Good morning. My name is Lori, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, today's call is being recorded..

I would now like to turn the call over to Ms. Karen David-Green, Vice President of Investor Relations, Corporate Marketing and Communications. Please go ahead. .

Thank you, Lori. Good morning, and welcome to the Weatherford International first quarter conference call. With me on today's call from Geneva, we have Bernard Duroc-Danner, Chairman, President and Chief Executive Officer; and Krishna Shivram, Executive Vice President and Chief Financial Officer..

Today's call is being webcast, and a replay will be available on Weatherford's website for 10 days..

Before we begin with our opening comments, I would like to remind our audience that some of today's comments may include forward-looking statements and non-GAAP financial measures.

Please refer to our first quarter press release, which can be found on our website, for the customary caution on forward-looking statements and a reconciliation of non-GAAP to GAAP financial measures. We welcome your questions after the prepared statements..

And now, I'd like to hand over the call to Krishna. .

Thank you, Karen, and good morning, everyone. Let me start with a brief recap of our operating performance in the first quarter.

Overall, this was a disappointing quarter, reflecting a sudden plunge in revenue across all regions, led by North America, while our aggressive cost reduction actions were not enough to stem the revenue drop, resulting in a sharp decline in operating margins..

Loss per share for the quarter before charges and credits was $0.29. Revenue of $1.6 billion for the quarter decreased 21% sequentially and 43% year-on-year.

The sequential decline was affected by a sharp decrease in the level of product sales, as customers around the world cut back on product spending, which is partly seasonal after a strong Q4 and partly reflective of the new lower 2016 spending budget kicking in for these customers..

Products sales were down 30% sequentially, mainly in the U.S., Canada, Asia-Pacific, Middle East and Latin American markets, with the Artificial Lift and Completion product lines declining the most. Excluding the decrease in product sales, service revenue was down 16% sequentially, in line with our peers..

Operating income margins, before R&D and corporate expenses, declined by 943 basis points sequentially to negative 6.6%. Excluding the rigs business, our core business revenue decreased 21% sequentially with a 931-basis-point deterioration in operating income margins to negative 5.4%..

Right through this long down cycle, we've been cutting costs and reducing our structure to cope with reduced activity and pricing pressures. This was evidenced by our 2015 decrementals versus 2014, which were best-in-class at 28%..

While we continue to reduce costs in 2016, we have now reached the point in several operating locations around the world where any further reductions in structure or in cost will mean exiting the business in those locations.

This means that we have reached a point where we will incur short-term operating losses by continuing operations at these locations.

We have chosen to maintain this minimum cost structure as the difficulty in the cost of rebooting and rebuilding our businesses when activity levels eventually increase far outweigh the short-term benefit of eliminating these businesses altogether..

In all, we are carrying about $48 million in such costs, representing 300 basis points of margin and about $0.05 in earnings per share terms in our Q1 results..

Below operating margins, R&D costs reduced by $7 million, while corporate costs were down $4 million, reflecting spending cuts in line with the reduced budget for this year.

The tax benefit recorded in the first quarter reflected the tax benefit and the losses in the U.S., primarily, which are recoverable, partly offset by tax provisions internationally. The tax rate for 2016 will be dependent on the geographical mix of earnings and will be heavily weighted by results in the United States..

Excluding the rigs business, sequential decrementals were 38% on a 21% revenue drop, and year-over-year decrementals were reasonable at 27% on a 44% revenue decrease..

Adjusting operating income for R&D and corporate expenses, our sequential decrementals improved to 35%, while the year-over-year decrementals improved to 24%. We expect to hold sequential decrementals in the low 30s going forward, while the year-over-year decrementals should hold in the mid-20s.

Bernard will comment in more detail on the operating results and the outlook later in the call..

Coming to net debt and cash flow now. Net debt reduced by $373 million to reach $6.6 billion at March 31. This reflects mainly the net proceeds from the equity offering of $630 million, partly offset by consumption of $216 million in operations this quarter.

The negative free cash flow performance, while disappointing, was significantly better than the $266 million free cash flow consumption of Q1 in 2015. Despite recording much steeper losses this year, all our larger peers recorded negative free cash flow in the first quarter this year.

However, we were the only one to improve versus Q1 of last year on the free cash flow metric. Excluding the cash consumption of $47 million on the Zubair contract in Iraq, $71 million of severance and restructuring cash cost and $50 million of out-of-period interest payments, free cash flow was a negative $48 million for the quarter..

Working capital balances reduced by $119 million, reflecting strong customer collections and inventory reductions. CapEx was well controlled and was low at $43 million..

