Weatherford International Ltd (WFT)
Q3 2010 Earnings Call
October 19, 2010; 09:00 am ET
Bernard Duroc-Danner – Chairman, President & Chief Executive Officer
Andy Becnel – Chief Financial Officer & Senior Vice President
Jim Crandell – Barclays Capital
Ole LlcSlorer – Morgan Stanley
William Herbert – Simmons & Company
Marshall Adkins – Raymond James
Angie Sedita – UBS
Mike Urban – Deutsche Bank
Kurt Hallead – RBC Capital Markets
Previous Statements by WFT
» Weatherford International Ltd. Q2 2010 Earnings Call Transcript
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» Weatherford International Ltd. Q4 2009 Earnings Call Transcript
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Duroc-Danner, Chairman and Chief Executive Officer. Please proceed, sir.
Thank you. Good morning. Andy will read prepared comments and I will do the same and we will take Q&A as usual. Andy please.
Good morning. For the third quarter of 2010, our reported EPS number is $0.18 before excluded items. This is a $0.07 improvement over the second quarter and chops are$0.16 guidance. Our reported number excludes the following items, which together represent an after tax gain of $12 million. One, non-cash benefit of $90 million related to the revaluation of the TNK put. A $54 million charge for revisions to our profitability estimates on our project management contracts in Mexico, where the client’s budget constrains triggered an activity decline to near zero and an expected modification to future drilling plans.
As a reminder, the only projects we account for on percentage of completion basis are in Mexico and one project in China. The Mexico projects cover approximately $2 billion of revenues over their lives. The change brought about this quarter was in essence due to a change in public policy in Mexico with respect to expenditures.
Third, $14 million in severance and restructuring costs, $7 million of premiums paid in connection with the tender and repurchase of outstanding bonds to 2011 and $3 million of costs incurred in connection with our ongoing and government investigations. This is about the same charge that we took in Q2 related to the investigations.
Following the Q3 gain on the TNK put, a $62 million liability remains on our balance sheet at September 30. A reconciliation of all these items can be found on our website at weatheford.com. On the EPS side, the field was responsible for the entire $0.07 sequential step up. North America contributed $0.08 while International Operations dropped by a $0.01.
On a consolidated basis, revenue increased at $96 million sequentially or 4%, and advanced $384 million or 18% compared to the prior year quarter. North America revenue climbed 19% sequentially with strong performance in the US land market and the seasonal recovery in Canada drove the growth. On conventional gas, oil directed drilling and liquid rich plates continue to ramp.
In the East, revenue declined $8 million sequentially or 1%. Compared to Q3 ‘09, revenue increased $95 million or 9%. Strong incremental performances in the UK, Iraq, Kuwait were offset by declines in Norway and parts of sub-Sahara Africa. Artificial lift and drilling services were the top performers on a product line basis. Latin America revenue retreated 18% or $74 million on a sequential basis and 36% or $189 million compared to Q3 ‘09. The Mexico events punished chops revenue by $110 million sequentially while the rest of the revenue, region grew revenue by approximately 15% over the prior period largely on the back of Brazil and Colombia.
Consolidated operating income before corporate and R&D was $372 million, up $64 million sequentially with operating margins at 14.7%. This is a 210 basis point improvement over Q2. Compared to the same quarter of the prior year, consolidated EBIT before corporate and R&D was up $138 million or 59%. By region, in North America, operating income of $202 million stepped up 56% sequentially and margins climbed 430 basis points to 18.3%, incrementals were just north of 40%. Increased onshore activity in the US combined with Canada seasonal recovery allowed for improved fixed cost absorption and further pricing gains.
In the East, operating income was down $12 million sequentially with margins down 100 basis points to 11.7%. Europe, West Africa, FSU operating income declined $2 million sequentially with margins relatively flat versus Q2. In Russia, we booked a one-time $6 million negative adjustment after finalizing third-party asset valuations in connection with the TNK-BP acquisition, this is included in our recurring results.
Middle-East Asia Pac operating income declined $10 million or 13%. And margins slid 170 basis points as start-up cost burdened the expense line and operating delays tolled revenue growth. Latin America profitability increased $4 million and margins expanded 310 basis points to 12.4% partly on the back of the decrease in revenue due to the project adjustments.
Cash in capital, during Q3 we generated EBITDA of $545 million with D&A running at $269 million, CapEx was 243 for the quarter net of $25 million of lost and whole revenue. Free cash flow was $85 million defined as changes in net debt, this is after payment of approximately $25 million in bond issuance cost and tender premiums and despite cash interest and taxes exceeding book expense by approximately $72 million.
Through the first nine months of the year we are $138 million free cash flow positive, which is a direct reduction of net debt. As at the quarter end, our ratio of net debt to net capitalization stood at 38.8% with total net debt at $6.3 billion. All free cash flow was applied to debt repayments. We completed a $1.4 billion debt offering in the later part of September and used the proceeds to pay down our short-term borrowings on our revolver and completed a $167 million tender of senior notes due in 2011.