourth quarter, we launched a final cost reduction initiative named Project 300 to target an additional $300 million of annualized cost savings before we get into the upcycle. In addition, we appointed a new CFO, a new President of Regions, and a new Head of Quality and HSC, reporting directly to me. Employee and customer communications and engagements have been significantly stepped up, and these are already paying dividends.

Overall, I'm pleased with our fourth quarter results. Revenue grew by 4% sequentially, with operating income incrementals of 68%, easily exceeding our targeted 50%. North America revenue grew 8%, and would have grown 17% had we continued our pressure pumping work for the full quarter.

The incrementals in North America were 104%, as we took costs out right through the quarter. Internationally, revenue grew by 2%, while operating margins improved slightly, reflecting stronger than expected year-end product sales, increased market share driven activity in the Middle East and North Africa, partly offset by seasonal winter slowdowns in the North Sea and Russia, combined with lower activity levels across Latin America.

First quarter revenue will be impacted by $70 million, as we suspended our U.S. pressure pumping activity, and a further $40 million as product sales returned to normal levels, coupled with continuing seasonal weakness across the North Sea and Russia. On the positive side, we will see a seasonally stronger Canada, increased service revenues in the Middle East/North Africa region, and higher rigs revenue with the start-up of the operations of three additional contracted rigs in Algeria. Operating income will be helped by the absence of the U.S. pressure pumping losses and cost savings from the Project 300.

In 2017, absent the U.S. pressure pumping business, we expect strong growth in North America, driven by completions, artificial lift, managed pressure drilling, and drilling services, with pricing power improving right through the year as supplies tighten. Internationally for Weatherford, we expect to see growth in the Middle East/North Africa region as we work ourselves into the market share we gained in the second half of 2016.

Barring the resurgent Colombia, Latin America will remain subdued for the rest of this year and is therefore a cost reduction play for us. Europe will be stable overall, while Russia will grow. The deepwater markets in Sub-Sahara Africa and Asia Pacific have bottomed, but we do not foresee any dramatic growth. So again, the focus here is on cost reduction. Overall, while international pricing is under pressure as several operators have locked in current pricing for long-term contracts, in the case of Weatherford specifically, revenue growth should result in improved margins and with incrementals of 50% or better, as fixed costs are recovered much more efficiently.

I would like now to set out Weatherford's strategic goals and directions. We have developed a strategy with four pillars. Firstly, we will reduce our net debt to below $3 billion over the next four years. Secondly, we will position ourselves as specialists in well construction and production optimization. Thirdly, we will work to create new sales channels and pursue external integration opportunities with partners. And lastly, we will get back to basics in the way we work.

Let me start by describing these to you one by one, starting with our debt reduction objective. Our net debt at the end of last year was $6.5 billion. There are two equity-linked structural reductions that will occur over time. Firstly, we issued share warrants to an investor last November granting the investor the right to purchase up to 84.5 million shares at a strike price of $6.43. With the recovering industry conditions, steadier oil prices, increase in E&P spending, increasing activity and more gradually pricing, we believe these warrants will be in the money in 2017, and will likely be exercised, giving us an additional equity injection of $543 million.

Next, we expect the convertible debt issued in June 2016 to convert into equity in 2021. The conversion price is $7.74, which should be reached in this intervening timeframe. As stated previously, we will issue equity shares against this convertible debt in 2021, and reduce our debt by $1.3 billion.

The next element in our debt reduction journey is the monetization of our U.S. pressure pumping business. As you know, we suspended our U.S. land pressure pumping operations in the fourth quarter, idling the last of our nine working crews on December 30. This was done primarily to reduce the steep book and cash losses we were incurring due to sub-economic pricing levels. Already, we're seeing signs of improved pricing of roughly 25% on average, versus December levels. There is considerable optimism, particularly in the equity capital markets, recently evidenced by the successful IPOs of pressure pumping companies, ascribing valuations of up to $2,000 per horsepower.

Based on these factors, we have decided to pursue a disposition strategy rather than re-enter the frac market on U.S. land. We intend to consolidate our U.S. pressure pumping business with another industry player to create scale in the market and jointly reap combination synergies with cost and supply chain savings. Alternatively, we will also pursue an outright sales strategy if we receive a reasonable offer. We expect to fully monetize the disposition of this business during the 2017 and 2018 timeframe.

Today, we have 1.04 million horsepower in the United States, comprising roughly 20 operating fleets. Nine of these fleets are ready to go back to work with zero CapEx, as they were demobilized just over a month ago. One additional fleet is hot stacked. The remaining ten fleets are cold stacked and require between $5 million and $7 million of CapEx per fleet to reactivate them. In other words, we have a strong, well-maintained fleet. In addition, we have an operating team that is conversant with the business, three service centers, transloading capacity of 58,000 tons, 750 railcars, and a long-term sand supply contract at fixed prices in what is becoming a rapidly tightening market. In summary, this is a complete and valuable business and should attract several interested parties.

