Good morning. My name is Laurie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International Fourth Quarter 2014 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] We ask that you please limit yourself to one question and one follow-up then reenter the queue for any additional questions that you may have. As a reminder, ladies and gentlemen, today's call is being recorded. Thank you. I would now like to turn the conference over to Karen David-Green, Vice President of Investor Relations. You may begin your conference.

Thank you, Laurie, and good morning, everyone. 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. Before we start our comments, I would like to remind our audience that some of today's comments may include forward-looking statements and non-GAAP financial measures. Please refer to our third quarter press release for the customary caution on forward-looking statements and a reconciliation of non-GAAP to GAAP financial measures. And now, I would like to hand the call over to Bernard.

Thank you, Karen. Good morning, everyone. Weatherford made tremendous progress in 2014. We set out a number of targets for the year and I'll address them one by one and report on achievements. Firstly, we established a goal to improve our negotiations with the U.S. government on the FCPA Sanctioned Country Investigations. We completed this in the first quarter. Secondly, we aimed at remediating the tax carry weakness and we announced this in February of 2014. Thirdly, we set out to achieve annualized cost savings of $500 million and we got there by eliminating over 6,000 positions and shutting down 64 underperforming operating locations in 2014. Next, we targeted the cash infusion of $1 billion from our divestiture efforts. We ended the year with over $1.7 billion in divestures proceeds. We also targeted an earnings per share range between $1.10 and $1.20 for the year. Our full year earnings per share was $1 which, while short of target, it's still a big improvement over 2013 when we reported an earnings per share of $0.60. Finally, we adopted a free cash flow from operations target of $500 million excluding the government fines. This is one objective we missed as we ended the year with a negative cash flow of a little over $200 million. The 2014 free cash flow was better than 2013, but it was one disappointment. Krishna will comment on the details underpinning the free cash flow miss in 2014. We will make material progress in 2015 despite the difficult year ahead. Let's keep in mind that we more than made up for the shortfall in free cash flow with divestiture proceeds. All in all Weatherford is in a much stronger position today than it was a year ago. With that I will now hand over to Krishna who will take you through the financial details. I will close afterwards with a few more comments.

Thank you, Bernard. I would like to start by commenting on our fourth quarter results. Earnings per share before charges and credits were $0.32 flat sequentially and a significant $0.25 year-over-year improvement. Revenue of $3.7 billion for the quarter remained flat versus the fourth quarter of 2013, but decreased 4% sequentially. Excluding the impact of the divested rig and pipeline businesses in the third quarter, the revenue declined by only 1% sequentially. Operating income margins before R&D and corporate expenses declined 63 basis points sequentially to 14.8% and improved 475 basis points versus the fourth quarter of last year. Let me now detail the results by region. North America revenue of $1.8 billion reduced 2% sequentially with margins essentially flat at 16% reflecting some weakness both in the U.S. and in Canada were a few operators began cutting back on uneconomic activity in December as the result of the low oil price environment partly offset by an improvement in pressure pumping results stemming from increased frac activity together with price increases negotiated at the end of the third quarter. Latin America had a strong quarter with revenue growing 12% sequentially; margins grew by 115 basis points to 16% with improvements principally in Brazil and Colombia more than offsetting continued muted activity levels in Mexico. The Europe Caspian/Sub-Sahara Africa/Russia margins continued to be strong at just below 20% despite reducing by 222 basis points from Q3. Revenue excluding the revenue of the divested businesses in the third quarter declined 6% sequentially. The sequential results reflect the seasonal drop in the North Sea and Russia regions further exacerbated by the rapidly declining ruble. Middle East/North Africa/Asia revenue declined 7% sequentially with 174 basis point margin deduction to 7.7% with the completion of an integrated project in China and activity reductions in Australia…

