Karen David-Green - Weatherford International Plc Krishna Shivram - Weatherford International Plc Bernard J. Duroc-Danner - Weatherford International Plc.

James West - Evercore Group LLC David Anderson - Barclays Capital, Inc. William Herbert - Simmons & Co. International James Wicklund - Credit Suisse Securities (USA) LLC (Broker) Ole H. Slorer - Morgan Stanley & Co. LLC Michael Urban - Deutsche Bank Securities, Inc. Waqar Syed - Goldman Sachs & Co..

Good morning. My name is Kim and I'll be your conference operator today. At this time I like to welcome everyone to the Weatherford International Third 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.

We ask that you please limit yourself to one question and one follow-up, then re-enter the queue for additional questions you may have. As a reminder, ladies and gentlemen, today's call is being recorded. Thank you.

I would now like to the conference over to Karen David-Green, Vice President of Investor Relations and Corporate Marketing and Communications. You may begin..

Thank you, Kim. Good morning, and welcome to the Weatherford International third quarter conference call. With me on today's call 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'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 our forward-looking statements.

Please refer to our Form 10-K for the period ended December 31, 2015, Form 10-Q for the quarter ended June 30, 2016 and current reports on Form-8K for risk factors and the customary cautions on forward-looking statements. We welcome your questions after the prepared statements. And now I'd like to hand the call over to Krishna..

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

Excluding the revenue impact of the Zubair project, which is now completed, and which had an extraordinary adjustment in our second quarter results, the revenue grew by 1% sequentially, marking the first sequential increase after seven consecutive sequential quarterly declines. This clearly marks a troughing of the cycle for the industry and for us.

And from now on, we expect to see a steady recovery on a sequential basis. Operating income before R&D and corporate expenses improved marginally by $5 million with sequential operating income margins improving by 48 basis points to negative 8.2%. Incrementals, excluding Zubair, were strong at 77%.

The loss per share for the quarter before charges and credits was $0.39. EBITDA, at $68 million, was $10 million better than in the second quarter. In the third quarter, we recorded after-tax charges of $1.4 billion.

The principal items included a non-cash charge of $718 million for the impairment of assets and inventory that have remained idle on a persistent basis and cannot support their carrying value any longer.

And a noncash charge of $683 million for tax valuation allowances, principally in the United States, where accounting guidance dictates that deferred tax assets based on tax benefited losses cannot exceed certain thresholds.

If we had been able to record a similar tax rate as in the second quarter, our loss per share for the quarter would have been $0.27. The economic value of these tax benefits are not lost. The tax benefit on the U.S.

losses can be carried forward for 20 years and we can use these losses in the future resulting in negligible cash taxes for several years to come. Going forward, for the next several quarters we will not be able to record a tax benefit on our U.S. losses.

This means that our future tax charge will largely reflect cash taxes paid internationally mainly in jurisdictions where deemed profit and the withholding taxes apply. Lastly, we also recorded charges of $20 million for severance and restructuring. Getting back to the third quarter operating results now.

North America revenue increased 12% sequentially versus an average U.S. rig count increase of 14%. Canada resurfaced after the spring break-up benefiting completions, artificial lift and well construction. Operating income margins improved by 394 basis points but are still way down by poor pricing levels and remain negative.

Internationally, excluding Zubair, the revenue declined by 4%. Latin America revenue improved by 2% principally coming from increased activity in Mexico, Bolivia and Colombia. This revenue uplift, coupled with cost actions taken in late Q2 and into Q3, resulted in a 453-basis-point improvement in operating income margins to reach 5.1%.

In the Europe, Caspian, Russia, sub-Saharan Africa region continued sharp activity declines offshore West Africa and on land in Nigeria dominated a reasonably resilient performance in Russia and the North Sea resulting in the sequential revenue reduction of 8%.

Operating income margins improved in Russia and in the North Sea Continental Europe region due to cost control measures and activity mix while sub-Saharan Africa margins plunged in line with revenue to reduce the overall region margin by 123 basis points to minus 1%.

In the Middle East, North Africa, Asia-Pacific region, excluding the Zubair contract, the sequential revenue decrease of 5% reflected activity reductions across the Asia-Pacific region while pricing headwinds in the Middle East more than offset activity increases.

Operating income margins declined 213 basis points to a small loss, essentially coming from the Asia-Pacific region where activity levels are at historic lows.

The revenue for the Land Rigs business declined 10% with lower sequential utilization rates and margins and were hampered by rig maintenance and delays in equipment and personnel re-activations in Algeria. On the cost side, we have completed the head count reduction plan of 8,000, generating annualized savings of $504 million.

Also, we ceased operations in three manufacturing facilities during the quarter bringing the year-to-date total to 10, which is in excess of the nine plant closures for the year. Finally, we closed five operating facilities, mainly in the United States, for a total of 59 for the year.

Given the current market context and the anticipated increase in activity levels, we have chosen to preserve capability to address the upcoming growth. Below operating margins, R&D costs reduced by $8 million while corporate costs were down by $4 million, reflecting continued spending cuts. These levels are now sustainable going forward.