We also expect to divest the land rigs business when utilization levels improve across 2017 and 2018 and we're able to improve the business' EBITDA, and consequently, valuation. Today we have 110 rigs in our fleet. In 2017, we plan to upgrade 90% of our active fleet with our state-of-the-art TRS and MPD kits, including a software upgrade to make these rigs much more value added to customers, just as we are doing with Nabors' rigs on U.S. land. All of these rigs that are targeted for an upgrade are located across the Middle East/North Africa region. We expect these upgraded rigs will gain market share and better pricing in 2017 and into 2018, allowing us to materially improve the financial performance of the rigs business.

Additionally, we will push for closer integration with our other product lines to be more competitive on integrated services. With these steps, we expect to improve the performance of the rigs business so that we could monetize this business in the back half of 2018. In total, we expect to monetize these two businesses for between $1.5 billion to $2 billion. These numbers could be conservative, depending on market conditions at the time of disposition.

When you adjust for all of these items I set out above, our pro forma net debt reduces from $6.5 billion at the end of 2016, down to a range of $2.7 billion to $3.2 billion at the end of 2021. We believe this debt reduction journey, as I've explained it, is eminently achievable and it is the single highest priority of the company, to reduce net debt below $3 billion by 2021.

We cannot conclude the discussion on debt reduction without discussing free cash flow. Free cash flow from operations will continue improving with the recovery in the business cycle. CapEx in 2017 and 2018 will remain tightly controlled as we improve asset utilization and mop up the enormous amount of excess equipment and manufacturing capacity we have on hand. In the medium to longer term, we expect our overall CapEx to run in the 5% to 6% of revenue range annually, after 2018.

We continue to be long on inventory, and we expect to continue liquidating inventory into 2017, as activity levels pick up. Starting in the second half of 2017, working capital will begin to consume cash at approximately $0.15 to $0.20 on every dollar of incremental revenue. Offsetting this, we expect to generate better earnings and EBITDA. Other items that have bled the cash flow in recent years will have disappeared after 2017, such as the SEC fine payment and severance costs for the several rounds of head count reduction.

We have demonstrated discipline on capital spending and working capital management; however, the key to sustainable free cash flow going forward is improved profitability. With increased activity levels and gradually improving pricing and also enjoying the full benefit of the cost reduction actions taken over the last two years, without the cash drag of paying for it, will put us in a much better position to improve profitability and sustainable free cash flow.

The second pillar of our strategic direction is to reposition Weatherford appropriately. Instead of trying to be a one-stop shop for everything from greenfield exploration to well abandonment, we need to recognize and focus on the sweet spots of Weatherford. Weatherford plays largely in the production arena rather than exploration, and is more well-centric rather than reservoir-centric. Our focus is to become the best well construction and production optimization company. We define well construction as including planning, designing, and drilling a well, ensuring its integrity and completing it. In Weatherford, this is represented by our drilling services, well integrity, well construction, and completions product lines. In this portfolio, Weatherford has unique value adding technology such as managed pressure drilling, or MPD, tubular running services, or TRS, and today we're global leaders in well construction projects and fishing and remedial services.

In directional drilling, our capabilities in smaller hole sections are unmatched, while our LWD measurements are best in class. Our high pressure, high temperature capabilities in DD/LWD/MWD are industry leading. In the completions realm, we have well built out portfolio products for both land and offshore applications.

You will notice that I did not mention frac anywhere. While hydraulic fracturing is an essential part of well construction and we've retained the full capability internationally, we believe the frac market in the U.S. is commoditized and best left to expert practitioners of that business. To synthesize, we believe we can plan, drill, case, secure, and complete a well or, in summary, construct a world-class well for our customers better than anybody else.

Secondly, we're leaders in the production arena. Our wireline suite is unique for field development and case toll work. Our Reservoir Solutions group is concentrating more and more on production optimization. And with our wide range of artificial lift technologies, we're ideally positioned to optimize the production across the life cycle of a well or a field. We believe the next five years belongs to the land development arena and Weatherford is uniquely positioned to benefit from both of these trends with our land and development. This also means that capital intensive product lines, such as U.S. pressure pumping and land rigs, will be disposed and monetized, making Weatherford an asset light company with improved returns.

The third pillar of our strategic direction is to open new sales or service channels to the market and pursue what we are calling external integration opportunities. We believe the entire industry should gear itself for a medium for longer oil price environment. This means that for the foreseeable future, we should expect oil prices to oscillate within the $50 to $70 per barrel band, as the U.S. becomes a swing producer and provides both bookends to this pricing arrange.

For the industry to survive, everyone in a value chain has to make an acceptable economic return, starting with the operator, the drilling contractors, the service companies, and the equipment manufacturers. The only way to do this is to lower the cost of producing a barrel of oil to the point where everyone makes a decent return within this oil price band. Today, that is certainly not the case. The only way forward is a step change in automation, mechanization, and digitization. In all my meetings with customers, this theme is often repeated. While integration is the way forward, the old monolithic style of heavy R&D spend, developing me-too technologies and competing on price is not entirely valid anymore.

