Baker Hughes Company (BKR) Q1 2013 Earnings Report, Transcript and Summary

Hello, my name is Sandra, and I'll be your conference facilitator. At this time, I would like to welcome everyone to the Baker Hughes First Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Mr. Trey Clark, Vice President of Investor Relations. Sir, you may proceed.

Thank you, Sandra. Good morning, everyone, and welcome to the Baker Hughes First Quarter 2013 Earnings Conference Call. Here with me today is our President and CEO, Martin Craighead; and Peter Ragauss, Senior Vice President and Chief Financial Officer. Today's presentation and the earnings release that was issued earlier today can be found on our website at bakerhughes.com. During the course of this conference call, we will provide predictions, forecasts and other forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks and assumptions. We urge you to review Baker Hughes' SEC filings for a discussion of some of the factors that could cause actual results to differ materially. Lastly, reconciliation of operating profit and other non-GAAP measures to GAAP results can be found on our earnings release and on our website in the Investor Relations section under Financial Information. And with that, I'll turn the call over to Martin Craighead. Martin?

Thanks, Trey, and good morning, everyone. Let me start off with a few comments about our results this quarter. First, North America took a step in the right direction, with growth in both revenue and margins. The results were driven by strong activity in Canada, along with improved utilization in our Pressure Pumping business. And we're starting to see the U.S. market settle down. The declines in spot pricing for well stimulation are showing signs of tapering off, and the onshore rig count is projected to begin climbing after more than a year of consecutive quarterly declines. Offshore, our customers experienced significant delays as the industry continues to adapt to changing regulations, and this is having an impact on our Gulf of Mexico business. Although these headwinds will probably persist for the short term, the long-term outlook remains bright. The number of ultra-deepwater projects continues to grow, and Baker Hughes is very well positioned to capitalize on these opportunities. Turning to our international business. Results were mixed. As expected, strong seasonal year-end product sales dropped off in the first quarter. Also, as we have previously communicated, startup costs to support our new contract in Norway had a negative impact on profitability for our Europe/Africa/Russia Caspian segment. Although our first quarter's results in this segment are disappointing, the long-term outlook is positive. The transition of Baker Hughes to the #1 provider of drilling services in the North Sea, an area known for the early adoption of new technologies, is more than just strategically important. This new business will drive long-term growth and profitability for years to come. And during the first quarter, we saw improved performance of our Middle East/Asia Pacific segment. We're building a strong integrated operations business in Iraq and growing our Saudi Arabia geomarket to include new work in the unconventionals. And gains in these markets were enough to overcome seasonal declines, and I'm pleased to see growth in both revenues and margins for this segment. And finally, I am pleased with the evolution of our product portfolio and our service offering, and I believe we are commercializing the very best innovations to meet our customers' needs, especially as we migrate unconventional technologies, such as our highly successful FracPoint sliding sleeve system from North America to places like China, Russia and now, Mexico. Later in the call, I'll provide more details on our outlook. But first, let me turn it over to Peter for details on the quarter and our guidance. Peter?

