Weatherford International, Ltd (WFT)

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Weatherford International Ltd. (WFT)

Q2 2011 Earnings Conference Call

July 26, 2011 08:00 ET

Executives

Bernard Duroc-Danner – Chairman, President and Chief Executive Officer

Andrew Becnel – Chief Financial Officer

Analysts

Jim Crandell – Dahlman Rose

Brad Handler – Credit Suisse

Will Herbert – Simmons & Company

Ole Slorer – Morgan Stanley

Angie Sedita – UBS

Robert MacKenzie – FBR Capital Markets

James West – Barclays Capital

Joe Hill – Tudor, Pickering, Holt & Company

Mike Urban – Deutsche Bank

Robin Shoemaker – Citi

Presentation

Operator

Good morning. My name is (Ashley) and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International Second Quarter 2011 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. (Operator Instructions) As a reminder ladies and gentlemen, today’s call is being recorded. Thank you.

I would now like to turn the conference over to Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Sir, you may begin your conference.

Bernard Duroc-Danner Chairman, President and Chief Executive Officer

Thank you. Good morning everyone. Andy will read his prepared comments and I will follow-up with the same.

Andrew Becnel Chief Financial Officer

Good morning. For the second quarter of 2011, we report non-GAAP EPS of $0.17 before excluded items. This is a $0.07 improvement over the prior quarter and at the high end of our guidance. Items excluded were $16 million after-tax or $0.02 made up a $13 million of after-tax severance and exit changes and approximately $3 million of after-tax expenses related to investigations.

A reconciliation of these items can be found on our website at weatherford.com. Sequentially, the field accounted for the entire earnings uplift growing the operating income line by approximately $68 million or $0.07. An $8 million improvement and below the line cost was offset by an increase in the effective tax rate, which came in at 27.2%.

On a consolidated basis, revenue increased $196 million sequentially or 7% and advanced $615 million or 25% compared to Q2, 2010. Consolidated EBIT before corporate and R&D was $421 million with operating margins at 13.8%, a 140 basis point improvement compared to Q1. Incremental margins were 34.8% companywide.

Operating profit in our international markets improved $108 million sequentially as revenue grew 14% or $212 million. Margins expanded 580 basis points to 10.4% on incrementals of 51%. This international performance was partially offset by North America’s $16 million revenue decline and $40 million retreat in operating income as strong growth in U.S. revenue and steadily expanding margins were overwhelmed by the impact of Canadian breakup.

The strongest regional performance came from Europe, West Africa, FSU, where operating income let $55 million on $82 million of revenue growth. Incremental margins were 67% as the winter seasonality in the North Sea, Russia, and Caspian abated and we experienced higher demand for drilling services, completion systems, and stimulation in chemicals as well as improved utilization in integrated drilling in Russia.

In the Middle East, North Africa, Asia-Pacific region, revenue grew $42 million or 7% with the resulting $23 million uplift in operating income. Incrementals were 55%. Improvements in Asia-Pacific, particularly Australia and China helped to offset the impact of a full quarter of reduced activity due to political unrest in the Middle East and North Africa.

By product line, well construction, integrated drilling, and artificial lift posted strong performances. Latin America added $30 million sequentially at the operating income line on $88 million of revenue growth. Incrementals were 34%. Argentina, Columbia, and Venezuela posted strong sequential performances. Drilling services, stimulation in chemicals, and artificial lift benefited from improved demand.

During Q2, we generated EBITDA of $598 million with D&A running at $282 million. Capital expenditures were $364 million for the quarter net of $23 million of lost and whole revenue. Net debt increased approximately $145 million this quarter to $7.0 billion. Operating working capital increased $193 million. As of quarter end, the ratio of net debt to net capitalization stood at 41.5%. In July, we successfully renegotiated our revolving credit facility. Capacity was increased to $2.25 billion and maturity was extended to July 2016, while reducing fees and improving pricing terms.

For the third quarter, we expect earnings per share of $0.24 to $0.26 before any excluded items. We expect seasonal recovery in Canada coupled with otherwise steady improvement in the U.S. and international markets.

I will now hand the call over to Bernard.

Bernard Duroc-Danner – Chairman, President and Chief Executive Officer

Thank you, Andy. I followed my own comments on Q2. Quarterly revenues reached new historical peak of $3.1 billion. Year-on-year growth was up 25%, while sequential growth is up 7%. It was achieved in spite of the Canadian breakup, which Weatherford is always the large financial event. We are, by far, the most Canadian of our peers. As a reminder for legacy reasons, Canada is still our second largest country by revenues.

The international segment earned the quarter with sequential of $108 million improvement in operating income and 14% quarter-on-quarter growth in revenues. International margin recovered 580 basis points sequentially to 10.4%, as a result of 51% overall incremental.

International performance is broad based. It was strongest in Russia, Caspian, North Sea, UK in particular, Australia and then China for Eastern Hemisphere. Columbia and Argentina for Latin America. The two highest performers company-wide were Russia and Columbia.

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