Thank you, Krishna. A few comments on Q4. Q4 was also helped by almost $0.04 of gains on bond buybacks and lower tax rates. At the same time working capital write-downs and foreign-exchange declines penalized the quarter by over $0.05. The point being operations and operating performance ran at $0.32. The quarter is flat on Q3. America was flat sequentially and modestly up year-on-year. U.S. weakened late in the quarter, Canada did as well. Canada had a short December which shut down during the holidays as U.S. dollar results were affected by a weak Canadian dollar. International performed well with the exception of the Middle East. Europe, SSA, Caspian and Russia declined seasonally or were affected by foreign-exchange, but they posted good results nonetheless. Performance improved by more than double last year's profitability and almost tripled its EBIT margins. Latin America had a very strong quarter and broadly based except for Mexico, which continued to weaken further. Middle East and Asia Pacific did not progress; it closed out the year with improved year-on-year results but still very low profitability. Aside from cyclical forces our specific regions for MENA, Middle East, to improve from here on. The long disappearing act of our Middle East profitability should be ready for reversal. Middle East was our most profitable region and second in size only to the United States until recent years and events specific to us. Turning around Middle East is a material event in our financial performance. Two priorities beyond the cyclical imperative drive our direction. One, this company which identifies itself as a growth culture has lagged its larger peers in organic growth. The fault is not in capabilities or footprint, the fault is in an overpowering internal focus. Two, our margins improved over 2013 by almost 300 basis points. We…

[Operator Instructions] Your first question is from Jim Crandell of Cowen Securities. Your line is open.

Thank you. And good morning everyone.

Good morning, Jim.

Bernard or Krishna, could you take us through how you expect your different regions, particularly North America to perform in the way of decremental margins in the first half of the year?

Jim, right now as we speak, compared to the other service companies, we are reporting a little later them. So we have the benefit of seeing January's results already. I can tell you that the pace of price discounts and activity reductions is fast and furious. So what you will see is a very sharp decline in revenue in North America, which with the cost still being in place for much of the first quarter of the year, the cost will start getting out by the end of the first quarter, so the second quarter we will start benefiting from cost reductions. But there will be a lead and a lag. This time the revenue drop is going to lead and the cost drop is going to lag, so the first half is going to be quite challenged in North America.

So would it be reasonable to think that we could see decremental margins initially in North America as high as 50% to 60%?

Yes. Jim, yes, that would be a good conclusion, yes.

And how about if you look outside North America? I would assume most as we go into the first and second quarters, most areas will be heading down although at different rates. How would you see the decremental performance there?

Well, you have two factors, you have seasonality, which is a normal factor in Q1, think Asia, think Russia, think the North Sea. And then just the spending patterns of our clients. This is historically always true in our case. I think it is true for the industry in general. So this actually will take place quite normally. I think the decline in both our volume and pricing will be more muted internationally, it depends where of course. For example, in Middle East and Sub-Sahara Africa it will be very muted. In Russia it is by and large a non-issue because it's the starting of the year, the relationship is already spoken for and the contracts are spoken for. I think you will see it in Europe and you will see it in Latin America primarily. In Latin America you will see a continued decline of activity and market conditions and certainly in Mexico and in Colombia. So these are the pressure points. I don't think you will see in the international side an evolution of profitability in Q1 and Q2 which will be particularly dramatic. In fact, there will be countervailing forces. So I would just say that it is muted; muted with some countervailing forces that will help on the upside. Again, the notion is international will be resilient. That doesn't mean it will be good, it will be resilient.

Okay. My follow-up, Bernard is, I was happy to hear about your external focus here. With all the turmoil in the industry it seems that you might have some very good opportunities to increase your market share over the course of this year in certain core businesses. Would you like to sort of address that and expand on it a bit?

Well, I think that without the turmoil and the change in the competitive landscape I think that would be the case. When you have the sorts of problems that we have, I don't want to belabor on them all the time, but probably had 2011, 2012, even in 2013, you really lose your focus on what is – why are you in business, which is to serve the client, which is a question basically of sales and marketing, but also a focus on quality and adapting your technology to the client requirements. You just lose that focus; you become very internally focused and understandable what happened to us. So the conversion from that to what we need to be which is entirely dedicated to the client, will yield, will yield absent any market changes, will yield a net gain. It always does. Every time you focus on something it yields a gain and we are going to focus intensely on external versus internal. So absent any of the changes in the industry it is a fair assessment to say that this year, obviously taking the market conditions into consideration but also in 2016 and 2017, Weatherford will have a stronger organic growth rate in its core than it has in the past taking the market conditions this year into consideration of course. Now, if the consolidations underway in the industry actually take place, because we don't know yet, yes, then you have probably some additional opportunities for us and others, true.