Thanks, Martin, and good morning. This morning, we reported adjusted net income for the first quarter of $290 million or $0.65 per share. This excludes the $23 million or $0.05 per share charge for currency devaluation in Venezuela. On a GAAP basis, net income was $267 million or $0.60 per share. Revenue for the first quarter was $5.2 billion, which is down $95 million compared to the previous quarter. Adjusted EBITDA for the first quarter was $893 million, up 4% sequentially. To help in your understanding of the quarter's results, I'll bridge last quarter's earnings per share to this quarter. In the fourth quarter of 2012, we posted net income of $0.49 per share. First, add back $0.14 for the reserve in Latin America during the fourth quarter; add $0.02 for North America operations, as higher Canadian activity and improvements in our U.S. Pressure Pumping product line, partially offset by reduced profits in the Gulf of Mexico; subtract $0.07 for international operations due to seasonal year-end product sales in the fourth quarter that did not repeat and overall weakness in Europe/Africa/Russia Caspian, which was partially offset by increased activity in the Middle East; subtract $0.01 for Industrial Services due to seasonality; add $0.01 for lower corporate costs; and add $0.07 for lower effective tax rate. At this point our adjusted earnings per share is $0.65. To get to GAAP EPS of $0.60, subtract another $0.05 due to the currency devaluation in Venezuela. On Table 5 of our earnings release, we provide adjusted financial information, excluding the impact of the Venezuela currency devaluation on our segment results this quarter. From this point on in the conference call, any comments on revenue, operating profit and operating profit margin refer explicitly to Table 5 in our earnings release, unless otherwise stated. Revenue in North America was $2.6 billion, up $44 million or 2% sequentially. North America operating profit was $235 million, up $13 million sequentially. As a result, our North America operating profit margin was 9%, which is an improvement of 30 basis points sequentially. This sequential improvement was driven by several factors. In the U.S., despite a 3% decline in the onshore rig count, our Pressure Pumping product line realized improved revenue, operating profit and operating profit margin. Higher fleet utilization resulting from improved activity, share gains and more 24-hour operations and reduced guar costs contributed favorably during the quarter. These were partially offset by continued pricing declines. Our other product lines in U.S. land experienced a modest sequential reduction in activity in line with the decline in rig count during the quarter. In Canada, strong sequential rig count growth contributed favorably to our quarter's results. And finally, our Gulf of Mexico geomarket experienced an unexpected sequential reduction in revenue with high decrementals, primarily due to industry-wide activity delays while our customers managed a variety of regulatory and operational challenges. As a result, Baker Hughes experienced inefficiencies that contributed to our profit decline. Moving to international results. Revenue was $2.3 billion, down $133 million or 5% versus the prior quarter and up $127 million or 6% compared to a year ago. International operating profit was $281 million, down $44 million sequentially, excluding the Q4 reserve in Latin America. International operating profit margin was 12%, down 110 basis points sequentially, again excluding the Q4 reserve in Latin America. Our Middle East/Asia Pacific segment delivered improved results during the quarter, with both record revenue and operating profit. Sequentially, revenue grew $12 million despite the seasonal decline in product sales. This improvement was primarily due to increased integrated operations activity in Iraq and Saudi Arabia, as well as activity gains in the U.A.E., Oman and Qatar. Operating profit increased $35 million sequentially largely due to improved operating efficiencies in Iraq. Operating profit margins were 13%, which represents a sequential increase of 380 basis points. In our Europe/Africa/Russia Caspian segment, we experienced a decline in revenue and operating profit. Operating profit margins were 11% in the first quarter. The revenue and profit decrease is primarily associated with strong seasonal year-end product sales in Africa and Russia during the fourth quarter that did not repeat. Seasonal declines in activity for Russia Caspian, along with project delays in the United Kingdom and Africa, also contributed to the reduction. As previously communicated, profit margins were further impacted by mobilization costs for our new integrated drilling services contract in Norway. And finally, in our Latin America segment, operating profit margin was 12.2%, which represents a sequential increase of 100 basis points relative to the Q4, excluding the reserve. Revenue declined during the quarter primarily due to year-end product sales that did not repeat. Activity improvements in Brazil and our Mexico field lab project partially offset these reductions. For our Industrial Services segment, which includes our Process and Pipeline Services business, revenue was $289 million, down $6 million sequentially. Operating profit was $24 million, down $3 million sequentially, and operating profit margin was 8.3%. Reduced revenues and profits were primarily due to seasonality in our Process and Pipeline Services business, partially offset by activity improvements in our specialty polymers business. Looking at the balance sheet. We ended the quarter with $1.1 billion in cash, up $86 million from the prior quarter. Total debt increased $176 million during the quarter to $5.1 billion. Currently, our total-debt-to-capital ratio is 23%. Capital expenditures for the quarter were $490 million, down $237 million compared to the last quarter and in line with recent guidance. Now let me provide you with our guidance for the remainder of the year. In the U.S., onshore rig activity is projected to improve. In the first quarter, we exited with 1,748 rigs. We anticipate that the rig count will rise to an average of 1,800 rigs for the second quarter. This would be the first increase in U.S. rig count following sequential declines over 5 consecutive quarters. And the rig count is expected to rise over the second half of the year. In total, the increase from the first quarter is expected to be about 100 rigs, to a Q4 average rate of approximately 1,850 rigs. The average annual rig count for 2013 is projected to be 1,810 rigs, composed of approximately 1,400 oil rigs and 410 gas rigs. The U.S. rig count includes offshore rigs, which are still expected to increase 8% to an average of 52 rigs in 2013, which is an increase of 4 deepwater rigs compared to 2012. In Canada, the second quarter rig count is projected to sequentially decline 70% to 160 average rigs due to spring break-up. The outlook for the second half of 2013 remains unchanged, with the rig count similar to the same period in 2012. Sequentially, we expect Q2 North America profit margins will decline primarily due to seasonality in Canada. Beyond Q2, anticipated U.S. onshore rig count growth, further utilization increases in our U.S. Pressure Pumping product line, improved Canadian activity and the shift of Gulf of Mexico activity from exploration to development are all expected to improve revenues and margins. Based on these activity drivers, we expect that Q2 will be the low point of our North America margins for 2013. Looking internationally. The average rig count is anticipated to grow steadily throughout 2013 to 1,316 rigs, with increases in every region. Excluding Iraq, this represents a 7% increase in the annual international rig count. Looking at our international margins. The Middle East/Asia Pacific segment should see steady growth as we continue to build our integrated operations in Iraq and drive improved profitability. Further growth in Saudi Arabia is expected to also generate continued margin improvement. In our Europe/Africa/Russia Caspian segment, margins should partially recover in Q2 as Russia's seasonality ends and activity picks up in the U.K. and Africa. However, there will be an additional quarter of mobilization cost for our Norway drilling contract. And in Latin America, we expect operating profit margins to decline slightly in the second quarter due to new customer delays in Mexico and our transition to lower levels of activity in Brazil. Beyond Q2, we expect margins should be similar to Q1 levels as new projects get underway in other parts of Latin America. Industrial Services activity is expected to increase in Q2 and Q3 as our PPS business ramps up following seasonal lows, with overall segment margins in the low mid-teens. Overall for Q2, we expect that profit improvements from our Eastern Hemisphere and Industrial Services segments should just offset profit declines in North America and Latin America. Also, for the second quarter, interest expense is expected to be about $55 million, corporate costs are expected to be around $75 million, depreciation and amortization expenses is expected to be around $420 million. Capital expenditures for the quarter are expected to be about $500 million. And finally, our 2013 full year effective tax rate is still expected to be between 32% and 33%. At this point, I will now turn the call back over to Martin. Martin?