While technology development remains key for the future of the industry, what I call external integration is emerging as a theme with regularity in our customer conversations. Weatherford will engage actively with other companies to collaborate on the themes of automation, mechanization, and digitization to develop value added processes and technologies that will reduce friction costs while drilling a well, reduce personnel on site through automation, while creating a safer environment and work on predictive maintenance programs that can make the production cycle super efficient. These partnerships or alliances would benefit all participants as their access to the markets gets enhanced and customers will undoubtedly benefit from lowering their overall drilling and production costs meaningfully.

Today, Weatherford is in active discussions on many such collaborations. The agreement with Nabors that was announced yesterday is a good example. Firstly, this arrangement provides a compelling proposition to operators on U.S. land to reduce costs by automating a significant part of the drilling operations, and delivering wells efficiently. Secondly, for Nabors, their rigs become much more attractive in a highly competitive but growing market, while for Weatherford, we open a significant new sales channel for our technologies and services to fuel our growth on U.S. land in our core businesses. This growth we expect will offset the loss of revenue from exiting the pressure pumping business. This is a key strategic direction for Weatherford, and we call it external integration.

The last pillar of our strategy is rebooting Weatherford with a back-to-basics agenda. Our key focus areas for operations are customer engagement, flawless execution based on excellent service quality and safety, talent identification and management, with a specific focus on field operating managers and country level product line managers, the rollout of the NextGen Weatherford engineers program, continuous cost improvement, and finally, enforcing a culture of accountability throughout the company. These are all reflected in our 2017 objectives, which were rolled out to the 2700 managers from country product line level upwards to myself on January 3 of this year. The entire organization has already spent the last 30 days working on achieving these objectives. We are wasting no time. Our day-to-day actions back these themes and is generating a new sense of purpose within the company.

With that, I will now turn the call over to Christoph.

Christoph Bausch - Weatherford International Plc

Thank you, Krishna, and good morning, everyone. Fourth quarter revenue increased by 4% sequentially as a result of increased activity in North America, year-end product sales and market share gains in Middle East and Asia. This was partly offset by lower activity in offshore markets such as West Africa, Brazil and the Gulf of Mexico, as well as continued pricing pressure in international markets.

Segment operating loss before R&D, corporate expenses and charges and credits improved by $35 million, with sequential operating income margins improving by 273 basis points to negative 5.4%. Incrementals were strong at 68% and 73%, excluding rigs. Excluding charges and credits, loss per share for the quarter was $0.32. During the fourth quarter, we recorded $246 million of charges and credits, net of tax. This included charges for an additional workforce reduction, the shutdown of our pressure pumping business in the U.S., litigation costs, as well as closure and impairment costs, as we continued to rationalize manufacturing and operational facilities.

In addition, we took a charge of $10 million relating to the devaluation of the Egyptian pound and a $16 million credit related to the fair value adjustment of our outstanding warrants.

North America revenue increased 8% sequentially, and operating income margins improved by 938 basis points, but remain negative at 11.9%. The decision to close our pressure pumping operations negatively impacted our revenue in North America, which would have grown 17%, had we continued our pressure pumping work for the full quarter. Both the U.S. and Canada grew strongly on land, while offshore Gulf of Mexico weakened. The incrementals in North America were 104%, as we continued to reduce cost throughout the fourth quarter. The operating loss in North America of $58 million includes a loss of $29 million related to the pressure pumping business and would have been worse by approximately another $20 million had we continued this business through the quarter.

Outside of pressure pumping, improved utilization and pricing in our well construction and drilling services businesses, combined with higher completions activity and reduced facility cost, supported this sequential improvement. Internationally, our revenue improved 2%. Latin America revenue decreased by 2%, principally coming from lower activity levels in Venezuela, Mexico, and Brazil. This reduction was partly offset by higher revenue in Colombia, benefiting from an increased rig count. As a result of the reduced revenue, as well as an unfavorable mix, operating income margins declined by 281 basis points, resulting in fourth quarter operating income margins of 2.3%.

In the Europe/Caspian/Russia/Sub-Saharan Africa region, revenue declined 5% sequentially, as offshore activity continued to decline in West Africa. Our operations in Europe and Russia were negatively impacted by the usual seasonal decline, partially offset by increased revenue in the Caspian. As a consequence, operating income margins deteriorated by 306 basis points, despite strong cost control measures.

In the Middle East, North Africa, Asia-Pacific region, revenue increased by 10%, reflecting product sales combined with increased revenue from start-up of new contracts, partly offset by continued pricing pressure. Operating income margins improved by 454 basis points with reasonable incrementals of 46%, as mobilization expenses and pricing pressure partly offset margin improvements resulting from increased sales. Revenue for our land rig business declined 4% with overall lower rig utilization, higher downtime, and delays of the start-up in Algeria.