The tax charge recorded in the third quarter of $32 million approximately reflected the cash taxes paid internationally comprising withholding taxes and deemed profit countries where taxes are levied on revenue without regard for income levels. As already explained for the foreseeable future, we cannot benefit the losses in the U.S.

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 and our current estimate is a quarterly charge of between $30 million and $40 million dependent on the geographical mix of revenue and earnings.

Moving on to the near-term outlook now, we expect continued robust recovery and activity levels in both the U.S. and in Canada with growth in rig count on land.

The growth will be driven by both completions and artificial lift, which are expected to improve sequentially with customers aggressively working through the DUC, which is the drilled but uncompleted inventory of wells.

Additionally, we expect to put two more pressure pumping fleets to work, bringing the total number of active crews to nine by year-end. While pricing remains challenged in the U.S. pressure pumping market, the first step to recovering pricing is increased utilization. There are industry-wide signs of slowly tightening capacity.

While year-end holidays and seasonal factors will weigh on the results, we expect to grow both revenue and margins in North America.

Internationally, we expect to see continued modest growth in Latin America, a reasonable growth in the Europe, Caspian, Russia, sub-Sahara Africa region, with growth in the North Sea based on recent contract awards and the deployment of an offshore MPD package on a Deepwater rig coupled with a bottomed out but stable sub-Sahara Africa, which more than offsets a seasonal slowdown in Russia.

In the Middle East, Asia-Pacific region we expect activity increases in the GCC region based on recent contract wins and some positive pickup in product sales. While pricing continues to be under pressure across the entire region, we do not expect any further deterioration in pricing from current levels.

In summary, we expect a solid quarter of growth coming up in the fourth quarter with improved margins. Moving on to net debt and cash flow now. Free cash flow in the third quarter was a disappointing negative $147 million.

Included in the third quarter's cash flow were capital expenditures of $62 million, $101 million of debt interest payments and $38 million of cash severance and restructuring costs. All the working capital generated $65 million of cash principally from a reduction in inventory balances.

This was well short of expectations, as a large number of customers are actively managing cash flow and further delaying payments to service companies across the board. As of Q3, we are light about $200 million in customer collections. Many of our customers are paying as well outside contractual credit terms.

We have never experienced this degree of willful disregard of contractual terms by several of our customers. Obviously, these customers have solid credit and recoverability is not in question, but the timing of collections is clearly delayed.

As our customers will benefit from better oil prices going forward, we expect them to improve their payment cycle in the fourth quarter and into next year. At the same time, we have been making normal payments to our vendors, which, in a sense, is similar to paying down debt obligations.

Free cash flow in the fourth quarter is expected to improve sequentially with better expected operating margins, higher customer collections, continued inventory reductions and lower cash severance payments.

Net debt in the third quarter increased by $271 million to reach $7.1 billion as of September 30, reflecting the negative free cash flow during the quarter and certain rig lease buyouts at the end of the lease period.

As of September 30, available liquidity remained very strong at $1.4 billion, including $1 billion of revolver capacity and $440 million of cash balances. With no substantial debt maturities in 2017 and 2018, we have enough liquidity to manage our needs. And with that, I will now turn the call over to Bernard..

Rapid OPEC production growth has reversed with major cuts in upstream investments and the steepening of decline rates. With our investment that trend is likely to accelerate to the point that some analysts are now sounding warning bells of future supply shortfalls, and I am in that camp. Two last words on our direction.

Direction is focused and disciplined. It is today, right now, it is all operations. Managing the expansion underway. What does it mean? Well, market our better technology through our 1000-strong base infrastructure. We'll develop and use our technology strength like we never have before to carve out proprietary innovative solutions.

Not all client-based solutions are evolutionary in nature. Many, or most, are evolutionary. We have a deep base of technology, which has not been harvested the way it could. It is being harvested here and now and will be developed further.

The few items disclosed in press release, and we'll this every quarter, illustrate what we are achieving routinely in technological breakthroughs. Successes come in different product lines ranging this quarter in TRS formation evaluation. We also illustrate closer to clients. Client intimacy.

Starting with specific technological application-specific client productivity and field development objectives is what we want to be known for. Beyond technology, operations will focus on two objectives. State-of-the-art operational efficiencies and achieving industry-leading quality execution.

We aim to keep the lowest safe cost structure feasible regardless of activity increases. We also want to be the industry's lowest NPT, nonproductive time, on all parts and service delivery in any and all of our locations. We want to be the most reliable. Operation's objectives can be summed up with two words, efficiency and quality.

In 2014, adjusting for divestments, Weatherford had about $14 billion in revenues and $3 billion in EBITDA. This year, 2016, we'll have less than $6 billion in revenue and less than $500 million in EBITDA. We lost about $4 billion of activity and $4 billion in pricing, almost the same size loss.