Thanks, Peter. For the past 70 years, we've been providing data on rig activity through the Baker Hughes rig count. In addition to rig count, we also monitor a number of related indicators throughout North America that provide us greater insight on both market conditions and activity. And what we're seeing right now is that most of these indicators are trending in the right direction. One of these indicators is drilling efficiency, and for the past several quarters, we've reported on these trends in the U.S. During the first quarter of the year, we measured a sharp drop in drilling efficiencies across the U.S. rig fleet, which is fairly common during the winter months when rig movements can be delayed by weather. And this year, the Mid-Continent and Rockies were hit particularly hard. This also explains why our U.S. onshore activity was down for most of our product lines compared to the fourth quarter. But we expect the trend in improving drilling efficiencies to resume and forecast another 5% improvement for 2013. This means that even though the average U.S. rig count is projected to be down 6% year-on-year, the total well count will essentially be flat, with roughly 35,000 wells drilled in the United States in both years. There are also specific leading indicators for the Pressure Pumping business, most notably stages per day, revenue per stage and fleet utilization rates. And although spot pricing continued its decline in the first quarter, albeit slowly, Baker Hughes noted an 11% increase in stages per day during the quarter. Our fleet utilization also improved, a direct result of recent share gains and more 24-hour operations. In fact, we ended the quarter with 40% of our fleets working on 24-hour projects. So while rig counts for Q1 and in fact, for all of last year have been declining, drilling efficiencies and well count, along with well complexity, are trending favorably. And when these are coupled with structural improvements in our Pressure Pumping product line, we are confident we will continue to see sequential improvement in our U.S. onshore business. Whether it is drilling services, completions technology, flow assurance chemicals or artificial lift, Baker Hughes has been leading innovation and technology development for the U.S. basins for more than a century. We are bringing the same level of differential capability to our Pressure Pumping product line. For example, last year, we introduced bifuel technology to a handful of units in the U.S. and Canada. This technology, known as Rhino Bifuel, replaces up to 70% of the diesel normally required to power the pumps with natural gas, resulting in reduced emissions without sacrificing any performance. And following a series of successful operations in the Rockies, customer demand for Rhino Bifuel is expanding, and as a result, we have a number of new customers that are now choosing Baker Hughes for well stimulation. To support demand, we are converting several fleets to be capable of bifuel operations. In addition to Pressure Pumping, our other product lines remained strong in the United States, and we are continuing to introduce differentiating technologies across these product lines as well. For example, we recently introduced a new composite plug milling technology, which incorporates proprietary metallurgy to improve performance. On a recent operation in the Bakken, we successfully milled 52 plugs during 1 trip, a record in that basin. This efficiency saved a major customer 4 days of operating time. In the past, this operation would have taken 3 milling runs over 6 days. This is yet another example of the innovations that Baker Hughes is delivering to the market that is dramatically cutting the time required for our customers to drill, complete and bring a well online. It's these continuous innovations and technology introductions that are driving the efficiency numbers and generating significant cost savings for our customers and ultimately improving the economics of the unconventionals. To this end, we continue to strengthen our position in sliding sleeve applications, including combining these products with other services and technologies. By incorporating intelligent well system technology into our coiled tubing-deployed sliding sleeve system for a customer in the Bakken, we were able to identify that the first 4 frac stages during a job would not produce as expected. Using data from the intelligent well system, we modified the fluid properties and sand concentration for the remaining frac stages, resulting in dramatically improved performance for our customer. Moving to Canada. We had a full quarter of activity, thanks in part to the later arrival of the spring break-up and strong activity with the mid-cap operators. Nevertheless, we are already experiencing near-shutdown conditions from the break-up, and the rig count has dropped 70% compared to the Q1 average. Looking to the second half of the year in Canada. Differentials could be down year-on-year, and as more takeaway capacity comes online, this is likely. And we expect second half activity to be similar to or slightly better than the same period last year. Turning to the Gulf of Mexico. As Peter mentioned, there have been industry-wide delays in rig activity, primarily from issues our customers are facing regarding certification of rig equipment and pressure controller systems. As a result, our Gulf of Mexico revenue and margins decreased sharply this quarter, but we do expect activity to sequentially improve. The investments Baker Hughes has made over the last few years in preparing this business for increased regulatory scrutiny have helped position us as a leading supplier of well construction and production services in the Gulf. Further, the investments we've made in world-class technology centers, coupled with our advanced stimulation vessels, have also helped position us to capture opportunities in the ultra-deepwater frontier. We anticipate that within this decade a $15 billion oil field services market will materialize in the ultra-deepwater Gulf of Mexico, and we're preparing today to create the highly customized products and services these challenging wells will require. During the quarter, we opened the offshore center for cementing fluids and chemicals in Lafayette to be closer to our customers' Gulf operations. And in order to support the challenges of subsea boosting, later this year, we plan to open the artificial lift research and technology center in Claremore, Oklahoma. When complete, this facility will house the industry's most extensive electrical submersible pump testing capabilities and will drive industry-leading advancements in reliable ultra-deepwater subsea lift technologies. Now turning to our international business. I'd like to start with our Middle East/Asia Pacific segment. I'm very proud of our progress there. It's unusual for us to increase revenue in Q1 following year-end product sales in any international segment. However, our team there grew revenue 1% sequentially and also recorded a meaningful jump in margins. In fact, for the first time, our Middle East/Asia Pacific region ended the quarter as our largest international segment. This quarter's results can be attributed to strong operational performance, most notably from Saudi Arabia, the United Arab Emirates, Oman and Iraq. In Iraq, our integrated operations work continues to expand. This time last year, we embarked on an ambitious plan to have 9 rigs up and running. We've now exceeded our plans and ended the first quarter with 11 rigs operating, and we will more than likely add another 1 or 2 rigs by the end of 2013. We expect our Iraq business will still experience some volatility and the cost of mobilizing rigs remains high. But as long