As of March 31, available liquidity was $1.4 billion. The debt to cap calculation came in at 53.6% versus a 70% covenant, meaning there was significant headroom against the covenant..

lower earnings by $350 million, partly offset by lower working capital; principally, receivables by $100 million; and lower CapEx by $50 million. Losses for the year will be higher, reflecting the unexpected sharp drop in activity and pricing levels in Q1, which is expected to persist into Q2..

With lower revenue, receivables will generate additional liquidity of $100 million. And given the low spend in Q1, a $250 million CapEx revised target for the year should not be difficult to achieve, particularly with the low start to the year.

Consistent with the previous forecast, this new forecast assumes that we will strike an out-of-court settlement agreement on change orders with our customer on the Zubair EPF contract in Iraq. If we are not successful in reaching a satisfactory settlement, we will take the matter to an international arbitration panel.

And while the cash settlement in this scenario could well be delayed into 2017, we believe the settlement through an arbitration process would be for a significantly larger amount. Such a turn of events could reduce this year's free cash flow forecast by an additional $150 million to $200 million. Discussions with our clients are ongoing..

The progress on the Zubair project has been very good with only 3 final milestones remaining out of 18 to be achieved. We expect these milestones to be achieved by the end of May..

We successfully repaid the bond of $350 million that matured in February 2016 as well as certain other short-term facilities totaling $150 million. With this revised free cash flow forecast, we expect net debt levels to reduce to below $6 billion by the end of the year..

Moving on to the new credit facility now. Given the environment we are in and the extreme pressure banks are facing with their exposure to the energy, principally E&P industry, with significant loan loss provisions being recorded by almost every bank, this was not the ideal time to negotiate a revolver for a non-investment-grade name like ours.

However, as our current revolver was due to expire in July 2017, we had no choice but to renegotiate this facility before it went current.

After over 2 months of difficult discussions and an extremely thorough examination by our banks, I am pleased to announce that we have successfully negotiated new financing agreements, which will be effective from next week, and replace the current facility..

firstly, it includes a secured term loan of $500 million. This term loan matures in July 2020. Next, it includes an unsecured revolver of $1.151 billion, expiring in July 2019. Both of these new facilities are enhanced by appropriate upstream subsidiary guarantees.

A residual revolver totaling $229 million, expiring in July next year, covering banks that decline to extend the current facility is also available..

Of the 17 banks in our previous facility, 15 of them agreed to extend their cover with only 4 of the 15 reducing their current commitments slightly. Two banks declined to participate in the extension, but their current commitments will stay in place until July 2017.

This demonstrates the strong relationship we have with the majority of our banking group, who share our common view of the future..

The term loan will amortize down 10% annually, while the revolver will amortize down by 5% in the first year and then by 10% annually after that, but will not reduce below $1 billion..

firstly, a specified debt to EBITDA ratio of below 3.0x until the end of 2016 and then below 2.5x after that. As of March 31, on a back test, we are at 1.1x versus a 3.0x, meaning there's plenty of headroom..

For covenant purposes, specified debt is defined as the debt enhanced by subsidiary guarantees and represents only the drawn amounts against the facilities, while the EBITDA is defined to exclude all noncash charges, such as impairments and write-offs of assets..

a specified debt plus letters of credit, that means a sum total of the 2 to EBITDA ratio of below 4.0x until the end of 2016 and then below 3.5x after that.

The only difference from the previous covenant is the addition of outstanding letters of credit or guarantees to the level of specified debt and a higher ratio by one turn to accommodate these LCs. As of March 31, on a back test, we are at 1.7x versus a requirement of 4x. Meaning, again, there's plenty of headroom..

There's also a third covenant, which is specified assets to specified debt. We must maintain a ratio of at least 4x. As of March 31, this ratio is at 14x, meaning, again, there's substantial headroom on the third covenant.

Based on our forecast over the life of the facility, we expect to retain and in fact improve the headroom versus these 3 covenants..

As we negotiated these covenants at a time when the industry is at a trough, we were able to secure extremely accommodating covenants, which have almost no danger of breach during the life of the facility. We also ran a stressed model assuming a flat $40 oil price until the end of 2018.

This model results in flat revenue, EBITDA and free cash flow in 2017 and 2018 at 2016 levels or slightly lower. Even under such a draconian set of assumptions, we retained significant headroom versus these 3 negotiated covenants..

Finally, the debt-to-cap covenant that existed up until now has been discarded and is not valid anymore. Just to be clear, we will have a $1.88 billion facility starting next week, down from $2 billion. This facility will reduce to $1.54 billion after amortization in July 2017, then it will reduce down to $1.4 billion as of July 2018 and so on..