We took out 43%, almost 44%, of our payroll worldwide, substantially curtailed layers of management, upgraded in-depth operating management and restructured our supply chains and shut down many inefficient facilities worldwide.

To the best of our knowledge, this resulted in cuts of about $4.5 billion in variable costs and about $1 billion in fixed costs that we can identify. With activity, we'll have fast-rising EBITDA. We used to have $3 billion of EBITDA, and with our structural fixed cost revolution, we arguably could be about $4 billion, or $1 billion per quarter.

Lastly, the capital intensity of our core business called businesses, plural, is much lower than it was historically, but we have the entire infrastructure built up. This company will turn and grow on far less capital. The cuts in fixed costs are permanent and sustainable, even after a more than doubling of activity, and we have ample capacity.

Our supply chain and over 1,000-strong location infrastructure can accommodate three times the present activity level. Our bedrock of technology runs deep and broad within our core and with applications we haven't put on the market yet. We have vastly improved our operating bench and leadership.

Our NPT and safety statistics today earn us acknowledgments and distinctions throughout the world. While our HR hiring, training and talent development is at par with our industry's best, our orders of magnitude is better than it was. Lastly, we have a legal and financial bench which is second to none in this industry.

The accomplishments delineated above have not had the time to demonstrate a change in operating economics and financial results. We understand this. We also believe they will now and in 2017. We are entering the recovery phase for our industry. We believe with honesty and confidence Weatherford is a different company, a much improved company.

As the recovery unfolds, Weatherford will provide and must provide the financial performance to evidence this transformation. With that, I'll turn the call to the operator for Q&A..

Your first question comes from the lines of James West with Evercore. Your line is open..

Hey. Good morning, Bernard..

Good morning..

So a couple of questions, one on the North Sea. You sound much more optimistic than I would say your peers around the North Sea. Is that a factor of contract wins? And maybe this actually – this question goes to MENA as well.

Have you been picking up market share in both those regions, giving you a better perspective or a better growth projector than the peers?.

We have. We picked up market share in the North Sea. We picked up market share also – in MENA, it's obvious. We haven't really picked up market share, we're regaining market share that we had lost some years ago. Market share in the North Sea is all in and around managed pressure drilling, sub-drilling services also and is balanced between the U.K.

and Norway. Norway, we never had a large presence. It's now becoming a bit more sizable. MENA, I think gave enough geographic backdrop. I can give you more details if you want..

Okay. Okay. Fair enough. Is managed pressure drilling picking up more in the North Sea than it has historically? I mean, I know you're the dominant player there. Is that the reason, or part....

As point of fact, no, because the entire offshore sector is so depressed and durably so. Actually, managed pressure drilling is picking up market share in general in some of the line applications, but it just so happens in the North Sea we have some clients that invested in MPD and it's happening now.

And so, therefore, the prognosis is better for us in the North Sea. But in general, SSA and all the offshore markets being the way they are, MPD being a natural application for all deepwater and certainly all offshore markets, more so and before so land, that has been deferred. It's just gains in North Sea and also on land, elsewhere..

Okay..

May I also add – this is Krishna, James. So, on land particularly in the Middle East, for all gas drilling applications in several countries, MPD is now becoming more increasingly so, becoming more compulsory almost as a requirement. So we are seeing some rapid growth on land there. And the driver is cost, safety, and I'll stop there.

And cost has actually a lot to do with fluids more than anything else....

Sure. Sure..

... as opposed to the speed of drilling and then safety is obvious. So it's becoming, given time, it's becoming the norm for any kind of drilling that is used as high-pressure, so gas being the classic example..

Okay. And if I could pivot real quick to North America and the artificial lift business. So, clearly, a destocking is going on with your customer base here.

Are there – and that will reverse itself as NAM picks up, are there any new technologies you've introduced as well that may enhance your position in lifts?.

We are introducing new technology, but for now I'd rather not talk about it too much. Give us a few quarters so we can have trials and things along those lines, and we'll see – and it's not only for NAM, it's also internationally. There's some trials going on also in the Middle East.

I think for now, it should suffice that the non-ESP forms of lifts, which are four – reciprocating, progressive, hydraulics, and gas, the first three in particular have had – the biggest competitor in 2015 and 2016 actually has been destocking as opposed to one another.

Now in ESPs it has been far less the case, which makes it in a down market, a much better product line simply because those wells don't go down, they not deferred in terms of maintenance.

And so the cycle of replacement remains quite healthy, whereas the other, depending on how low the business gets, will get cycles of deferrals, and we have extensive ones.

And on top of all, our clients pressured cash flow have been using their inventories of all manners of reciprocating and progressive cavity pump lift products, which has made life far more difficult for lift than it normally is in a down market.

Now the flip is there is an inventory turn of course which is coming, yes, in addition to increasing activity..

Got it. Okay. Thanks, gentlemen..

Your next question comes from the line of David Anderson with Barclays. Your line is open..