as things progress according to plan, we possess the critical mass and operational experience to begin generating profit from Iraq in the second half of the year. Additionally, in Saudi Arabia, we project another 30 rigs will be added to the fleet in the Kingdom by the end of this year. Much of this additional capacity will be dedicated to the development of unconventional gas. We've heard a lot of talk about the potential of unconventional development in international markets, and this is a very significant effort to develop an unconventional basin on a large scale outside of North America. To prepare for this, we opened our center for unconventional technology in Dhahran early last year. In Q1 of this year, we successfully completed our first unconventional stimulation job in Saudi Arabia, and we are mobilizing additional horsepower to support future operations in this region. We expect the upcoming jump in activity to add momentum to Saudi Arabia's neighbors, so we anticipate the surrounding Gulf states will also increase drilling activity. In Kuwait, we've steadily grown our share of drilling services. And during the first quarter, we were awarded work to provide drilling services for an exploration rig targeting a deep Jurassic formation. These projects are high temperature, with lateral sections that can reach 2,500 meters. But based on current performance, we've been asked to take on a second rig. Activity growth in the Middle East could be the much-needed catalyst to finally drive pricing improvement throughout the Eastern Hemisphere. In Asia Pacific, we're seeing better profitability and a growing need for high-technology applications. In Japan, for example, Baker Hughes played a critical role in the development of the world's first successful marine methane-hydrate production test. Methane-hydrate deposits are commonly found offshore on the continental shelf and in Arctic regions. There are more methane-hydrate reserves in the world than conventional natural gas reserves. Although not currently economical, countries like Japan that don't have abundant sources of domestic conventional oil and gas are very interested in the potential energy that could be extracted from these methane-hydrates. On this particular project, we help to make this production test a reality by providing a very unique solution to depressurize the hydrates through the use of our electrical submersible pumps, intelligent well technologies and fiber optics. In addition, we provided completion tools, sand control services, Pressure Pumping and wellbore intervention services. Now turning to our Europe/Africa/Russia Caspian segment. Results were down for the quarter. While we expected the normal seasonal decline, there were also transitory cost issues in Norway and delays in the U.K. and Africa that were disappointing. Although Norway transitory costs continue into Q2, our outlook for the region in the second half is very positive. We recently introduced RCX Sentinel, our latest generation wireline fluid analysis service in the North Sea. This product provides our customers with more accurate fluid analysis in 1/4 of the time over previous generations' sampling services. The RCX Sentinel was launched in the Gulf of Mexico only a few months ago, and it's a good example of how we're rapidly deploying new products from our technology centers around the world. Another example of technology transfer is taking place across the unconventional market. Baker Hughes has been a leader in developing innovative technologies in the North American shale plays. And by leveraging our strength in well construction, we have positioned the FracPoint system as the #1 sliding sleeve product in the United States. And our product line management team is working with international operations to identify projects which can benefit as well from sliding sleeve technology. As a result, FracPoint has quietly been gaining momentum in Latin America, Europe and China. In this quarter, we received our largest order for FracPoint outside of North America to date to be delivered to a major customer in Russia the next 3 years. It wasn't too long ago that our business in Russia was comprised almost entirely of direct sales like these. In fact, about 70% of our business came from the sale of products such as drill bits, completion tools and artificial lift equipment. Yet today, only 30% of our Russian business comes from product sales, and the vast majority is now service-related. And it's equally spread between drilling and evaluation and completion and production. This diversification not only reduces the volatility of our business there, but it positions Baker Hughes to capture a greater share of technically-challenging and large-scale projects. As an example, during the quarter, we were awarded a significant contract for drilling services, including advanced logging-while-drilling systems. The scope of work includes drilling 437 wells in Western Siberia over the 3 years. Moving to our Latin American business. In the Andean region, although customers are still experiencing some delays with permits, our business is continuing to grow, particularly in the Llanos basin in Colombia, where our drilling and evaluation product lines have been very successful for a diverse customer mix. And in Mexico, despite some near-term customer delays, we are encouraged by the long-term opportunity there. Our work on our field lab has been particularly successful in improving production rates for our customer. This success can be attributed to the transfer of latest-generation technologies. And Mexico is yet another country where FracPoint orders are growing and helping our customer reduce the time to complete a well without sacrificing quality or reliability. Turning to our reservoir development service. During the quarter, Baker Hughes introduced its JewelSuite 3D subsurface modeling software, which incorporates 3D geomechanics functionality to minimize drilling risk and optimize well design. JewelSuite builds on the Baker Hughes JewelEarth platform and is designed to enable our customers to find sweet spots in the shale plays, understand conductivity better, optimize well placements and ultimately, plan the ideal fracture design. Now let me offer some final thoughts on the year ahead. First, if $4.00 natural gas prices hold, the increase should generate improved cash flows for our customers. And while we don't believe that $4 gas is enough to prompt the race back to the dry gas basins, these higher prices should help support, if not stimulate, additional investment in oil-directed drilling. We believe the North American market is on the road to recovery. Rig count is projected to rise from here. Drilling efficiencies are continuing to improve, and the Gulf of Mexico outlook is very positive for high-technology quality service providers. And for Baker Hughes, our U.S. Pressure Pumping business continues to take strides in the right direction, with improvement expected throughout the year. Internationally, our growing business in Norway and Iraq will drive margin improvement in the North Sea and Middle East as transitory costs for these businesses should wind down in the second quarter. Furthermore, a jump in Saudi Arabia activity holds promise for a long overdue inflection in pricing throughout the Eastern Hemisphere. Across all of these markets, we remain committed to leading in innovation, growing our expertise in reservoir development and integrated operations and expanding our core service offerings to include critical capabilities and emerging technologies. And finally, we continue to remain firmly committed to improving our return on capital and the quality of our earnings. Now with that, I'll turn it over to you, Trey.