On the cost side, we initiated a further head count reduction plan totaling 3,000 employees. In addition to a general streamlining of our support call structure, it includes pulling back our pressure pumping operations in the U.S., closing additional uneconomical field locations, removing regional structures in the two largely deepwater dependent regions, namely Asia-Pacific and Sub-Sahara Africa, and combining them with the Middle East and Europe regions respectively, and further rationalizing our manufacturing footprint. These actions are expected to generate additional annualized cost savings of about 300 million. At the time of this call, we have already reduced 2,000 employees out of the 3,000 mentioned before. And most of the other cost reductions have been put in motion.

During the fourth quarter, we ceased operation in an additional five manufacturing facilities, bringing the 2016 total to 15. As part of the incremental savings mentioned above, we expect to close another four manufacturing facilities in the first half of 2017, which allows us to strategically consolidate our manufacturing footprint with presence in each of our operating regions while retaining additional capacity to address the expected growth.

R&D costs went up by $7 million sequentially to $40 million in the fourth quarter, reflecting increased commitments to develop new product and service offerings. Corporate costs increased by $2 million, following exceptionally low costs during the third quarter. The current levels for both R&D and corporate costs can be considered as run rate for 2017.

The tax charge recorded in the fourth quarter of $6 million represents mainly cash taxes of $21 million paid internationally, predominantly in deemed profit countries where taxes are levied on revenue without regard for income levels. These cash taxes were partly offset by release of provisions related to expected withholding taxes in a variety of countries, which did not materialize. As mentioned last quarter, we will not be able to benefit from accumulated tax losses in the U.S. and in some other jurisdictions in the short term, until we reach a level of sustained profitability. This means that the tax rate for future periods will largely reflect the cash taxes paid internationally. Our current estimate is a quarterly charge of approximately $40 million, dependent on the geographical mix of revenue and earnings.

Free cash flow in the fourth quarter was $171 million. Included in the fourth quarter cash flow were capital expenditures of $68 million, $105 million of debt interest payments, and $39 million of cash severance and restructuring costs. Working capital generated $263 million of cash, principally from a reduction in inventory balances, a reduction in DSO by five days to 90 days, as well as extended payment terms with suppliers. Although we reduced our DSO at year end to 90 days, this is still materially higher than the DSO at previous year ends, which have ranged between 74 days and 81 days.

I want to take this opportunity and thank our team for their relentless efforts to improve our working capital and I'm sure we will continue to see improvements over the year 2017.

As we are benefiting from a robust infrastructure and surplus equipment in most of our product lines around the world, we expect total capital expenditures in 2017 at around $250 million, depending on activity levels, as well as market opportunities. This excludes the buyout of operating leases in our US pressure pumping business, amounting to $240 million, which we finalized in January 2017. This buyout will not only increase our EBITDA in 2017, but it will also give us increased flexibility for our plans for this business going forward.

Net debt of $6.5 billion decreased by $507 million during the fourth quarter, reflecting the proceeds from the equity issued during the quarter, as well as the improved working capital, partly offset by the net loss. During the quarter, we deployed a small portion of our available cash to pay down an additional $50 million of our term loan. At the end of the quarter, we're compliant with all covenants on all of our financing facilities, and we expect to remain compliant going forward. To be specific, our calculations at the end of the year were 1.6 for specified debt, divided by specified EBITDA, versus the covenant of three. 3.0 for specified debt plus LCs divided by the specified EBITDA, versus the covenant of 4. Asset cover of 22 versus a minimum covenant of 4. As of December 31, we had $1 billion in cash and an undrawn revolver facility of $1.3 billion.

As the new CFO of Weatherford, my top priorities are: debt reduction, free cash flow generation, improving profitability, disciplined capital allocation, and improved predictability going forward. And now, I'll turn the call over back to Krishna. Krishna?

Krishna Shivram - Weatherford International Plc

Thank you, Christoph. I would like to close out our prepared comments by repeating the four pillars of the strategy for Weatherford. Number one, we will reduce the net debt to less than $3 billion by 2021. Number two, we will position Weatherford as the best well construction and production optimization company in the world. Number three, we will open new sales channels and pursue external integration opportunities with partners to enable automation mechanization and digitization. Number four, we will run Weatherford's operations with a strong back-to-basics approach revolving around customer engagement, flawless execution, talent management, cost control, and fostering a culture of accountability.

We believe that with this strategy, Weatherford will reinvent itself and thrive. You will see a new revitalized Weatherford with disciplined growth and improved returns, with no surprises and better predictability. Being predictable is usually boring, but for Weatherford, being predictable and boring is a damn good thing. Thank you and now we will open it up for Q&A.

Question-and-Answer Session

Operator

And your first question comes from the line of Jim Wicklund with Credit Suisse. Your line is open.

James Wicklund - Credit Suisse Securities (USA) LLC

Good morning, guys and, Krishna, I agree, it is a damn good thing.

Krishna Shivram - Weatherford International Plc

Thank you, Jim. Good morning to you.

James Wicklund - Credit Suisse Securities (USA) LLC

With the comments about strategy going forward, and the fact that the word interim doesn't appear in the press release, are we to assume that you are the full-time, continuing CEO of Weatherford?