$1.04 billion as of 30th September last year, $967 million as of last year-end, and now $1.04 billion as of the end of the first quarter this year, which are far below any of these levels that I mentioned..

At its lowest point of availability, which is $1.4 billion as of July 2018, we still have sufficient headroom when recent utilization levels of approximately $1 billion are taken into account. As a reminder, we also maintain roughly $500 million of cash balances on an ongoing basis.

So when you net that off against the outstanding revolver, you got to reduce $500 million as cash is roughly fungible..

I would like to also remind you that, that of a gross -- total gross debt of $7.1 billion at March 31, only the revolver drawdown of $1.04 billion has any financial covenants attached to it.

The remaining debt, comprising mainly long-term bonds, which is over 80% of our total debt, do not carry any ratio-driven covenants, nor do they carry any credit rating figures..

firstly, free cash flow is expected to be in the $400 million to $500 million range this year, as I explained previously. Add to that a range of $600 million to $750 million annually of free cash flow for each of the next 4 years, and you get a total of $2.4 billion to $3 billion.

These cash flows assume a recovering and strengthening oil field services markets, resulting in improved margins -- improving margins with solid incrementals given the reduction on a fixed cost base.

And despite investment in working capital to fuel the growth, CapEx will continue to be muted as our excess capacity gets fully utilized, delaying significant growth CapEx spending into 2019..

Next, we expect to divest the land rigs business over the next 3 years when industry conditions and valuations get better. Our current estimate is that the cash component of such a transaction would be between $500 million and $1 billion..

Lastly, we will opportunistically tap the public debt markets to refinance some of these bond maturities. And over the next 4 years, we believe debt markets will be open to us. In reality, we believe there is a high-yield market open to us even today..

In conclusion, a combination of free cash flow, proceeds from asset sales and potential new debt issuances will allow us to comfortably manage the upcoming debt maturities..

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

revenue declined 21% sequentially, 43% year-on-year; decrementals, 38% sequentially and 28% year-on-year..

Free cash flow was $260 million use of cash, but $50 million better than Q1 '15, and that without any consideration for large severance cash payments and final cash outlays for Zubair. Free cash flow doesn't matter for our peers; it does for us given balance sheet differentials.

It is worth observing Weatherford's free cash flow numbers, as is, inclusive of all, were the best or the least bad, if you will, in class year-on-year performance of our peer group. This is just an accident. The company has had all levels of operations, an ingrained focus on cash flow here and now and perennially..

product sales dropped by over 30%, service revenue by 16% and rigs by 19%. This added up to sequential 21% drop. Product sales usually drop sequentially in Q1, and this year was no exception. The overwhelming [indiscernible] to the drop was seasonal and particularly affected the Eastern Hemisphere..

Product sales for Weatherford are well construction, except TRS and Managed Pressure Drilling, Completion and Lift. Service revenues are Tubular Running services, MPD and Formation Evaluation. Taken together, the proportion of product sales to total revenues is on average about 40% with large quarter-to-quarter variations.

Product sales will improve in Q2 seasonally..

Regionally, the quarter was difficult in every corner of the world. Both U.S. and Canada were very challenged. Canada's Q1 was the lowest in company's recorded history for first quarter, normally that region's strongest seasonal peak. Q1 was in fact lower than Q2 of last year, [indiscernible] then already very depressed breakup.

It's quite unimaginable that activity crash..

pressure pumping and rentals, no surprise there. With 30% of U.S. revenues in Q1 being counted for 76% of the losses, those numbers say it all..

Revenues for NAM declined by 22% and decrementals were more severe 39%. Year-on-year decrementals are held at 19% or 53% revenue decline, which is excellent cost management in the midst of a collapsing volume and pricing environment..

For the first time in 15 months, we held back on further organizational cost action in NAM beyond what was planned. By March, with only a few exceptions, we decided not to curtail employee counts or basin presence any further. We decided to keep some measure over staffing and place U.S. and Canada on furlough, waiting on market direction beyond Q2..

Latin America held better than NAM, albeit it was also very strained. Revenues declined by 18% sequentially, decrementals are held at 18% also and very decent 30% year-on-year by aggressive cost control. All country operations declined, except Argentina..

Colombia, traditionally one of our largest Latin American operations, was eviscerated. Brazil and Mexico weakened further. We had already seriously curtailed Venezuela last year. The operational minimum necessary fell on to our nucleus organization and infrastructure..

Eastern Hemisphere experienced a severe seasonal, in addition to cyclical, downturn activity. As highlighted earlier, product sales were very low in the quarter, representing much of the company's overall product sales drop. That drove 22% lower revenues and 45% decrementals sequentially..