Thanks, Martin. At this point, I'll ask the operator to open up the lines for your questions. [Operator Instructions]. Sandra, could we have the first question, please.

[Operator Instructions] Our first question comes from James West from Barclays.

Martin, on the European business -- Europe/Africa/CIS business, obviously, Peter had articulated that margins would start to move up in 2Q, but you still have the impact of the startup costs. As we think about 3Q and I guess, early fourth quarter, could we be back to kind of more normalized Baker Hughes margin levels at that point? And of course, we would probably be on a much higher revenue base, too, with your leadership position that you're going to achieve in the North Sea.

I think that's a reasonable assumption, James. So, yes, I'd agree with that.

Okay, great. And then just one related follow-up for me. On the Pressure Pumping business, I think you mentioned you are 40% 24-hour operations today. Is there scope for you guys to take that percentage higher from here or are we leveling out?

No, our target for our team is 50% of the fleet by the end of the year. And a lot of that, as you know, James, is driven by the customer mix, which is trending in the right direction. So I'm confident we'll get there, 50% of the fleet.

Our next question comes from Kurt Hallead from RBC Capital Markets.

So Martin, I'd have to say the tone of your commentary as it relates to the international market in general, I think, are the most, I think, optimistic or positive that I've heard from any service company probably going back to the 2007, 2008 time frame. It seems like a significant amount of that, as per your commentary hinges on Saudi. So how close do you think we are in terms of now -- is this like a second half pricing event in your view for the international marketplace? Or is it more a building block for pricing inflection going out into 2014? And then, maybe when you answer that question, can you help us put it in the context of is it -- do you think it could be similar to kind of the inflection that we saw from '06 to '08?

Okay. I would answer it this way, Kurt, certainly, the Middle East is the center of the world right now for the growth in activity, but it's not limited to there. And we've tried to take a measured tone with the outlook, and I appreciate the fact that you recognize how positive we are, but it's kind of a steady as she goes but trending in the right direction with maybe an increasing upward bias. We have been looking for a while for the catalyst, if you will, somebody to come out in the Eastern Hemisphere particularly and have very ambitious plans about expanding their production. And probably no surprise, once again, it's -- Saudi has stepped up and is mobilizing these rigs. And what we learned in the '05, '06 sequence was that Saudi's neighbors generally follow suit, and it drives a certain mentality across operators all across the Eastern Hemisphere in terms of access to people and equipment and particularly the higher-technology products and services that Saudi absorbs. So I'm very optimistic. I think we have all been frustrated with the lack of pricing traction. I wouldn't expect that it's going to be that meaningful in the second half, as you know, given the tendering cycles and delay of projects after a project is awarded in terms of when it starts. But given the momentum we're building into the second half of this year, all across the international and particularly our position in Europe, in Africa and of course, the Middle East, and we haven't even mentioned Iraq, given that momentum, '14, I think, is going to be stronger. And I'd be cautious about comparing it to the numbers we posted back in '05, '06 internationally, but it's a little early to tell if we can get there. But certainly, it's going in the right direction. There's no doubt about it.