Hey, Bernard, can you just help me understand some of the moving parts in North America and what drove the sequential growth this quarter? I'm kind of curious how much of a headwind was tubular running services in the Gulf this quarter? And maybe just what parts of onshore outperformed? Was it rentals? You talked about lift of course, pressure pumping.

Maybe I'm missing something here..

No. No. It's very simple, actually. Most of the non-pressure pumping pipelines started moving in volume towards the end of the quarter. The volume increase in simple terms in NAM in Q3 was for us unusually high for pressure pumping versus anything else. So that sums up the quarter when you look at it.

This is Q3, right? Now if you looked at September, you saw movements in all the other categories of product and service lines, which gives us the visibility into Q4. If you look at July and August, I would have to say to be simplistic, but it's correct, it was predominantly pressure pumping, which is unusual because that's not the core of our core.

And in pressure pumping, I'm afraid that at least our experience with the pricing level we have, we have absorption benefits, true. And that's a good thing, but still very limited at the end of the day versus the other parts of the service side, they're high incrementals.

Put it another way, we started the quarter with between three and four spreads utilized, we ended the quarter close to six in pressure pumping. Therein lies the increase that took place. And again in September, you had the full range of the other parts and service lines beginning their move much stronger into October..

And just to complete the thing on the Gulf of Mexico, clearly there was an activity reduction in the Gulf of Mexico, which did affect our offshore product lines. So the bottom line is that the land pickup was extremely good to offset the offshore reductions. And North America shows the mix really – our results really show the mix there.

But at this point, David, I think our Gulf of Mexico mix for the U.S. alone, because Canada obviously is a non-issue, must be less than 10%. But I think the reduction in the Gulf was happening already in Q2 and more in Q3 so it affects liner hangers, cementation, TRS, all of that. That's absolutely correct also.

But still, the land segment was still lopsided with pressure pumping much more so than it will be in the future. It's just the way it happened..

You just said you called pressure pumping not the core of your core, and that's one of the things I'm wondering about. About a month ago, you sounded like you were potentially thinking about exiting the pressure pumping business. This quarter you're talking about adding some more pressure pumping.

Can you help us understand what you're thinking is regarding pressure pumping? Where does it fit for the next couple of years? What do you want to do in this business really, ultimately?.

First of all, we have and we want to make it better in terms of the quality of the equipment, being the maintenance number one, which we have done. Number two, how well we run it. And also the combination and those applications and completion wireline. Completion wireline being obviously the plug and perforate.

Now, what will we do with it? We certainly are not interested in selling it today, it's the wrong time to sell anything today, obvious. So that's not in the picture. What we do later, I don't think we'll put any capital in it. Why? Because it's got low barriers to entry and, frankly, through cycles, low returns.

We've also learned that we need to focus all of our current attention on service and product lines that have the highest returns through cycles. We're very clear on this. So we're not going to put any capital of any significance in that business.

But we'll protect it, we'll enhance it and we may or may not divest of it, but not today and not anytime soon, wrong time..

And we use it also as a vehicle to bundle some of our other....

Yeah. Well completion..

...more higher return businesses around pressure pumping. So it does serve as a vehicle – as long as pressure pumping can return its cost with a positive contribution to margins, that's what we're focused on..

And then just or added color on the whole thing, our entire fleet, the one that we've kept, which is a million horsepower, it was organic, it was never acquired, which makes it by industry standards relatively young. It's all the same OEM, which makes it also from a maintenance standpoint very coherent and easier to manage.

And as I mentioned in my comments, I meant what I said, we have cold-stacked maintained that equipment. Maybe too well because it was an expenditure that went through our P&L, not our CapEx. But it is in good shape, and we're not going to rush to put it on the market; we'll just do it gradually when we get decent incrementals.

The program is being protected and also has been I think enhanced, best we can, with the notion to make it more valuable either to sell one day or to run it and have proper return, but not to grow it. That's our mentality. And Krishna is absolutely right.

The added bundled sales of wireline in completion give you an idea; it was very, very low initially. In Q3 it was about 50% of our fleet on the market had our wireline in completion. We think this moves to 75% or 80% in Q4, et cetera.

That's actually interesting, although that is reflected in the completion of wireline marketing and contribution, not pressure pumping, but it is facilitated by it. That's another consideration..

Okay. Thank you..

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

Thanks. Good morning, Bernard. I was wondering if you could elaborate on Eastern Hemisphere and MENA, and, if I heard you correctly, markedly improved in the fourth quarter both top-line and margins.

I'm curious with regard to the statement on top-line, you highlighted the impressive wireline contract win, but I'm just curious as to whether, one, that starts in the fourth quarter and, two, there are other contract wins that you did not highlight in the fourth quarter that provide you with the visibility and confidence for the significant top-line and margin improvement in Q4..

Well, the one that was put in the, I think, in the press release is simply because it happens to be a large number and they're not going to put all the contracts in the press release because that's probably not terribly helpful.

The other, but it's not all clear, $1.5 billion that we have right now today and that's a number that will move up over a period of time in next quarters is not all wireline, obviously not. DS, drilling services, is the second largest component. DS is in Kuwait, again; it's in Abu Dhabi again, and it is also in Saudi Arabia.