Okay. And just one more quick one, Bernard. There's been a little bit of buzz recently about a potential debt downgrade by one of the rating agencies. I guess, A, if this did happen would that have much of an impact on Weatherford's interest rates or interest expense going forward?

The short answer is not that we want it at all, it is not desirable. The answer is it has basically almost immaterial impact. Krishna, you might want to address that.

Thanks, Bernard. Jim, obviously the rating agencies will do what they have to do. We have derisked the company significantly, as I just mentioned. We have plenty of debt capacity and the actions we are taking on the cost side and CapEx and working capital are going to keep us on-site as far as debt is concerned going forward over the next several years. We have no big maturities coming up, so really at the end of the day I think the impact is going to be minimal. If there is a downgrade then it will impact our costs marginally. Our short-term borrowing costs will go up by about $10 million for the whole year. We've already reduced our interest cost by $12 million by buying back some bonds in advance below par. So we really don't see any material impact of any such action by rating agencies. Of course, we don't want it and we are going to speak with them and impress upon them that they are on an improvement track and a downgrade is unwarranted. But they will do what they have to do.

Okay, great. Thank you very much.

Thank you, Jim.

Thanks Jim.

Your next question is from Scott Gruber of Citi. Your line is open.

Hello, gentlemen.

Scott, good morning.

Am I correct in stating that the new build program in land rigs has been complete? And therefore is there a silver lining here maintaining the business and that it will be a free cash flow contributor to the organization this year given the typical delta between EBITDA and maintenance CapEx in that business?

You are right, Scott, certainly on the first assessment, completely right. We are long steel; we don't need to invest in steel anymore. As to the strategic consideration, Krishna, you might want to address that.

Yes. You are on the right track, Scott. We fully expect that given the contracts we have on hand and expected EBITDA of the rigs business, which is much more predictable by the way because it's international and we have backlog, the EBITDA should exceed CapEx in 2015 for sure.

So it is not – it won't be a cash drain whether we should keep it or not I think we stick to our guns that long-term it is not something that we need to keep. The ties between that business and the core are not strong enough to make it I think deserving that is where we are today. But your first assessment is absolutely spot on. It is not a cash drain and doesn't need to be. It will actually be a small cash positive.

And given the contract backlog would you be willing to state how much potentially you could generate in free cash flow from the business?

It will be over $100 million.

Over $100 million, it is not much, but it is positive.

Okay. And then Krishna, did I hear you correctly in stating that Iraq will be cash neutral in 2015?

What I said, Scott, was that the Zubair contract will be expected to be cash neutral in 2015 given the trajectory of where the contract is going the dates of completion and end of contract payments. And that compares with a negative $342 million cash drain in 2014. That is just the way the contract was laid out. The cash – the milestone payments are laid out in a certain way. So 2014 versus 2015 there's going to be a big change in our overall cash flow performance to the tune of over $300 million.

To help you further understand, Scott, the contract indeed is structured in such a manner that the phase of fabrication and installation we went through in 2014 was to be entirely financed by us. It is true that as we complete and it is tested, et cetera, et cetera, by the client, we have a number of payments that are coming our way. If everything goes well the assessment by Krishna may be conservative. We may actually end up having a source of cash. What I think Krishna tried to convey is that what made such a big difference for us in 2014 which is about $350 million in cash just paying for the completion of this project is not something at a minimum that will reoccur in 2015. And that is I think reliable. Whether you get all these progress payments and completion payments from the clients, et cetera, then I think all of this comes in and actually will become a source of cash. Iraq per se as a market where we operate with our core is not – is not at all a use of cash. It actually is a decent business that is a separate issue. Zubair is a self-contained problem. I hope this is helpful.

It is. Thanks for the color and we applaud the focus on free cash. Thanks.

Thanks Scott.

Your next question is from Ole Slorer of Morgan Stanley. Your line is open.