Okay. And then I have a follow-up coming back around to the North American dynamic. You mentioned that well count would be kind of flat, I think, year-on-year. Given the efficiencies and so on and so forth and the incremental cash flow, how would you characterize a bias to that? Would you be more biased that you could see that number move up? And if it were to move up on the well count, do you think there's a possibility that could rapidly accelerate in the second half of the year?

I wouldn't say it's going to rapidly accelerate, but I'll say that I think there's a little bit more optimism out there with the favorability we've gotten on gas recently versus -- granted, it's just recently happened. There's a little bit of slight correction on the oil side. But I think the movement in gas has got a little bit more of an impact right now in terms of the temperament of our customers. And as I said, don't expect any kind of reactivation in the dry gas basins. If there was a pickup, it'd probably be the Marcellus first and the Haynesville last. But just putting a little bit more money in our customers' pockets, I think there's a lot of oil-directed drilling out there that's a little -- that's kind of on the margin, and we could see it move in the right direction. So I think, again, it's looking good in the second half and -- but we're not projecting any kind of takeoff in North America at this stage. I don't know, Peter, do you...

But just mathematically, obviously, the rig count, we're projecting modest growth from here. If the rig count goes up and the efficiencies continue, then the well count by -- mathematically goes up high-single digits or double digit from here. And Q1 was a nice recovery over Q4. So if that trend continues, the number of wells drilled and the number of wells completed goes up and the number of stages goes up, and it's very positive.

Our next question comes from Bill Herbert from Simmons & Company. William A. Herbert - Simmons & Company International, Research Division: A question for you here with regard to the Gulf of Mexico and the delays in the first quarter. Peter, do you have any -- are you able to kind of quantify the margin impact in the first quarter relative to what otherwise would have been the case have we not had the bolt issues in Q1?

Yes, it probably costs us a few pennies kind of like the hurricane in the quarter so... William A. Herbert - Simmons & Company International, Research Division: So call it, $0.02?

Yes. William A. Herbert - Simmons & Company International, Research Division: And if I heard you correctly, Martin, you expect a reversal of the burden in Q1 to become a benefit in the second quarter, correct?

On this -- the bolt issue is behind us, behind the industry. But there's a couple of issues, it's not just -- I mean, the bolts were kind of unexpected. It was dealt with. I think 11 rigs were affected. We had a large share of that, and that is behind us. But there's still a great deal of inefficiency. And Bill, I'm sure with all the customers you talk with, it reminds me of what we went through 18 months or 2 years ago with the permitting situation. A lot of confusion, customers are not going to run in the hole if everything is not checked out right. There's some new regulations with regards to testing the shear rams, pulling the stacks on a more frequent basis than before. And so -- and let's face it, in the past, I think, if you had redundancy, if one didn't -- one pod didn't check out, you were okay. Today, nobody's going to run in the hole unless everything checks out perfectly. So -- and then there's some moving -- still some moving dynamics on the regulations, and so it feels a lot like the permitting situation, which did sort itself out, but not in 1 quarter. So I mean, for your models, the bolts are behind us, but we still have some inefficiencies. Q2 is better than Q1. Q3 will be better than Q2, barring any weather issues. But it's not where it needs to be from a clarity around these regulations yet. William A. Herbert - Simmons & Company International, Research Division: Right. But I mean, we averaged 27 deepwater rigs last year. We're at 37 today, and we're probably going to go on our way to 55 by early '15. So good Lord, the outlook is strong.

Right but outlook is strong on rig count. But you know that we added several rigs from Q4 to Q1, deepwater newbuilds, and let me tell you, the market contracted nearly double digits, Bill, because of the inefficiency. So the rig count is growing, but the inefficiency is growing faster. And now that will abate and eventually go away, but right now, I'd say for the next couple -- 2 to 3 quarters, I'm not going to try to guess when our government and our customers are going to get on the same page. And right now, it's affecting us.

Bill, this is Peter. The rig count was up, I think, 6% sequentially in the Gulf, and we reckon the market was down more than that, more than -- negative of that. William A. Herbert - Simmons & Company International, Research Division: That's fair. It's helpful. And then the second line of inquiry here relates to international. Peter, if I heard you correctly, average rig count 2013 up 7% versus 2012. Martin, considering you've got great sort of momentum in the Middle East, we've got some adjustments in Latin America, we've got delays in Europe, CIS, West Africa, with a strong outlook for the second half, are -- your revenues for 2013 internationally, should we expect them to be higher than the rig count?

This is Peter. I'm just -- I think we're looking in line with the rig count overall for international year-over-year. William A. Herbert - Simmons & Company International, Research Division: Okay. And on the margin front, would it be unreasonable for us to expect incremental margins year-over-year for the full year to start with a 3?