And then you have your completion. Completion is not as big of a dollar number as wireline, but it is very high margin, and again that one would be in the markets I just mentioned.

And then you have managed pressure drilling on land, which is something that we're trying to manage the growth as carefully as we can from the quality of execution standpoint, so we're not going to go very fast on that, and it is progressing; Saudi Arabia being the leader on it.

And, of course, you have a series of liner hangers, cementation, TRS on land, applications also in terms of separate contracts to be added to it. Lift not really, except in a few trials of technology, but not really lift. That would be the only one that would be missing out of these incremental contracts in MENA.

We have the equipment for that contract. I'll just make a general statement. We have the equipment. The equipment is in region or is coming in the region from other regions. So the capital requirement is it's very low in terms of fixed assets.

We do have the equipment where the equipment well-maintained, identified and everything else, and the equipment is already being deployed. In the case of wireline, in the case of DS and in the case of – well, completion is a products business, the equipment is being deployed. Managed pressure drilling is being deployed.

Actually, it's being already executed on. So this is not a situation where you're going to have these sort of lumpy contracts and all the sudden we choke on the volume and so forth and so on. Not at all. We've learnt our lessons. The equipment has been identified, it's being deployed, people have been trained already, it's going to be gradual.

So it's not all going to be in Q4; of course not. It's going to be throughout 2017 there'll be further growth.

Be mindful of the fact that I think we have been disappointing and disappointed in MENA for two years now, a bit longer actually, and it's been a considerable amount of work, considerable amount of work regaining a presence in that market, which going back many years was our most profitable region on all measures, and the highest return region on all measures.

We lost it and why we lost it is probably not something we should discuss on this call. Many of you know why. But recovering it has been a very high priority.

We have finally made some progress, and if we execute well, it's all about in NPT, our technology performs, again it's all about NPT, then I think this will be a repeat performance for future volume gains on the broad set of parts and service lines. I really believe this..

Yeah.

So in order to specifically frame the question so we're better positioned here going into this quarter, in terms of expectations, I'm just curious as to whether we could just kind of – if you feel comfortable doing so, specify because the adjectives were markedly – you sort of seem to indicate a relatively rigorous rate of sequential improvement, and I'm just trying to calibrate that with regard to the magnitude of sequential revenue improvement as well as margin improvement in MENA for Q4.

What are a realistic set of expectations on those fronts?.

First, I will let Krishna answer that. One lesson we have also learned, many lessons, is that we have I think with trying our best and everything else, I think you'll agree with me that guidance has not been our forte when we quantify things. And that will be a charitable comment.

We're well aware of it, so we're being more -directionally, we see things as they are. We're being far more careful on how we express numbers and so forth and so on because we dread the notion of being wrong. With that being said, I'll ask Krishna to get his feet wet and say something before I say something..

Right. So, Bill, first of all, if you look at the last quarter's press release, you'll find some, one or two mentions of very large contract wins in the Middle East as well. Now those contracts are also being mobilized, all the equipment, people, training everything has been mobilized across Q3, but you start seeing the revenue kicking in in Q4.

So it's not just the wireline contracts we referred to in this press release. It's also earlier contract wins that you can verify. So really there's quite a robust underpinning of our expectation of revenue growth in the Middle East. I mean, as Bernard said, do we want to put a number to it? It's definitely going to be in the high-single digits.

That's our expectation sequentially..

Okay..

And obviously it'll come with margin growth as we recover our fixed costs in a much more effective manner. Remember, much of the equipment is already – most of the equipment is already on our books depreciating, so there's no additional CapEx or depreciation costs associated with earning this revenue, so it's going to be accretive to our margins..

That's helpful. And then last one for me is that on the North American, I certainly agree with the line of sight with regard to the sequential improvement in a top line. You had pretty vigorous improvement in the third quarter and yet the incrementals were subdued.

We probably have a decent amount of reactivation expense and R&M expense associated with those frac leads.

I'm just curious as to what drives the above-average incrementals in the fourth quarter when we saw pretty vigorous top-line growth in Q3 but subdued incrementals?.

Actually much of the revenue growth in Q4 will come from all the other products and service lines. This is what we saw in September, this is what we are seeing in October.

Now pressure pumping will continue to rise, but I think we won't get, I don't think, any further more rich incremental contribution from them but they'll be diluted in terms of effect on margin by the incrementals of the other projects of that size will be much more robust in Q4 for us than they were in Q3..

It's activity mix. I mean the growth ....

The mix, the mix will be..

...the growth in Q3 in North America dominated by pressure pumping, but the other product lines did contribute. But the returns, the incrementals on pressure pumping are obviously lower. In Q4 that reverses..

Reverses..

So the other product lines increased more, that's our expectation, and they bring more margins..

Okay..

So, the long description of various product lines is trying to cover the fact that they were moving and they just didn't move as much in July and August.