High for us because product sales typically carry higher margins. Cost reductions could not help as much as they will. They lagged in North America for local regulatory reasons by about 2 quarters.

In the European, Caspian, Russian, SSA region, revenue was down 24%, reflecting sharp seasonal winter decline in Russian and North Sea, a couple of project cancellations across SSA..

SSA margins dipped ever so slightly into negative territory as cost could not make up for activity reduction fast enough. Revenues in Middle East and Asia Pacific region decreased by 20%, with margins dropping to just under 2%, with sharp seasonal decline across several parts of Asia Pacific region.

MENA showed resilience, but much was offset by a combination of very low product sales in the quarter and the full effect of pricing concessions..

Lastly, during operations, as expected, had a difficult quarter. It was a transitional quarter as we moved rigs into new markets to mobilize our new contracts..

On the cost side, we announced earlier this year an additional reduction in force of 6,000. As of the end of April, almost 6,000 or 5,871 employees have already left the payroll, substantially completing the program.

We extended the program to cover another 2,000 reduction in force, bringing it to 8,000, if you will, which we expect to complete by the end of Q2..

Annualized savings, already crystallized from actions to date, are specifically $408 million, with savings impacting Q1 to the tune of $34 million. So the bulk of it is coming in Q2, et cetera. The next 2 quarters will show much higher levels of savings from the actions to date..

Similarly, the cash cost of the severance program was heavy in Q1, heavier than we expected. There will be lower severance cash payouts in Q2 as a corollary. We had also announced the closure of 9 manufacturing facilities this year; of this, 4 were shut in Q1 alone.

In addition, 26 operating and service facilities were shut down in North America during the quarter..

All this added to a difficult but productive quarter, which was expected. And also, we believe we will set the trough for the year in this cyclical depression, which brings me to the outlook for Q2..

NAM results will be weaker in Q2. Revenues will decline Q1 or Q2, similarly to Q4 and Q1. The depth and breadth of cost caps achieved will improve the decrementals at this Q1. But the regions operating income will decline further. We believe Q2, though, will be the trough for Weatherford's NAM..

Latin America will also be weaker in Q2, but substantially less than NAM, in terms of decline. Q2 will look similar to Q1, and we'll likely have single-digit lower revenues and operating income, no worse. We also believe Q2 will be the trough for Weatherford's Latin America..

Eastern Hemisphere in Q2 will be up modestly, Q1 on Q2, revenues and, more significantly, operating income. The increase in revenues is one factor. The different mix with a return of product sales is the other factor, probably a larger factor, together with a much lower cost basis.

The cost cuts have aligned, remember, and they will benefit Eastern Hemisphere in Q2 -- starting from Q2..

we believe Q1 will have been the trough for Weatherford's Eastern Hemisphere. And lastly, the rig operation will improve gradually as profitability in Q2. And thereon, because of the mobilization, Q1 will have been the trough also for our rig operation..

Now I do realize our assessment of Latin America and even more so, Eastern Hemisphere for Q2 is at a variance for our larger fields. Remember, although we overlap and compete in formation evaluation and completion, by and large, we do not, what we call, Well Construction and lift.

Well Construction and Lift, we are more complementary than competitive and have, at times, a somewhat different prognosis, time-wise, for performance..

Adding the pieces together, our view is that Q2 will net out at a similar net income to Q1 with a worse NAM, but a better international..

By the end of Q2, we'll have concluded the bulk of our 2-year massive cost restructuring, leaving behind only supply chain work underway. The change in efficiency and cost structure make a very large and structural difference. We also believe there will be seasonal and some early signs, however, modest, of cyclical market improvements in Q3 and Q4..

Profitability in the second half of '16 will be improved over the first half. We're preparing cautiously with determination for the beginnings of a possible recovery. The decision to opt for furlough program in North America rather than more organizational shrinkage is a clear example of such..

in NAM, our Completion and Lift portfolios are directly applicable to the gradual completions of the drill, but uncompleted wells; second, the massive destocking of cloud inventories for rod lift and PCP lift equipment will be the first drivers of the turn. That's for NAM.

Internationally, Russian and pockets of Latin America will be the first movers, while our Middle East region will accelerate its rebuilding through the second half of the year..

Again, we remain very cautious, but we are building our own conviction that second half '16 will be better for Weatherford and the beginning of a long-term turn..

Reiteration of '16 priorities. At the time of this call, we have successfully achieved banking commitments for our credit line through July '19 to replace the existing line. Successful equity offering last March also provided additional liquidity..