I guess a little high.

Yes, I think it's high.

Our next question comes from Jim Wicklund from Crédit Suisse. James Knowlton Wicklund - Crédit Suisse AG, Research Division: Martin, I continue to be fascinated with your development of JewelSuite. And I realize that in terms of sales, things like Petrel are going to be hard to impossible to displace. But I would think that the internal use of your capability, especially in the unconventionals, would be a significant improvement. Can you say whether I'm right and expand on that?

I think you're exactly right, Jim. It's not our intention to -- and thanks for bringing up a competitor product name on our call, Jim. But it's not our... James Knowlton Wicklund - Crédit Suisse AG, Research Division: Sorry about that.

That's all right. It's not our intention to displace the incumbent in the installed base. But it is our intention to have a better product for our customers who choose to access it, and certainly, JewelSuite and JewelEarth, the platform is a much newer architecture than anything that's out there, including the big provider. And that enables our customers -- and I tell you, you're right, it's a lot about our own internal use as we work with our customers on these unconventionals, as we hook up with CGG and do some things on trying to high-grade the areas we're frac-ing and so forth. A lot of our IOC customers have expressed interest because, as they develop their own best-in-class analysis capabilities, they need to be able to not just port and connect, but weave the analysis into a new platform that's simulation all the way to the refinery, and JewelSuite can do that. So it's a much more receptive vehicle for the new stuff that our big customers are working on. And it's important to them because as they partner with IOC, NOCs and try to differentiate themselves, a lot of it is around their own intellectual property, and they just want to be able to use a platform that's more modern. So is it our intention to become a massive software house? Absolutely not. But to put a product out there that's better than anything else on the market, we'll let it do its own talk. James Knowlton Wicklund - Crédit Suisse AG, Research Division: Okay. And my follow-up, I know that a lot of investors think that business is terrible right now, but actually, domestically and internationally, relative to history, business is pretty good. And we're starting to see another round that seems -- of personnel cost hikes, higher turnover. A lot of the companies were reporting a significant pickup in turnover. Can you discuss your outlook on personnel cost inflation and turnover over the next year?

That's a good question. It's settled down a lot in North America. There was quite a bit of turnover in the Pressure Pumping business this time last year. It was abating, and then now it's down to normal levels and manageable levels. We are -- I think the industry is exceptionally tight on your subsurface expertise. There's a war on talent in that area, geoscientists, LWD, MWD, directional drillers. Once again, there's always a little bit of trickling back and forth between these big service companies. There's a bit of a leakage to your smaller providers, and there's probably been a pickup in leakage of our talent to our customers. That's just kind of par for the course. But I wouldn't -- we're not modeling any material inflation. I don't know, Peter, any...

No, no, we're not. In fact, we're not modeling it. We're not seeing it. But you're right to point out that there's some pessimism about the industry. But when you look at the number of jobs we do internationally, we're at record levels. We've had 3 years in a row of growth in the international rig count. We're sold out in many places. The good news is we don't have high turnover internationally anyway, so we're not seeing any inflation there. But we had record revenues in all of our international segments in Q4, and we expect revenue growth again this year. So things are strong internationally in terms of activity levels, and that's why we're so optimistic about 2014.

And Jim, let me just follow up. I know the question was international, but from a domestic standpoint, the job creation engine that these unconventionals and particularly the big service providers is continuing. And it's pedals to the metal in terms of attracting the best talent for these basins, so it's a real positive on that front.

Our next question comes from David Anderson from JP Morgan. John David Anderson - JP Morgan Chase & Co, Research Division: You guys talked about the rig count coming at an inflection point here, at least starting to pick up here in North America. Can you comment on kind of pricing that you see in stimulation? Excluding anything on the gas side, if the rig count kind of comes up from here, where do you see stimulation pricing bottoming here?

I'm cautious about calling a bottom on that. We had mid-single-digit decline, 4 to 1. You can take that number and maybe trim it down a little bit from 1 to 2. So it's kind of we're vectoring in on leveling off. We have more weakness in Q3. It's possible, but it's negligible, let me put it that way. But I'm not going to call a bottom on it. John David Anderson - JP Morgan Chase & Co, Research Division: Okay. And then I guess, another question. You talked about sliding sleeve completion technologies a few times. Just kind of wondering how your customer penetration is today compared to a year ago. I mean, one of the things we continue to hear out of the E&P side is that they're still focused on costs in unconventional. I'm just curious of whether or not you've seen a falloff in kind of penetration of that product as they're kind of moving away from efficiency-driven technologies now because of looseness with the expectation it comes back. Have you seen that fall off?