It is also true, I would add, that the types of clients that we're getting work from and inquiries from and so forth in NAM is a little bit different, was a little bit different already in September. It is in October than was an earlier part of Q3. Bigger companies, I think ones that have high engineering content, et cetera..

Thank you..

Thanks..

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

Good morning, gentlemen, and Karen..

Good morning..

Congratulations on the realization of the negatives of giving explicit guidance. Thank you. Just perform; you'll make us all happy.

Bernard, did I hear you guys say that offshore is only about 10% of North American revenues?.

Less than that, actually. If you include Canada, it would be less than that. Yes..

Okay. I didn't want that to be my first question, though, it was just a clarification. Bill was talking about the cost, you guys talked about the cost of reactivating, starting to reactivate your 10 idle pressure pumping spreads. You noted that you kept them well maintained, which should reduce the capital costs required.

Can you give us an idea of how much, is it $1 million? $2 million? $3 million to reactivate an idle spread today?.

It's about $5 million to $7 million, in that range per spread. But, obviously, we will spend that if the pricing justifies bringing those fleets back online. This is roughly what we expect. It depends on the particular spread we're talking about..

That's helpful. But let me ask a question that's kind of, I think, on everybody's mind, and that's the free cash flow issue.

Is there any reason why Weatherford can't generate free cash flow? Is there something about artificial lift, or well construction, or completions or formation evaluation that would cause them not to be able to generate free cash flow?.

Not at all. I mean free cash flow in Q2 and Q3 is a very simple story, Jim. Customers are not paying us on time and we are obviously incensed about it. Given the balance sheets and the financial stability of some of these very large customers, the way they are managing the cash flow is a little bit egregious to say the least.

When you think about their own cash flow and the uses they're making, they're favoring dividend payments and other things like that, including some stock buybacks, and disadvantaging the service industries that are vendors to them. Obviously, this is not a permanent situation. With oil prices improving this will reverse itself.

But it's a simple – one simple situation that explains the free cash flow miss. It's not insidious or something different from that..

The other thing you can say is that our DSOs are off about 14 days from the beginning of the year, right? On receivables. Our DPOs have been, actually this is up 14 days. Yeah. Yeah. I'm sorry, up 14 days. Now DPOs on the payables side are actually down about eight days.

The point being that we're paying down – our payables are rather low and there are reasons why we've done that because we're getting good terms from our suppliers for the future. But our clients are doing exactly the opposite and outside of contractual terms.

And now the other thing about Weatherford is of course for us, because we have leverage, we need EBITDA in order to create free cash flow or we have to harvest our balance sheet. To harvest our balance sheet we need inventory which we get liquidation. We also need a receivables-payables balance which is positive.

It hasn't been positive in two quarters for the reason that Krishna explained. That's it. Period..

I think I'd like to expand. It's not just a free cash flow comment.

We have seen many instances now of internationally, particularly, basically international, where we have won contracts and signed contracts with the price list with customers and these very well-charged customers have come back after signing the price list in the midst of executing a multi-year contract and demanded pricing discounts.

This is what happens in a down cycle and we have given them pricing discounts. On top of that, they've delayed payments to us, right And not just that. The comments I'm making are generic. Also, these companies have gone through both pricing discounts and slow payment from these customers.

Now what happens and this is, again, based on experience, many, many years of experience, when oil prices do reverse, we feel that we can certainly go back and this has happened in conversations with customers.

We can certainly go back and request pricing increases, and these customers will reward for loyalty as they will with the rest of the industry as well for being patient with them, and that is part of the mechanism of reversing the pricing internationally and reversing the payment terms as well. This is the real world.

It doesn't just depend on what you write on a piece of paper. It's the relationship that goes very, very deep and over many years and both sides share the pain, and when that turns, everybody shares in the gains despite the rhetoric you hear publicly..

And as investors, we kind of lose track of the timeframes that actual industries operate under, so I think that's part of it. My last question, if I could, Bernard, you mentioned that sub-Saharan Africa and Asia-Pac can't get any worse. Those have been the two worse markets for everybody, but not being able to get any worse is positive.

Does that mean your margins, your income, operating income won't get any worse either?.

I think actually from what we see, it is getting a little bit better. No, I mean, it's a negative. Now let's be very clear, but Q4 is, from what we see, better than Q3 simply because of cost cuts but has continued. But don't look at it from the top line....

No, no, no..

...because we don't see anything there. So the answer is we are as cautious as we've become now. We are on safe ground, we believe, when we say that it won't get any worse in Asia Pacific and SSA. The truth is with self-help, as in cost cuts, the losses will not be as great.

And believe me, they've been the worst performers in the Eastern Hemisphere by far. Without that, it would've been actually far better behaved..

Okay. Gentlemen, thank you very much..

Thanks, Jim..

And your next question comes from the line of Ole Slorer with the Morgan Stanley. Your line is open..

Thank you very much. Bernard, must be good to get to this quarter in the rearview mirror..

Yes..