Krishna Shivram - Weatherford International Plc

All right. So, Jim, you have to understand that for a company as large as Weatherford, having one CEO for over 25 years, the board has to run a professional process to pick a permanent CEO. That process is still ongoing, and it is the right way to do it. It's the professional way for boards to behave. So that process is still ongoing and we expect in the next several weeks, the selection committee and the board will reach a decision on who the permanent CEO is going to be. We have a board meeting scheduled for around March 10, which is just over a month away. And our expectation is that by that time they will reach a conclusion on who that permanent CEO's going to be. I have been informed by the board that I am one of the candidates in the running for that position. So, I think we just have to take it from there.

James Wicklund - Credit Suisse Securities (USA) LLC

All right. With the strategy that you've laid out, I think that – I think that's very positive. So, I wish you, in the decision-making process, the best of luck.

Krishna Shivram - Weatherford International Plc

Thank you, Jim.

James Wicklund - Credit Suisse Securities (USA) LLC

If I could, on the divestiture program, and I think the debt reduction plan as a priority is clearly a positive. I think all investors think that. Looking at the land rig fleet, I know that you guys have had a scalp bid or two over the last some period of time and there's no reason to hit it at this point. You mentioned monetizing it, hopefully by the end of 2018. What is the CapEx that you're going to have to put into the rig business to upgrade 90% of the fleet over the next two years?

Krishna Shivram - Weatherford International Plc

Well, that's the beauty of the whole strategy, you know? We're talking about upgrading it with stuff that Weatherford makes on a daily basis. We're talking about mechanized DRS, we're talking about MPD systems, land, land MPD systems, which are not that expensive, and we're talking about upgrading it with Weatherford software – with a new Weatherford software called OneSync that integrates all of these measurements in one platform and makes the rig operations much more effective and automated. And much of this CapEx that we talk about is already sitting in inventory in Weatherford product lines. So it will be largely going out of our inventory levels and going into the CapEx of the rigs business, so really from one pocket to another. In terms of cash flow, there's hardly a dent that can be made on our cash flow. It's just, like I said, different categories of – different lines on the cash flow statement. So, no, the CapEx is not significant at all.

James Wicklund - Credit Suisse Securities (USA) LLC

Okay. And my follow-up, if I could, you mentioned just as a bookkeeping item, what is your exposure, in terms of North American revenues, what's your exposure, generally, to the offshore sector? How much is onshore land? How much is onshore land, onshore and how much is offshore? (37:54-37:59)

Krishna Shivram - Weatherford International Plc

Well, we're largely onshore. We're largely onshore but let me just look at these numbers here. In Q4, for example, excluding pressure pumping, we are – well, I'll give you the exact number, 89.4% onshore, on land, and only 10.6% offshore, so largely land-focused company.

James Wicklund - Credit Suisse Securities (USA) LLC

Okay. Perfect. Thanks very much.

Krishna Shivram - Weatherford International Plc

And that is going to be the big market going forward, as you know.

James Wicklund - Credit Suisse Securities (USA) LLC

Yep, it is.

Krishna Shivram - Weatherford International Plc

Offshore is going to grow very gradually. Yeah. Thank you, Jim.

James Wicklund - Credit Suisse Securities (USA) LLC

That's a much better mix than most of your peers have. Thank you very much.

Krishna Shivram - Weatherford International Plc

Thank you.

Operator

And your next question comes from the line of Bill Herbert with Simmons & Company. Your line is open.

William A. Herbert - Simmons & Company International

Thanks. Good morning. Great call, Krishna. Very compelling plan that you have put forth and also detailed. So, well done. With regard to examples of kind of additional external integration, let's talk about the Nabors alliance as a paradigm. It sounds compelling with regard to the marriage of your drilling services with their rig platform, and yet it's non-binding. So, can you talk about that one, and two, other sort of examples of external integration that we might expect, going forward?

Krishna Shivram - Weatherford International Plc

Okay. So, let me talk about the opportunity with Nabors, first of all. As the rig count grows in North America and we listen to our customers, both organizations, we talk to our customers all the time here on U.S. land. We're talking about some customers thinking of going to super specced rigs with 30 pads around it, 30 well pads. I mean, you're talking about a completely different paradigm shift. It is going to be only some companies that can actually drill effectively in a cost-effective manner on U.S. land and make the economic cut at, let's say, a medium oil price environment. So, our customers are driving this. They want much more automated drilling. They want lower cost, much more efficiency, lower people on the well site, and drag the cost per barrel downwards, right?

So, for Nabors, they have very strong super-spec rigs. They have a good position on U.S. land and, of course, it's a highly competitive market. But by adding Weatherford technologies on drilling services, MPD, TRS, all of these things, particularly MPD and drilling services, they cross the paradigm from being a very efficient driller to being a fully automated drilling services provider as a one compelling drilling package. They can offer the entire package to customers in one fell swoop, which is exactly meeting the customers' needs today.