Yes. Thanks a lot. Wonder if you could give us some more color on this rather aggressive – ambitious perhaps better word – headcount reductions and CapEx reductions. They are very big compared to what your peers are talking about. So could you help us understand a little bit how much of this ties to reductions in the core, both on a CapEx reduction and personnel reduction versus what is to be disposed of?

So Ole, first of all on the CapEx reduction we overspent, if you will, on CapEx in 2014, mainly on the Well Construction side, because we had to pre-fund some projects in Latin America and Sub-Sahara Africa for customer deliveries. And lead-times were getting larger, so we had to pre-fund the projects to the tune of about $200 million, $250 million in 2014. This explains partly why we missed our 2014 free cash flow goal, part of it Now this also explains why partly the 2015 CapEx appears to be that much lower. We can actually cut it quite easily down to the $900 million level. The CapEx in the second half of 2014 is about $800 million. And much of the revenue related to that CapEx has not been generated yet. I mean it is just beginning now. So really we are quite comfortable that given the activity reductions in 2015, and the heavy CapEx in the second half of 2014, particularly in the Well Construction side, we are quite comfortable that the $900 million can be achieved.

Of the $900 million rough numbers, Ole, about $800 million is on the core, $100 million is on the non-core, rough numbers.

Yes.

The $800 million are not a starvation diet, is what Krishna is trying to convey, in so far as you can probably borrow $200 million spent in 2014, added back to the $800 million we plan to spend in 2015; that gives you a truer picture of what we'll actually be doing.

That's right. And there will be a lot of excess equipment coming free --

Yes.

Given the activity declines particularly in North America. So we will actively seek to redeploy this equipment.

Not to be zealous, but we can actually shrink that number in CapEx further if needed, without doing the starvation diet.

Well, a step at a time. That would be very good, Bernard, but I think – one step at a time here. On the headcount, that is another very big number. How much of that is on core relative to non-core?

Much of it is on the core actually and it has to do with support functions and direct – both are being impacted, but support functions is a big focus area for us. As Bernard mentioned, from the years about 2010 to 2011 right through 2013 we added a lot of support function heads married with various initiatives that were spawned by functions across the board, partly to address our historical issues on the legal side, accounting side, safety side and so on and so forth. But there was no care given to how much load there needs to be, what is the efficient loading of these support functions right through to the operational level. We are taking a good hard look and taking some metrics to guide us through this process using a template approach. So we are using a standard template to see what a normal operation should comprise and then everything else that falls out is going to be questioned and cut. So it is really partly correcting the sins of the past, if you will, on headcount and partly to adjust to the downturn. In fact, we are using the downturn to do both at the same time.

And on the cash flow shortfall again, there was nothing there tied to deferred or payments that you had expected from Venezuela or Mexico that you did not foresee?

No, no, no. No, no, on Q4 it will – essentially the biggest gap was $200 million more CapEx. We were conscious of this, could it be in Q1, could it be in Q4. And $200 million more of CapEx in Q4 were essentially for Latin America or Brazil specifically, and offshore SSA specifically. And they had an issue of deliveries that was one thing. We were less profitable because the market softened also by a shortfall of $50 million to $100 million as profitable that we had expected a while ago, that is at the end of Q3. Those are the primary movers in Q4. The payments and all that sort of thing, no, there was no noise there.

Okay. Well, I have some other ones, but we will take that off-line and hand it back. Thank you very much.

Thank you, Ole.

Your next question is from Jim Wicklund of Credit Suisse. Your line is open.

Good morning, guys.

Good morning, Jim.

When I look at the core businesses, you talk about the $200 million CapEx in Q4 for Brazil and sub-Sahara Africa and that is Well Construction. And outside the U.S., I would think well construction would still be a good business. You are the second company that has noted the resilience at least of Artificial Lift. What happens to completions? How much of your completions business is North America? And what happens to Formation Evaluation, which is your lowest margin business and I would think it's a little punitive in this market?