Both capital formation events are clear positives and place us on safe ground. They do not change our free cash flow objectives. Free cash flow generation is ingrained in the company's long-term direction. We have total organizational buy-ins, specific incentives and disciplined metrics on free cash flow objectives.

With the end of the risk or reduction in force severance on Zubair's financing, our free cash flow performance at the balance of the year will be strong and reliable..

We'll build our operating progress today with more efficiency, cash discipline and systematic talent upgrades and selected market share focus. We'll delever the balance sheet through free cash flow each and every year and eventually with more asset sales when achievable. This is our direction..

one, lower cost structure through cycles. Out of an estimated annualized to date, $2.5 billion of cost reductions realized since 2014, we know specifically that over $1 billion are permanent or structural. This means Weatherford will have close to $1 a share of incremental earnings and cash flow above our prior earning's peak.

Two, capital allocation and cash generation is a company-wide discipline. This is ingrained in our culture. Three, leapfrog talent bench and talent development as a culture. We have upgraded our talents systematically from field to senior management. We have made talent development into an organizational priority.

We never had operationally and financially as talented and deep of a batch as we have today. We may be smaller; we are much better managed. Four, focus on quality and reliability for all product lines. Quality and reliability in execution everywhere, all the time, are a strategic priority.

I specifically commented on these internal objectives and priority in my recent comments at the opening ceremony of the ATSE conference in Dhahran. Quality and reliability is our most important metric of operational achievement. Five, technological innovation, both incremental and step change, channels strictly on our core.

The buttressing of leadership where we lead and gaining issues with leadership where we don't..

During OTC, which is happening now, we have hosted a 3-day technology exhibition at one of our R&D centers in Houston. We had more clients attendance by far than we ever experienced. We cannot afford to be technological leaders or coleaders on all product lines or service lines. We can and will on our core..

As the massive cost containments come to an end, I will summarize the cost accomplishments in the first days of '15. We believe we did more and further than anyone else. Reduction in force to a total employee count on January 1, '15, 55,318. We ended Q1 '16 at 34,808. We expect a trough of total headcount at about 32,000 shortly after Q2.

We'll have been at 42% total company payroll reduction in 18 months. This is a clean cost restructuring without any divestment to assist the numbers..

We took down our support ratio, which is indirects to directs, or supports to direct, if you will, from 59% in '14 to a where it presently stands at 38.6%. A 20% decline in support ratio is a colossal structural change in record time. To do this in a strict cyclical downturn is very difficult.

It is also structural change which will provide us with outsized incremental margins through the recovery years. Operations were streamlined, with consolidation of geographic segment, flattening of the reporting organizations, scaling down regional headquarters and push the country closer to the sand face.

Supply chain is in the midst of a 2-year restructuring and productivity leap frog. Manufacturing, logistics and procurement are implementing fundamental productivity and efficiency change..

This is an economic breakthrough for our operating cost structure flexibility of adjustment to changes in business volumes. Of all the great cost collection initiatives, this one alone will carry forward through '17..

Much of the above describes what we have accomplished, taking advantage of extremely depressed market conditions. The operating decisions will now be adjusted. We're calling for an end to our reduction in force drive and organizational compression.

The last remnants of the layoffs will occur in Q2, but beyond, we'll arrest the direct cost drive and prepare cautiously, [indiscernible] nonetheless, return in our markets. Only the vast supply chain reorganization work will continue until full completion..

Weatherford is well advanced in fundamental transformation. From cost structure, cooperating practices and quality focus, returns objective in a culture of sales, we are completely different company in the making. Our performance in the recovery to come will surprise to the upside..

I have a few comments on macro, but I'll keep them to a minimum. We have long said that after a lag, decline rates would accelerate, that the effect were underestimated and the industry was producing at near capacity, which is something none of us have ever experienced.

We also added that the industry will not be able to manage required oil demand as early as '17. This means oil demand will not be met by existing oil capacity..

Inventory overhang will help. But by definition, it is more than a stopgap solution. We more than ever believe all the above is correct. Other than a few barrels coming from Iran, in theory, one day from Libya, by our assessment, the industry has little spare capacity beyond the present operating rates.

Public renouncements to the contrary, we believe this to be accurate..

Furthermore, elasticity of supply response to higher oil prices are being ignored or overstated. In my 30 years in the oil field and my prior years watching my father operate in same, I have never seen anything like it..

in summary, regardless of the macro outcome, we're making Weatherford focused, operationally very strong, disciplined and returns driven. We'll never go down the same path of excessive leverage ever again. We have fundamentally changed our cost structure, quality, efficiency, returns culture and emphatically, our talent bench.