For Weatherford, Nabors, from what I gathered, they have about – between 70 and 80 rigs operating on U.S. land today and it's growing rapidly with increase in rig count. We operate on just a handful of those rigs. So it is a great, huge, new channel to the U.S. land market and this is one of the ways we're going to supplement the loss of the U.S. pressure pumping business with, let's say, more profitable and more core product lines for Weatherford going forward. So we will tap into that sales channel and increase our sales.

Now, it is a non-binding MOU at this stage, because we have a strong meeting of minds and we're working – our engineering teams and our commercial teams are working together, and as we knock out the details in the next few weeks going forward on all those dotting the I's and crossing the T's and put rigs to work on the ground, let's say the union will become more binding as you would imagine, right?

Now other examples, we are, indeed, in discussions with other companies along similar lines. The basic premise here is we have to move quickly as an industry to lower the cost of production. And there is not one services company or one equipment provider or one drilling contractor that has all the technologies needed to automate the entire drilling process. So it takes years of engineering and investment to get there, if one wants to pursue that strategy.

The much quicker way to get to market on this and address customer needs is for companies to collaborate and we're certainly in the middle of these discussions and we think customers actually – everyone we've spoken to with the strategy, about the strategy, they absolutely love it. They want to see this happen. So I'm very pleased with this alliance that we have struck with Nabors. We're going put the first, let's say, fully-automated rig on the ground as partners very shortly.

William A. Herbert - Simmons & Company International

Okay, that's great. Thank you. And then secondly with regard to monetizing your frac business in the U.S., first, are you in dialogue with prospective counter parties with regard to JVs, and then with regard to outright sale, would that also possibly encompass a public market alternative in the form of an IPO or what have you? If you could elaborate in terms of where you are in your discussions on frac and what the forward path may include with regard to divestiture possibilities.

Krishna Shivram - Weatherford International Plc

So, Bill, I mean, there is a huge amount of interest in our frac business. We have had numerous inbounds from every quarter that you can imagine. The market is very active now, as you know. And we are in discussions, actually, already with some interested parties, discussing all of the above. We're discussing combinations. We're discussing outright sales and we are, potential – we have not discussed IPOs so much, but the first two we have discussed. And we think, at the speed of the discussions that are ongoing right now, the monetization part is actually going to most likely be much quicker than what I set out in our prepared comments.

I said 2017, 2018, because if we get into a partnership with an industry player, we might get some cash now and then a stake in the business going forward and that might take a little bit longer to monetize, as we let that stake go over time. But if we pursue the sale strategy, we might be able to monetize it much, much quicker.

William A. Herbert - Simmons & Company International

Very good. Thank you, sir.

Krishna Shivram - Weatherford International Plc

Thank you, Bill.

Operator

And your next question comes from the line of Ole Slorer of Morgan Stanley.

Ole H. Slorer - Morgan Stanley & Co. LLC

Yeah, and thank you very much and, again, a very clear presentation, Krishna, and I couldn't understand why the board wouldn't endorse your plan here. And also, Christoph, congratulations with your CFO role.

Christoph Bausch - Weatherford International Plc

Thank you, Ole.

Ole H. Slorer - Morgan Stanley & Co. LLC

So if I could just ask a little bit about – there's many moving parts here and still (45:23) you have quite a ramp in the Middle East, based on contract awards and that was also something we heard when we were out there last, and I'm glad to see it come through – North America improving. But now without the pressure pumping and streamlined, could you give us a little bit of guiding on how your regional businesses are performing right now in the first quarter from a margin standpoint?

Krishna Shivram - Weatherford International Plc

So, let me just take you quickly through that. In North America, clearly, you know, we will have the virtual absence of the drag on pressure pumping results. So Q1 will benefit from that. Canada is obviously much stronger in Q1 seasonally. And in fact, most of our other product lines are performing quite robustly right through Q1, with increased rig count, increased activity levels, right? So, you will probably see a reduction in revenue, because of the absence of pressure pumping, but an improvement in margins in North America. In Latin America, we're taking out cost as you see.

Ole H. Slorer - Morgan Stanley & Co. LLC

Could you give us some kind of guiding on the magnitude of that improvement, and be willing to share where you are running right now?

Krishna Shivram - Weatherford International Plc

It's going to be good, but we're not going to give specific numerical guidance on the call. We can only talk directionally, and I think directionally it will be pretty noticeable, the improvement in margin, because of the reasons I mentioned.

In Latin America, Ole, we're going to take out more cost. As we speak, we are working on that and so you will see cost driven margin improvement. We don't expect, except for Colombia, a major shift in sentiment of our customers in the first quarter. Europe will remain subdued because of seasonality. So, you might see, again, there's a cost implication there, so maybe a slight improvement there.