I must admit I felt a little queasy coming in this morning but thanks for a very clear conference call in terms of how you see the next quarter shaping up. Just, I mean, we do run a bunch of land rigs, which give you also some kind of forward view of what's going on, maybe beyond that of other service companies.

So I wonder whether that you can tell us what you see particularly in North Africa, Middle East from your window into the land rigs..

I'll let Krishna answer most of it. I would just say that, in general, the quantity of inquiries and also of bidding invitations has been substantially increased over the past 60 to 90 – let's make it 90 days for future activity. Particularly in MENA. You're also ....

That's right. We're seeing a record number of tenders coming in from the GCC countries in general, particularly two countries where we have – three countries in fact where we have a number of rigs being tendered.

And this was a leading indicator and where we had a contract driller, one of our businesses is contract drilling, so it's a leading indicator for increased land activity, first in the form of rig tenders and then of course services will follow.

So we are quite, let's say, enthusiastic about increased activity and then of course down the line with better commodity prices, increased pricing as well in the Middle East..

Remember that, by and large, we are, although we have obviously plays in offshore TRS, et cetera, we are historically predominantly a land player. And this is true for the rigs, true for everything else therefore the early warning system that land rigs represent is valuable to us for all the other product and service lines.

Because this is where we play. That's our natural spot, land..

Just sort of the grapevine, it sort seems as if we are looking at maybe tenders for a total of maybe as many as 40 or 50 incremental land rigs across some of the key kind of Kuwait, Saudi, Abu Dhabi.

Can you give us some sort of maybe ...?.

Algeria also. It's really Algeria, Oman, Saudi Arabia will be – and Kuwait, they'll be the primaries..

And your number is fairly accurate except that on top of the current tenders which approximate the number you said, there's another tender coming up in one of those countries for an additional 45 rigs..

An additional 45 rigs?.

Exactly. In the next six months, we are working with a customer closely on this one. So there's going to be a significant addition of rigs in the next 12 months, I would say, in that region..

The interesting thing, and I don't want to get sidestepped here, is that, this increase in rig activity is not expected to come with a material increase in oil-producing capacity; much of it is going into gas..

That's right..

Interestingly enough..

And also to stay in place..

In the same place, that is actually a separate comment, which I don't want to get into, but it's an interesting side comment..

So this is what gives you part of your confidence when you're talking about growth beyond the fourth quarter in the region?.

Yeah. Fourth quarter is, look, fourth quarter is just the beginning. Frankly, the third quarter should be in the fourth quarter. Or put another way, we have to start somewhere, and the fourth quarter is the beginning in our view, but it's not one quarter.

For that part of the world, it should be a methodical, organized, disciplined, growth process not with some crazy startups and things like that, not at all. Again, the operating focus has been so intense at Weatherford, we'll take our time. Quality is an obsession.

We can live with growth and quality, we can live with growth and margin, we can live with growth and predictability. We can live with growth and very good free cash flow. I know these things are all hard for us to manage historically, but that's what we think we're organized in doing today.

And that's what we plan on doing Q4, and 2017 beyond is, we don't know; beyond is beyond; but Q4 and 2017, directionally more the same..

Second question, yes or no question, Krishna.

Free cash flow in the fourth quarter? Yes or no?.

Yes, there will be free cash flow in the fourth quarter, positive free cash flow. Of course, the extent of it will depend on customer collection, the extent of customer collections, so wish us luck on that one..

At this point, we'll settle for free cash flow. Don't promise too much..

That's right..

Finally ....

The other aspect, if I may, is that your EBITDA is climbing..

That's right..

Because at the end of the day, free cash flow comes from EBITDA, at the end of the day, that's where it should come from. But of course in a very depressed market, it's hard. That's where should come from, and then it becomes a lot of free cash flow, which seems to be antithesis to Weatherford and just, give us some time..

I'd like to add also that, from a strategic standpoint, there is no existential liquidity issue now for Weatherford. We have a first major maturity of debt only in 2019, sometime in 2019. So there's no imminent threat or anything like that. So we will recover our liquidity position even stronger as we go through the next quarter..

No, I wasn't suggesting there was a liquidity situation; it's just nice to see free cash flow..

Right..

Finally, $0.39 was a bit of a shocker, but it sounds like it suggests that $0.27 was sort of more the number that would be computed on a comparable way to the way the first quarter came together?.

The normalized is $0.27 had we just been able to do the normal tax benefit on the U.S. losses, right? So the expectation was that we would continue to do that in the third quarter as we've done for the last several quarters.

Now we were not able to do it for accounting reasons, because of the valuation allowance charge we had to take, and that reversed the tax benefit on the U.S. So the $0.39 comes like a sticker shock, but the real underlying is $0.27..

You might want to expand a little bit on how that works if the U.S. becomes profitable..

Well, if the U.S. becomes profitable going forward, then we will see profits in the U.S. and no tax charge against it. So in fact the tax rate will be an artificially low tax rate....

The opposite phenomenon, it appears to be better than it really is..