This is today a very different company. We'll maintain strong free cash flow and liquidity. We dedicate our every effort to delever the balance sheet and do so permanently..

We are positioning Weatherford with selected markets and clients, using our product line strengths and specific technological leadership. In this time of great transactional turbulence in our industry, we have remained an island of calm, an internal efficiency focus.

Our operating and management capabilities are immeasurably stronger than they historically were. .

Lastly, we have a worldwide infrastructure of service support, second to none. Except for a few marginal locations internationally, we have kept the international infrastructure intact. We are confident of our technological strengths, product line breadth and market potential for organic growth.

Our numbers will prove out the merits of our direction in this brutal down cycle, and even more so when the market turns. We believe this is what will deliver the highest shareholder returns at the lowest risk..

With that, I will return the call to the operator for Q&A. .

[Operator Instructions] Your first question is from Bill Herbert of Simmons & Company. .

Krishna, could we discuss Zubair a bit here, because it seems like the range of outcomes there are reasonably wide in terms of order of magnitude on the impact on free cash flow possibilities for 2016. So can you discuss that with a little bit more detail because you talked about revising the free cash flow forecast down to $400 million.

But in the event that Zubair doesn't swing your way, that could be too high by a couple hundred million dollars, if I understood you correctly.

So can you shed some light on that, please?.

Yes, Bill. First of all, I said that the free cash flow forecast for the year is going to be revised down by $200 million down to about $450 million, right? Now included in that $450 million is an assumption that we will successfully negotiate a settlement of our variation order claims on our customer.

That settlement is being discussed right now, and we have not reached a point where we can mutually agree to the settlement. If we don't reach a settlement, we will not get any more cash, even against the milestone payments that are due to us contractually, because we believe our customer will withhold all cash going forward.

If that happens, then about $150 million to $200 million of cash, that would otherwise have come to us, including the settlement estimate, will not come to us anymore, so which means basically the $450 million of free cash flow will then reduce to -- by $200 million -- $150 million to $200 million, right? That's what I was talking about.

Now in fact, we are getting closer to a settlement agreement with our customer. And maybe, if everything works out, we'll be able to announce the settlement in the next several weeks. If that happens, then the $450 million remains intact. .

So you believe that it's likely you will reach a favorable settlement on this front?.

I think both sides are not too far apart right now. And so, I think it is -- I would give it more than 50% chance that we will reach a settlement, yes [indiscernible]. .

And so, what exactly -- yes, what exactly is being disputed here?.

It's a level of compensation for the change orders. We have a number of change orders that we have documented over the last 3 years, which are changes to the original design of the facility that was in the tender. And none of those change orders have been compensated for.

So we have a certain claim, and that claim has not been honored or recognized by our customer. So that's basically the subject matter of the discussion. .

Okay. Switching gears for a second for the balance sheet.

Bernard, in the event that international revenues, as a whole, continue to bleed lower over the course of the year, what then is the likely roadmap for margins given the interplay between pricing concessions on the one hand and those continuing to roll through, and on the other hand, a more aggressive cost cutting that you continue to implement?.

Well, just to put things in perspective, as I mentioned, a lot of the cost cuts have not impacted much yet, but they will follow in Q2, the international operations, and more specifically, the Eastern Hemisphere, which takes the longest from a regulatory standpoint to be able to absorb the layoffs and so forth.

We have approximately -- going through all the cost cuts through Q1, there are approximately $100 million a quarter more of cost cuts that are going to come through the Eastern Hemisphere and also Latin America. But that is actually -- but lobbying didn't come through the Eastern Hemisphere.

That is quite a cushion on further erosion coming from volumes and pricing. The second thing also, Bill, is that when we talk about product sales, that is one we have some visibility on. We have a notion of what is going to be delivered or expected to be delivered, a number of different products.

And that gives us also a sense of volume and margins to come. The services more, I think, are vulnerable in the event the project gets further canceled and so forth. With respect to pricing, we have also a sense of what was given. In our particular case, pricing concessions have been given.

There is no significant amounts of other pricing concessions being negotiated from us.

We'll also point out to you that there are very large tender activities, which are ongoing, which have been very recent, which suggest that many of our clients are, all of a sudden, very interested in locking in volumes at current pricing, which suggest also that volume is unlikely to go down further, more likely to inch up some.

All this would tell you that the cost reductions are sizable, the product line deliveries are relatively predictable. Pricing concessions, we have already quite a bit, has gone through Q4 and Q1 P&L. There isn't much that we know of analytically to go through incrementally in Q2.

All this to say that the roadmap for international in Q2, Q3, Q4 should be depending on your viewpoint, on the macro, either constructive or better than constructive in our particular case. .