Russia will remain subdued because of seasonality. Middle East will actually – Middle East and Asia Pacific benefited the most from, let's say a higher level of product sales in Q4, which will then abate in Q1. So, the revenue and the margins associated with that higher level of product sales will reduce in the Middle East. Having said that, the service footprint in the Middle East is increasing day by day, because of all the contracts we won in the last six months, and we're gradually working ourselves with control into all of these contracts. So, for example, the large wireline contract we won in one of the countries there, we just put our first nine trucks on the ground in Q1, and the first jobs were performed last week; three jobs were performed last week. They were the first jobs under the contract. So, you're going to see a buildup of service revenue in the Middle East, which is quite remunerative and quite profitable, offsetting part of the product sales disappearing.

So overall, I would say just from a percentage margin level, I think we will do fine.

Ole H. Slorer - Morgan Stanley & Co. LLC

Very good. Helpful. Thanks for that, Krishna and, again, good luck. I'll hand it back.

Krishna Shivram - Weatherford International Plc

Thank you, Ole.

Operator

And your next question comes from the line of Angie Sedita with UBS. Your line is open.

Angie M. Sedita - UBS Securities LLC

Thanks. I echo the sentiment of others on the very strong game plan, Krishna. Impressive here (48:50) and we appreciate the details.

Krishna Shivram - Weatherford International Plc

Thank you.

Angie M. Sedita - UBS Securities LLC

So on the $300 million in cost cutting and savings that you think for 2017, you imply that some of it was completed in Q4. And could you talk about how much was completed in Q4? I assume modest, and the timing as we go into 2017 on the rest of that coming out of the system, and is that generally internationally weighted or both internationally and North America?

Krishna Shivram - Weatherford International Plc

I'm going to ask Christoph to respond.

Christoph Bausch - Weatherford International Plc

Yeah, Angie, I'll take that one. So, that Project 300, as we call it, a big portion of that was the shutdown of pressure pumping, which we'd already talked about. That will have significant cost savings in North America. In addition to that, as I've mentioned in my prepared remarks, we're reducing support call staff and we're consolidating our regions. That is internationally. So, we have already taken out 2,000 head count, as I've mentioned, at this point in time. So, that means that reduction is already in the Q1 results. There will be some going into – towards the end of Q1 and into Q2, but by the – I would say towards mid end Q2, we will have achieved the full reduction potential.

Angie M. Sedita - UBS Securities LLC

Okay. Okay. Very, very, helpful. And then Krishna, on the new sales channels that you're considering, does that include – maybe you could talk – a little more color there. Does that include looking at some of the local oil service companies internationally, or are you more focused on an integration approach?

Krishna Shivram - Weatherford International Plc

No, we're not looking at local service companies internationally, not at all. I think what we're looking for is meaningful partners that we can work on a large scale. I don't want to waste my time on small countries with small channels here and there. The Nabors, for example, alliance is a very large market in the U.S. land, and that materially moves the needle for both Nabors and Weatherford. So those are the kind of channels that I'm interested in pursuing.

Secondly, there are some discussions on technological, let's say, integration with other companies, which make eminent sense, which could open new markets. So, those we will pursue as well, but we will not pursue local companies to deliver our either combined technologies or individual technologies to different customers internationally.

Angie M. Sedita - UBS Securities LLC

Okay. Good. Good. Thanks. I'll turn it over.

Operator

And your next question comes from the line of Marc Bianchi with Cowen & Company. Your line is open.

Marc Bianchi - Cowen & Co. LLC

Thank you. First question, as it relates to the 50% incrementals that you discussed, is that a company-wide comment and is that something we could expect to see here in the first quarter?

Krishna Shivram - Weatherford International Plc

Well, it is a company-wide comment, and it is generally true for all quarters, going forward, right, depending on where the revenue moves. Now, first quarter is going to be a little bit peculiar because you're going to see a revenue reduction because of the absence of U.S. pressure pumping, in North America, that is. But you're going to see a pick-up in margins, because of the absence of the pressure pumping losses. So, it is going to be skewed positively because of that. So, I would not say from Q4 to Q1 is a regular transition because of these peculiar movements of revenue and bottom line, but on a more sustainable basis, yeah, that is the companywide number that we're targeting.

Marc Bianchi - Cowen & Co. LLC

And Krishna, that would include the full benefit of the cost reductions you're talking about as well as perhaps some price increase? Or is the price increase adding some upside to that?

Krishna Shivram - Weatherford International Plc

Certainly, the full benefit of the cost will be there and pricing is going to be gradual, Marc. It's depending on the market. Internationally, for example, as we said in our prepared comments, many operators internationally, many NOCs have issued a slew of tenders in the last six months, eight months and have tried to lock in current pricing levels for multiyear – for many years going forward, between one and three years typically.