No, we've seen some -- we've seen more competitors in the space on the more basic types of sliding sleeve. But I think maybe Trey or Eric can get you some of that. My feeling would be, honestly, David, that it's a much broader customer base than we had this time last year, much broader, and it depends on the customer, if some feel that the plug and perf are working. But I think the data is there that kind of more sophisticated operators acknowledge the fact that the sliding sleeve gets them exactly what they want. So -- and then remember, we have sliding sleeve capabilities out there now that we didn't have this time last year so that's a product that continues to evolve technically as well. So the penetration is -- I would bet a lot that it's much broader than it was this time last year. John David Anderson - JP Morgan Chase & Co, Research Division: Okay. One last question on the Gulf of Mexico. You've historically had a very strong share in the shelf, and we've noticed a nice pickup in the jackup rig count over the past quarter. So has this been incremental to your business? Or is deepwater now such a bigger part of your business that it really doesn't move the needle?

I'd say it doesn't really move the needle.

Our next question comes from Byron Pope from Tudor, Pickering, Holt. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Martin, you mentioned the progress that you're making in Iraq. I was just hoping you could frame -- just given the nature of the work that you're doing there, as you think about getting into 2014, how do you think about where we might see margins migrate to in Iraq? I mean, you mentioned getting to profitability in the back half of the year. But just again thinking -- as we get into 2014, just given the nature of the work, how do you think about where margins could potentially get to, just ballpark terms?

Yes. I think Iraq has got quite a journey from a service company perspective to be -- it's going to contribute earnings. Is it going to get to a point that it's accretive? I don't see that yet. I mean, I just don't see that yet. But of course, it's a country in one of the most profitable regions of the world. But it is going in the right direction. I do expect us to be profitable by the end of the year. And that's a big shift given where we were and given the size of that business, so it's not immaterial to the overall results. I think the market there has to evolve to the next level. I think our -- it needs to start with our customers being more successful in terms of their own economics before we, as contractors, are going to be able to extract, let's say, accretive margins in there. And Byron, I think the thing we have to keep in mind with regards to Iraq is this is not a fly-by country in terms of its potential, in terms of its -- what's under the ground. And the infrastructure that we have all put into that place, it may be a few years from now, but I think it could be another Brazil, it could be another Norway, it could be another Saudi in terms of its contribution. And I don't have to go back very far in my memory to realize that all 3 of those countries at times were, if you will, disappointing. So this is a long-term business, but it's got all the right fundamentals. Customers are still trying to find their footing. But I'm real proud of the job that our folks have done, I mean, just tremendous performance in terms of our drilling, in terms of sorting some of the logistic issues, and so it's the right thing to be doing.

Our last question comes from Jim Crandell from Cowen.

Martin, my question is about your success in penetrating and growing the ultra-deepwater market globally in both formation evaluation and completion. It seems this is the big growth area of the business globally. And I'm wondering if you looked over the past 6 to 12 months, and address it maybe in 2 parts, one is deepwater completions globally and the other is formation evaluation globally, what do you think is the market share change over the last 6 to 12 months? And is your goal going forward to maintain in each of those 2 segments or grow in each of those 2 segments? And lastly, would you -- how do you plan on accomplishing that?

Okay, that's a good question, a pretty broad one. Let me try to come at it this way. First of all, this is an evolving market and it's even a bit ambitious to say that it's already getting started, it is, but it's right on our doorstep and particularly around the completion side in the deepwater here. We -- when we were drilling some of these wells and making some of these discoveries, it was frightening to hear our customers say 2 years ago that the technology just simply did not exist to complete the wells. Now you've been through, as many of the listeners have, through our Center for Technology Innovation, and that was a pretty forward-looking investment in terms of roofline and capabilities, where we can test things to 700 degrees Fahrenheit and 40,000 PSI. Without that capability, we would not be having a solution that we can put on the table for our customers to begin mobilizing later this year and throughout the next 3 or 4 or 5 years in the Gulf. So I think we stand unique in having that package and being able to have that discussion. The additional part was, again listening to our customers, was we needed a similar facility to understand subsea boosting and have the reliability necessary to run an ESP and leave it in the ground for 5 years before you turn it on, on a $200 million well. And that's what's been coming out of the ground now up in Oklahoma is a center very much like the CTI that will take ESPs to a whole new level of reliability. So the penetration and the market share is going to continue to increase, but it's built on the back of having very unique products that nobody else can put out there. And I feel very confident that we're going in the right direction on that. And I think the Gulf of Mexico is going to be a proving ground for the rest of the world in terms of these type of wells, and we're not -we don't stand unique in having these lower tertiary-type of formations. So I'm very optimistic, Jim.

Okay. So Martin, I'm interpreting your answer as that while you may not have increased global market share in formation evaluation and deepwater completions yet, it's very much your plan to do so based on what you just elaborated?

Yes, and we're the leading driller in the Gulf. So now we're the leading driller in Norway. We've been the leading driller and today, we still are in Brazil.

What do you mean by leading driller? Do you mean total oil service revenue?

I mean total LWD, MWD.

Total LWD. You believe in overall LWD, MWD, you are the leader in the marketplace overall in the Gulf and Norway?

I'd say in Norway and the Gulf of Mexico, yes.

Congratulations. Do you think that applies to deepwater Gulf of Mexico or overall?

Overall in the Gulf, if you include the shelf and everything in the Gulf of Mexico.

Thanks, Jim, and we appreciate everyone's time this morning. Thank you.