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

So just to clarify, you say that a similar quarter in the second quarter to also deliver in the first quarter.

Do you mean at the EPS level or at the normalized level, the EBITDA level?.

Yes, yes. Well, actually, the EBITDA and the EPS level. The EBITDA may be a little bit higher, but not materially. But net-net, at the net income level, at EPS level, similar made up of deteriorating North America further, if it was possible.

Latin America, a little bit lower and Eastern Hemisphere, a little bit higher on the top line, but operating income -- the biggest moving part for us, simply because of product mix in Q2 versus Q1.

You add the pieces together, it suggests to us that we would have Q1 or Q2 flat at the earnings level, albeit the revenues may come down some when all is added up together. .

And if we think about the normalized free cash flow loss in the first quarter as $50 million, and it excludes Zubair on the second quarter, what were they -- a reasonable range be to bracket the second quarter free of cash flow, excluding Zubair?.

Yes, yes. Let's put Zubair on the side, because it is a onetime event. And so with -- for clarity's sake, without Zubair, our free cash flow in Q2 should be $100 million to $125 million, something like that, excluding Zubair. That's net of whatever severance would be still occurring, which should be less than in Q1, but some still. .

Understood. And just finally, at your macro statements, you highlighted the declines.

Is it anything particularly that you see around the world, which makes you more confident that we are closer to this inflection point? And any particular region or anything else that you see?.

I would say that one of the benefits of having a fabulous team around me at Weatherford today is I tend to have more time to do what I think might be useful as a juncture. And what is more useful, I think, at this juncture is trying to interact as much as I can with the client base. And that's a long-term process.

What does that have to do with your question? I have then a multiplicity of verbal, qualitative, but meaningful, nonetheless, data points from the Continental Europe, from Russia, from Latin America, from pockets of the Middle East. And I know full well what's going on in the deepwater plays, which are longer to have an effect.

So ignoring the latter, just all the commentary on the particular regions I'm describing, add them together, it doesn't take a great modeling capability to see a frightening amount of volume being lost permanently. And it doesn't have to be spectacular individually. 100,000, 115,000 being lost over a period of a few quarters and accelerating.

But you add them all together, and the picture is, for us, actually is as much as we recompute our numbers all the time, we have a hard time believing it. The picture is one of a shrinking supply base, which we do not see any available capacity, which is there to be able to replace it, certainly not on-call. And I mean on-call, within a year or 2.

So it's qualitative, but it's multifaceted. Many, many client interactions, particularly in more relaxed atmosphere after meetings take place. .

[Operator Instructions] Your next question is from Jim Wicklund of Crédit Suisse. .

Just as a quick follow-up to Bill's, how much -- will you lose any cash in Zubair in Q2?.

So it depends on -- Jim, it depends on you -- whether you assume we strike a settlement or not. If we do or do not strike... .

If you do strike a settlement, will the cash actually hit in the second quarter, is that what you're saying?.

Yes. So that's part of the settlement discussion, so we don't know where that's going to end up. But assuming that no settlement takes place at all, right, and we go to arbitration, then, yes, we will have a cash outflow in April and May. .

I understand getting paid back for change orders.

I'm just trying to figure out how much the operating loss -- cash loss would be?.

They are intertwined. So operating cash flows is about $10 million to $15 million a month. And we will have 2 months of operations in the second quarter. That's the worst-case scenario. .

And Jim, if that is the case, we will shut -- the operation will come to an end anyway at the end of this month. .

There are several of us who are looking forward to Zubair being over almost as much as you are. .

That's impossible. That is not possible, I think. .

Almost, you'd be amazed. CapEx, you've dropped CapEx by 80-plus percent since 2014. I understand there's overcapacity, your rental business is not doing fabulous. And that's, I guess, historically been a big eater of CapEx. How much do you jeopardize the future? How much are you going to have to ramp up in '19? I mean, are we sacrificing... .

I'll give you beginning of an answer and then Krishna will do the second half.

If you take CapEx, and you break it down into 3 different places of application, so you talk about the infrastructure, which is all the bases around the world, you talk about supply chain and you talk about the tools, the service tools, generally service tools being applicable whether it's a completion service tool, whether it's LWD kit, et cetera, okay? I would have to say that the supply chain, as it now stands, can accommodate easily, easily, 3x of volume we have, and that's actually almost a silly statement, because we have no -- we have plenty of machining and roofline and so forth.

So we're rationalizing it right now. It is not a source of CapEx requirement, until and unless the industry is materially different, and I'm talking a level of volume that you do not expect any time soon, talking about years. So that one is just not a consumer of CapEx. And to the infrastructure, we rationalize North America.