And so, international pricing is going to be recovered more gradually. North America pricing is going to recover in a more robust fashion. In the product lines that we will remain, which is well construction, related product lines, MPD, completions, et cetera, the pricing trajectory is quite nice and we will continue to enjoy that. But, I'd like to basically say that for Weatherford, even internationally, because of the cost actions we have taken and the very large fixed cost infrastructure and equipment infrastructure that we have, we're increasing our market share. And as we work into that market share increase, the incrementals are going to be very strong, even if we don't get that much of a measured price increase, because we will just recover and grow into that infrastructure without any additional cost. So, for us, it's a little bit of a different play. We were vastly underrepresented in market share internationally, and that's what we're trying to get back, and we're getting it back now. So, you will see, despite not a measurable price increase, you'll still see reasonable, very good incrementals internationally

Marc Bianchi - Cowen & Co. LLC

Certainly, lot of spare capacity to fill up. Thank you for that. I'll turn it back.

Krishna Shivram - Weatherford International Plc

Thanks, Marc.

Operator

And your next question comes from the line of Ken Sill with SunTrust Robinson Humphrey. Your line is open.

Ken Sill - SunTrust Robinson Humphrey, Inc.

Yeah, good morning. Congratulations again, like everybody else.

Krishna Shivram - Weatherford International Plc

Ken.

Ken Sill - SunTrust Robinson Humphrey, Inc.

Wanted to clarify something you just said, Krishna. You talked about North America revenue being down sequentially. I guess pressure pumping is going to be down, but the rig count in the U.S. is already up 15%, 16% and still rising. Canada up huge seasonally. So, was that just kind of reference to pressure pumping or do you expect North American revenues to be down sequentially in Q1?

Krishna Shivram - Weatherford International Plc

It was a reference mainly to pressure pumping. You're absolutely right. We're expecting growth in the other product lines, not only with the U.S. rig count, but with Canada being stronger in Q1. So that will be an offsetting. But, if you just look at North America as a whole for Weatherford, the two will offset each other. And, we could likely end up maybe flat, potentially.

Ken Sill - SunTrust Robinson Humphrey, Inc.

Yeah, that seems a little bit low, but I'm not going to push guidance at this stage. And I wanted to kind of dig in a little bit, get ahead of the game here. So, you guys have historically been pretty big in Canada and it was stronger in Q4; it's starting out strong here, and it's a little bit ahead of game. But in terms of how you see that progressing with the spring break-up, how big is Canada now that pressure pumping's gone? And what kind of impact is spring break-up going to have on the sequentially improvement for Q2?

Krishna Shivram - Weatherford International Plc

You know, the spring break-up is still in the future. I mean, it's kind of hard to predict when it's going to start, right? I don't want to predict weather here. So far, so good. We are experiencing a very strong quarter in Canada. So, in the short term, Canada is – a proportion of North America obviously increase because we have an absence of the pressure pumping business in the U.S., right? But over time, the other product lines in the U.S. will pick it up, and offset the last of the year's pressure pumping revenue. So we will probably end up with roughly the same kind of proportion we used to enjoy in North America.

But I want to come back to when you said the flatness of North America from Q4 to Q1, it seems to be low. I just want to put a number to it, you know. We're going to lose $70 million of revenue. Pressure pumping revenue in Q4 was $70 million, seven zero. That is going to go away. Which means what I'm saying is we're going to grow everything else by $70 million. That's not insignificant.

Ken Sill - SunTrust Robinson Humphrey, Inc.

No. Thank you for clarifying that. I had the impression that revenues in pressure pumping were less than that in the fourth quarter. My bad. Could you give us an idea of how big Canada is proportionally to North America right now?

Krishna Shivram - Weatherford International Plc

No, I think we would prefer not to divulge that level of detail on the call, Ken. Sorry.

Ken Sill - SunTrust Robinson Humphrey, Inc.

Okay, that's fine. And then one final question. Go ahead. Never mind, I'll turn it over.

Operator

And your next question comes from the line of Byron Pope with Tudor, Pickering, Holt. Your line is open.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.

Good morning.

Krishna Shivram - Weatherford International Plc

Morning.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.

Just one question from me as I try to calibrate North America in the context of the disposition strategy with the road to the U.S. pressure pumping. I'm obviously not looking for numbers here, but just framing ex the pressure pumping business. You guys have always been strong in artificial lift in North America, but strong in completions and well construction as well. So, as we think about North America in 2017, just trying to size those relative businesses to make sure we don't get out over our skis in terms of how we think about topline growth for North America for you guys.

Krishna Shivram - Weatherford International Plc

Well, pressure pumping in North America in 2016, the revenue was – for us was about, oh, just under $300 million, and that will disappear effectively in 2017. And like I said in my prepared comments, we absolutely expect to at least make that up in the growth of the other product lines. So, we will not only offset it. We probably will more than offset it with the growth in rig count and activity in North America. Now, all of the growth there is going to favor our well construction and production portfolios, which will benefit disproportionately from the North American activity, the type of North American activity increase we're going to see.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.

Thanks. That's helpful. Appreciate it.

Krishna Shivram - Weatherford International Plc

Thank you, Byron.

Operator

And I'll now turn the call back over to the presenters for closing remarks.

Krishna Shivram - Weatherford International Plc

Well, thank you for participating in today's call and we'll turn it back to the operator for closing the call.

Operator

And ladies and gentlemen, this concludes today's conference call and you may now disconnect.

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