Completion is very much like Artificial Lift. First, it is not capital intensive in that respect, that is Item 1. Meaning it is quite easy to move the activity up and down; it is purely an issue of inventories. With respect to the split in our Completion, Completion is actually less North American centric, except for Canada, than you might think. Completion is something along the lines of 60% international, 40% North America, which the 40% North America is more Canadian than it is U.S. Mind you, that is not a positive, Canada will be hurt as much as the U.S., but this is a point of fact – sorry?

Go ahead – that is a nice breakdown, we appreciate it, keep going.

So I don't think Completion is going to do any differently than Well Construction. It is going to actually focus a lot on the international markets and take its hits in Canada and in the U.S. And it is not that difficult from an operating standpoint to manage. Again, because it is not fixed assets intensive; it is essentially a products business, it is essentially inventory intensive. So this is one issue. And with respect to Formation Evaluation, the real key there, Jim, your question is right on mark, is our ability to pull out of North America equipment in an efficient and organized manner and redirect it to markets in the international play which will be more resilient. To the extent we can get that done, that product line will actually do far better in this down market than maybe it did in prior year recessions. We are very focused on that, extremely.

Okay. My follow-up if I could. Krishna, you mentioned $700 million plus in short-term debt pay down in the quarter and I am assuming that is commercial paper. And you talk about the rating agencies will do whatever they do. You almost sound fatalistic like it is going to be a downgrade. And while you guys can weather it, our fear is that if you get downgraded all the accounts who can't own investment grade will have to sell you. So can you give us a little comfort, I mean should we look for a downgrade in ratings, but that is okay because you will survive? Or do you really think you can convince the rating agencies that a downgrade is unnecessary?

We think we can convince the rating agencies that a downgrade isn't necessary at all. We are going to work with them in the next few weeks, giving them a lot of detail and hopefully convincing them not to downgrade us. I mean we have to look at mid-industry cycles, margins over a cycle rather than just look at 2015 and conclude on that basis that it is the end of the world. This is one of the things that we have to talk about in detail with the rating agencies and we will.

What we try to convey, Jim, is that for us as an enterprise, just as an economic entity, it doesn't have much of an effect. We understand the issue of holding – the ability to hold debt, et cetera from a fund standpoint, we understand that. So we will do our very best and we have a good case to present, we really do, fundamentally.

I think the combination of the aggressive cost reductions, the CapEx control and the ability that we have to generate free cash flow going forward.

International, the international strength.

Should be – make a good case in front of them. We are confident.

And the last question since Jim snuck one in, I will sneak one in. You talk about pushing down your supply chain to help save your margins. And everybody is doing that, several companies, red and blue companies, have already put out letters to all their suppliers. Can you walk through a little bit of how much pressure you can bring to bear and how much reality you can wring out of your supply chain to try and salvage your margins through the course of the cycle?

Actually, we have a letter campaign.

We do.

The letters have already gone out and in fact we are getting very strong, very good responses. In percentage terms we are able to match quite easily the discounts we are giving to customers with discounts we are getting from suppliers.

To a degree you can make a virtue out of the fact that we're not quite yet terribly good at some functions within the company, or put another way, not as good as our peers. So you make a virtue out of it. Why? Because self-help allows you to make more progress just by focusing on things. And so that is what is going on, Jim. It's not so much that somehow we're going to be better at it than our peers. No, the answer is that we are probably not as good at it than our peers.

But you are going to be better at it than before.

To be good at it now. Do you understand?

I do. You are going to be better at it now.

Precisely.

Okay. Gentlemen, I appreciate it. Thank you. All the best.

Thanks Jim.

Thanks Jim.

Your next question comes from the line of Bill Herbert of Simmons & Company. Your line is open.

Thank you. Good morning. Krishna, I'm trying to frame your realism for North America Q1 recognizing and appreciating your perspective on January and how that has unfolded. If you look at Q1 2009, your North American revenues were down, if my model is correct, 29% quarter-on-quarter and margins compressed by about 1,000 basis points on 51% decrementals. And thus far quarter to-date 2015 the unraveling is actually worse than in Q1 2009. So should we expect a similar if not worse performance top-line and margins in Q1 2015 relative to Q1 2009?

So Bill, I think on the revenue side the unraveling is real, yes, it will be in the same ballpark we think.

