Weatherford International plc (WFT)

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Weatherford International Ltd. (WFT)

Q1 2010 Earnings Call Transcript

April 20, 2010 9:00 am ET

Executives

Bernard Duroc-Danner – Chairman, President, and CEO

Andy Becnel – CFO

Analysts

Jim Crandell – Barclays

Ole Slorer – Morgan Stanley

Angie Sedita – UBS

Bill Herbert – Simmons & Company

Jeff Tillery – Tudor Pickering Holt & Company

Dan Boyd – Goldman Sachs

Mike Urban – Deutsche Bank

Robin Shoemaker – Citi

Presentation

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2010 Weatherford International earnings conference call. My name is Gina and I will be your coordinator for today. At this time, all participants are in listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

We’d now like to turn the presentation over to your host for today’s call, Mr. Duroc-Danner, Chairman and Chief Executive Officer. Please proceed.

Bernard Duroc-Danner

Thank you. Good morning. Andrew – Andy will read his comments and then I will read mine and we will take questions as usual. Andy?

Andy Becnel

Good morning. For the first quarter of 2010, we report adjusted earnings per share of $0.06. The adjusted number excludes the following items totaling $81 million after tax.

A non-cash charge of $40 million as a result of the Venezuelan Bolivar devaluation; this came in below the $50 million estimate we communicated on the Q4 call. A $38 million non-cash charge related to the curtailment of our supplemental executive retirement plan; this was frozen on March 31, 2010. $6 million in severance and facility closure costs, primarily in the Western Hemisphere. A $5 million benefit related to the reversal of prior cost accruals for our exit from sanctioned countries. And finally, $2 million of government investigation costs.

Compared to our Q4 performance, earnings per share increased $0.04 net. The field contributed $0.05 of improvement with a $0.09 uptick in North America, partially offset by a $0.04 internationally, $0.02 each from the Eastern Hemisphere and Latin America. The sequential operating improvement would have been greater but for one, an $8 million non-cash charge related to the TNK put and two, a one-time $7 million adjustment to Borets' equity and earnings. This stemmed primarily from asset write-downs at their operating company. Both items handicapped results in Europe/West Africa/FSU.

Below the line items took away $0.01 of EPS sequentially with all items other than tax flat quarter-on-quarter. The effective rate for the quarter was 19.3%. On a consolidated basis, revenue declined to $88 million sequentially or 4%. In North America, revenue climbed 21%. The $154 million improvement was split fairly evenly between both United States and Canada.

In the East, revenue fell 5% or $52 million. The drop was equal in both markets and was worse than the 3% to 4% seasonal decline we typically see during Q1. Exceptionally, cold weather in Europe and China, as well as politically induced delays in Algeria were the primary culprits.

Latin America revenue retreated 31% or $190 million on the back of reduced project activity in Mexico and continued deterioration in the Venezuelan market. Venezuela ran at roughly 40% of its Q4 '08 peak.

Consolidated EBIT before corporate and R&D was $257 million, up $41 million sequentially. Operating margins were 11%, a 210 basis point improvement over Q4. In North America, margins climbed almost 700 basis points to 12.6% with a $71 million improvement in profitability. Prior cost reduction efforts, improved fixed cost absorption, and a more favorable sales mix drove the upturn.

In the East, operating income dropped $12 million, margins slid 60 basis points. Europe/West Africa/FSU produced the entire decline as the TNK put and Borets write-off stung our profitability by $15 million.

Latin America profitability retreated $18 million and margins fell 70 basis points. Profit improvements throughout the region were unable to offset the loss of revenue and associated profit from the reduced scale of project work in Mexico, as well as deterioration of the Venezuela market.

A few comments on cash flow performance and capital structure. During Q1, we generated EBITDA of $410 million, D&A ran at $249 million. Capital expenditures were $209 million for the quarter net of $22 million of lost and whole revenue.

At the request of some investors, we have included both a balance sheet and a net debt roll-forward in our earnings release. Net debt increased to $165 million during the quarter. This most accurately represents our net cash flow, including net cash flows from acquisitions and dispositions and differences between cash payments and current period expense for interest and taxes.

Cash payments on interest and taxes exceeded book expense by approximately $150 million this quarter. At quarter-end, our ratio of net debt to net capitalization stood at 40.4% with total net debt at $6.6 billion, up from $6.5 billion at the end of Q4.

Looking forward to Q2, we expect a flat EPS performance compared to our reported Q1 number, $0.06. Our current expectations by region are as follows. North America, a $40 million decline in revenue and a net $0.05 decline in earnings with a seasonal decline in Canada, partially offset by modest top line growth in the U.S. and further margin improvement.

In the East, a $100 million improvement in revenue and $0.04 of EPS improvement due to improved activity on the back of more clement weather. The improvement should be fairly evenly spread between our two geographic units in the East.

Latin America, we expect a 5% to 10% decline in revenue and $0.01 improvement in earnings. Wells drilled in ATG field will be down sequentially and will be partially offset by a ramp in other activity throughout the region.

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