Correct. Today, this quarter in Q3 and Q4 for example, we'll be showing losses and a tax charge, and then in the future, we'll show potentially taxable profits, but very low tax, no tax in the U.S.. for example, and no cash taxes for years to come either in the United States.

So it's really the way the quirky accounting really works on this one more than anything else. So one should not get sidetracked by that..

Well, it would be nice to see a few quarters coming up that will look deceptively good on top of being good; we can handle that, Bernard..

So can we. Thank you..

Thank you very much..

Thank you, Ole..

Your next question comes from the line of Mike Urban with Deutsche Bank. Your line is open..

Good morning. Thanks for sneaking me in. Sorry to harp on the Middle East but it does seem to be really a critical driver here in the near term. You talked about that $1.5 billion in contract wins as being net or incremental. You're going to do roughly $1.5 billion in that whole region, the MENA region this year.

Is that suggesting over the next few years that business can double or are there offsets to that?.

Well, let's just bracket it. The $1.5 billion over three to four years, so take $1.5 billion divided by 3.5 and that will give you the annual increase. It's a net increase. That's absolutely correct. So let's call it $400 million a year in simplistic terms, but that's real.

So you could say that if we are, we are $1.5 billion, that's MENA and Asia-Pacific together. You could add $400 million. Now the numbers will end up being different because you'll get some in Q4 and it will move the way operations move, but that is a reasonable thing to say. The $1.5 billion doesn't all happen in one year.

It gets spread over three to four years. So that is the difference between what you said and the reality.

However, I will also add that the $1.5 billion, which is in hand, has been in hand for a few weeks that you would stand different times and since we already mobilized for some, actually for quite a bit and so forth, there will be other further net incremental contracts, clearly, or they're also signing of contracts win some, lose some.

We purely focus on the net incremental. Otherwise it's meaningless. There will be further contractual gains that will happen in two or three quarters. It may not be as spectacular. I don't know. But they'll be further.

They will add fuel to the growth fire there, but again the key for us is to deploy the people, the equipment in a manner that is operationally very focused on quality, NPT, safety because it's good marketing. It also generates better returns. So the growth will be, I think, gradual.

It will be disciplined growth, the kind of disciplined growth that you would want us to have, that we want to have also. That's the one that gives the highest return, including free cash flow..

Okay. Got you. And then just more broadly, you have laid out a path to significant growth with the current base of capital both infrastructure and equipment that you have.

It's a good problem to have, but once you get to that level and things normalize, I'm not sure what that even means anymore, but once you get to some sort of normalized level of the business and activity, what do you think your capital intensity is going forward? So in the past, I mean ....

We actually know. We actually worked a lot on it, but that will take a while before we get there. For us, it's around 5%, 6%, something like that percent of the revenues but that's not today. When you get to that normalized level that, I agree with you it's hard to know what normalized is, but I know what we think of normalized.

This is where we'll end up with a sort of product service line mix that we have, remembering that we'll maintain, protect and enhance pressure pumping, we'll maintain, protect and enhance rigs. We're not likely to pour capital there, because the highest return product and service lines are completion, well construction, lift, et cetera, not that..

And on a working capital basis, I mean, that used to be $0.25, $0.30 per dollar of revenue growth.

What do you think that is? Is it kind of normalized?.

No. I think $0.15 to $0.20 is much more reasonable as an assumption going forward, subject to the collection bumps that the whole industry is seeing right now. So I'm talking about a normal situation in which we expect to take place sometime in 2017, and then you're looking at $0.15 to $0.20..

Okay..

In the near term, actually, you may have that be a lower number for 2017. For example, based on the fact our DPOs are so low and the DSOs are so high. Yeah, but that's a one-time sort of adjustment.

Do you understand what I just said?.

When we enter 2017 you're going to see also the initial spurt in revenue growth, particularly in the start-up sales product lines. It's going to the new inventory going forward. We are still long on inventory. It's not like we have exhausted all our long inventory from the past. So you're going to see a slow start in the build-up of working capital..

Right..

And then it'll gradually normalize at the levels I spoke about..

That's all for me. Thank you..

And your next question comes from the line of Waqar Syed from Goldman Sachs. Your line is open..

Thanks for taking my question.

I understand that you're not giving concrete guidance but any color you can provide in how we should be thinking about incremental margins either on a regional basis or company-wide basis for fourth quarter and perhaps into 2017 as well?.

Look, I think given that we have taken out a lot of our fixed cost base and our CapEx, incremental CapEx requirements are quite modest and we grow into topline growth based on those two fronts, our incrementals will be quite strong. I would say well in excess of 50%. I mean, I don't want to say more than that at this point.

But on a company level, you are looking at that kind of incremental..

Okay.

And that's on the EBIT side, and on the EBITDA line side, would that still be within that range or would that be less than that?.

No, EBITDA will be better than that..

Would be better than 50%. Okay..

Yeah..

Thank you very much..

Thanks, Waqar..

Thank you, everyone, for joining us today. We've gone a little bit past the hour. So, this concludes the call..

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