We did take down a number of facilities, not too many, internationally. We now have, in 85 countries, by my latest count, the sort of base representation we feel is desirable given our long-term presence, et cetera.

And I will have to say that the infrastructure can accommodate more than 2x of volume that we are running through the company today, easily. That, again, is not an area of CapEx that will remind you that we built this infrastructure ourselves. It was a big use of CapEx in years past. Then you get to the tools side, the service tools side.

Well, we do have -- take a look at our inventory, take a look at our PP&E, depending on where -- what kind of tool will be in one of the other category.

By our assessment, also, we have largely available somewhere between -- something -- tool components that can accommodate 50% to twice the size of volume we have, right? That's a lot of numbers that suggest we're not starting the business. We're very careful how we do it. We are not sort of holding our breath waiting for better times.

We have far more PP&E and equipment capabilities than people realize, which is, in a way, sanctioning an overspending of the past, which none of us are very proud of, least of all myself, but it is an asset today. If you don't presume we're starving.

Do you want to add, Krishna, to that?.

Yes. I think when we normally you look at 2017 and '18, we can certainly spend very low levels of CapEx, while still maintaining a healthy growth potential. And then from '19 onwards, I would suggest that as a percentage of revenue, we will stay at -- between 5% to 6% of revenue for the next 2 or 3 years.

So this is quite low compared to historical levels, but it's well explained by Bernard. We have plenty of capacity. .

Okay. And my follow-up, if I could.

Latin America, what and where gets better first?.

That's a good question. I would say that my guess, it's a guess, is Colombia, primarily, because it's so devastated, and it's heavily a land market, you know that, not only heavily a land market, it's so eviscerated. They don't have a counter political upheaval here in Brazil. Argentina has remained healthy.

I can't imagine Venezuela because they are so, I think, financially, let's say, strained. That leaves Mexico, but Mexico is still going through a lot of the restructuring of the industry and so on and so on. By process of elimination, I have to say, Ecuador -- sorry, Colombia is your best bet. .

Your next question comes from the line of Rob MacKenzie of Iberia Capital. .

Bernard, couple questions for you, if I may. First, are you guys seeing any signs of pickup, say, in the U.S.

in any kind of completions or work-over activities for you guys? And secondly, as part of your conversations with your customers that you talked about earlier, how have those changed, if you will, over the past week, 2 weeks, months, 2 months? Are we seeing a turn in sentiment there?.

Okay. On the first one, I'm sorry to say that no, there isn't any signs of pickup or anything else like that as of today in the U.S. I think the U.S., it's really a question of cash flow for our clients. And that's price of oil, it's also financing capabilities. So this is one thing. The second is an interesting question. It is very simple.

I'm getting a lot of questions on what I am seeing in terms of production rate difficulties with other reservoirs in other plays from particular clients.

They are wanting to know how the other ones are doing, what do I see in terms of trends? It's sort of interesting that they want to compare their own difficulties, all around decline rates, with other difficulties, not so much for competitive reasons, but to get a sense what is happening to the industry.

There's been a really a lot -- these are informal conversations, and they are outside of the realm of formal meetings, which take place also with clients and, I think, for me, are far more valuable than the formal aspects. So there's a lot of conversations, systematically, really, from what am I seeing in other parts of the world.

One of the advantages of being an oilfield service person from an oil and gas perspective is you get to see lots of reservoirs and lots of reservoir situations, actually more so than if you were exploiting it, who are constrained or restricted to the ones they're developing.

So you have a richer sort of pool of information as -- if you will, a traveling salesman, as it were. .

Great. But in terms of what they're indicating to you -- I understand they're pumping you for information.

But what are they indicating to you, if anything, about how their plans are evolving?.

They are sort of -- in general, they are -- they have no authority or capital or plans for additional drilling, and they're trying to hold off decline rates. And they are -- in many cases, it's coming to the point where they cannot do that anymore. And so it creates a lot of strain and worries.

And they're quite anxious to know when -- where and when cash flow will allow them to restart activity because they're very afraid of losing production rather rapidly now. There is an acceleration. You hold it off and ultimately, there's acceleration.

So it's really a sense of we're at the point now where they are afraid of declines, that they cannot hold off, hence their interest in understanding where and when the industry could have a turn because they're sort of worried about their own production profile given the fact they're running out of -- through intervention and the sort of things you could do with limited budget, and they're very scared drilling.

They're worried about being able to hold off the decline rates, where they are, without them accelerating further. .

You have no further questions at this time. .

Then we'll conclude the call. Thank you very much. .

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