Okay.

But the big difference between now and 2009 is that we are much more focused and aggressive on cutting costs. So the cost catch up, the cost-cutting will catch up by the end of Q1. So the decremental in the second quarter will be much more muted compared to the 2009 timeframe for Weatherford because our cost-cutting actions in 2009 were not as extensive as we are planning today. So again, I would say Q1 is going to be challenged. But then we will start catching up on the costs in Q2 and the second half of the year is going to be quite benefited by cost cuts.

Bill, it's okay, ask your question, sorry.

Sorry, Bernard. So if you get a similar order of magnitude with regard to revenues in Q1 in North America relative to Q4 and similar decrementals, you are down kind of mid-single-digit margins or a little bit lower, you get some margin recovery in the second quarter because of the proactive nature of your cost cuts?

Yes. Certainly, we will get some margin recovery subject to Canada, of course, which will deteriorate further seasonally. But subject to that, yes, we will certainly get a margin recovery due to cost cuts.

So is it plausible that North American margins first half 2015 kind of settle in the low-single-digits kind of breakeven area? At the trough – I mean recognizing that those are transient and that they are going to get better.

Yes. I think that would be a reasonable conclusion.

Okay. And then secondly, Bernard, my goodness you are the longest tenured CEO in the business. So putting on your historian's hat, to use the word – the dreaded word 1986, or number. And I am just curious with regard to the adjustments that you are making with regard to headcount. I think somebody said those aren't big numbers, they are actually huge numbers. It is like 15% of your headcount it seems. What does that imply? I understand that there's a cyclical response and there is a structural remedy. But with regard to the adjustments that you are making and as you envision where we are today and you are looking into this abyss, what is your expectation with regard to duration of the downturn and path of recovery as we come out of this catharsis?

You are right, one of the few who has lived 1986, which I am not sure that is a positive or not. Probably it isn't a positive. But it is what it is. But I will answer, it is a paradox. If it is true that in 1986 it took between 10 to 15 years to switch from what was a continuously depressing market to something that was a long positive cycle, depending on where you start the positive cycle, 10 to 15 years, my assessment, based on what we know on reservoirs around the world, what we know also on political considerations, et cetera, et cetera, et cetera, is that the adjustment is not going to be 10 to 15 years, it is probably more 10 to 15 months. So paradoxically here I am telling you that the debate between V-shape and U-shape, I think it is a U-shape that sort horizontal portion of the U will be awfully short. And it has to do with elasticity of supply or capacity rather to price, elasticity of demand to price and we have – actually we do a lot of thinking and work and questioning on and around this which we don't necessarily share because it is not our business, we are not an economic consulting firm. So paradoxically this is how we feel. Paradoxically because you are right, we are roughly, rough numbers we are taking down the people side of our equation by about 15%, that is correct. And actually maybe more by the time – before we are finished. But do understand that this dichotomy, cyclical and structural, is very powerful at Weatherford. And I wouldn't want to sort of split structural versus cyclical because it would be artificial. When the year is – well, before the…

Okay, fair. And then one quick last one for me. Against sort of a backdrop I will throw a number out there of international E&P capital spending contraction of 15%. You kept using the word resilient. What does that mean? I assume that means better than a contraction of 15% with regard to international revenues, but is it substantially better or merely modestly better? How would you frame your internal expectations right now with regard to international revenue performance?

It is better, Bill, because of penetration, Well Construction in Latin America and SSA, because of self-help in the Middle East. It is also – it will be affected by foreign-exchange issues. For example, I think it's relatively well-known that we have a good market share that has been maintained in Russia. We have good incremental contracts. However, when you have an exchange rate which goes from 30 to 60 and above clearly the reported side of it in dollars becomes very muted. So these are forces that we have no control over, but in general because of what I characterized as self-help on and around Well Construction in Latin America, SSA and Middle East and if you want to squint there is more than that. I think it is fair to say that we are likely to do better than the market in international plays, period.

Okay. Thank you, sir.

Thanks Bill.

And on behalf of Weatherford we thank everyone for joining the call. Our time is up. So thank you all.

Thank you for much and thank you for your time.

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