Baker Hughes Company (BKR) Q3 2012 Earnings Report, Transcript and Summary

Hello. My Name is Kanesha, and I will be your conference facilitator. At this time, I'd like to welcome everyone to the Baker Hughes Third Quarter 2012 Earnings Conference Call. [Operator Instructions] I'd like to turn the conference over to Mr. Trey Clark, Vice President of Investor Relations. Sir, you may proceed.

Thank you, Kanesha. Good morning, everyone. Welcome to the Baker Hughes Third Quarter 2012 Earnings Conference Call. Here with me today are Martin Craighead, President and CEO; and Peter Ragauss, Senior Vice President and Chief Financial Officer. Today's presentation and the news release that was issued earlier today can be found on our website at bakerhughes.com. Additionally, reconciliation of operating profit and non-GAAP measures to GAAP results for historic periods can also be found on our website in the Investor Relations section under Supplemental Financial Information. Today's presentation -- during today's presentation, I must caution you that any company outlooks discussed this morning are subject to various risk factors. We'll try to highlight these risk factors as we make these forward-looking statements. However, the format of the call prevents a more thorough discussion of these risk factors. For a full review of these risk factors, please refer to Baker Hughes' SEC filings and, in particular, the forward-looking disclosure in this morning's news release. With that, I'll turn the call over to Martin Craighead. Martin?

Thanks, Trey, and good morning. Baker Hughes' third quarter results were impacted by 2 very different issues: first, we experienced several nonrecurring items that impacted our results and Peter will describe these for you in more detail later in the call; second, we experienced challenging market conditions in both North America and internationally and I'll offer some insights on those conditions. The pressure pumping market remains unbalanced due to excess capacity. This imbalance continues to drive pricing pressure and strained profitability as the industry works to align to this market reality. Additionally, some of our customers are postponing activity, especially mid-cap North America operators, for a number of reasons, including budgetary issues, over-leveraged balance sheets and uncertainty over future commodity prices. As a result, we're seeing pockets of delays in certain geomarkets and I'll address this in more detail later in the call. I'll also expand on our operational results this quarter, which provide evidence that we are positioning Baker Hughes to succeed in this market with a strong emphasis on execution, differentiating technology and a sharp focus on cost and capital discipline. But first, I'll turn the call over to Peter to describe our third quarter financial performance. Peter?

Thanks, Martin. Good morning. Before I begin the review of the third quarter operating financials, I'd like to highlight several items that impacted our results this quarter. First, we have taken a charge of $28 million after tax associated with an impairment of internally developed software and other information technology assets, as well as expenses associated with the new data center. Second, we've taken a charge of $15 million after tax associated with the closure of a chemical manufacturing facility in the United Kingdom. This decision is part of our supply chain savings initiative, which will drive down costs in the future. Third, we've provided $27 million after tax for bad debts in our International segments. $22 million is related to a significant customer in Latin America and the balance is due to a customer bankruptcy affecting our operations in Europe. Fourth, our Gulf of Mexico operations were impacted by Hurricane Isaac, resulting in a 2-week delay and a loss of $0.02 per share. And finally, we've made the decision to sell our Process and Pipeline Services business, otherwise known as PPS. Accordingly, we've reclassified in all periods the revenue, expenses, cash flows and balance sheet at PPS to discontinued operations. PPS was previously a component of our Industrial Services segment, which now primarily consists of our downstream chemicals and specialty polymers businesses. We currently expect the ultimate disposition of PPS to be finalized in the coming months. Now moving to the operating results. This morning, we reported adjusted net income for the third quarter of $322 million or $0.73 per share. This excludes 2 of the previously highlighted items: charges for IT and the closure of the U.K. manufacturing facility. On a GAAP basis, net income attributable to Baker Hughes for the third quarter was $279 million or $0.63 per share. We posted revenue for the third quarter of $5.23 billion, up 3% or $164 million from last year and up $16 million sequentially. Adjusted EBITDA for the third quarter was $924 million, down 18% compared to last year and down 7% sequentially. As mentioned, third quarter results were impacted by several items. To help in your understanding of this quarter's results, I'll bridge last quarter's EPS to this quarter. In Q2, we posted earnings of $1 per share. First, subtract $0.10 for the change in our overall tax rate. This is to account for a favorable tax position in the previous quarter. Subtract $0.03 for North America operations as the seasonal return of Canadian activity was more than offset by further weakness in the pressure pumping market and higher raw material costs. Subtract $0.07 for international operations, primarily due to activity delays in Europe and North Africa and transitory expenses in the Middle East. Subtract $0.02 for Industrial Services, primarily due to reduced demand for specialty polymers. Add $0.03 for lower corporate costs. At this point, our operational earnings per share would have been $0.81. However, due to the bad debt provision in Latin America and Europe and the hurricane in the Gulf of Mexico, we subtract another $0.08. This brings us to adjusted earnings per share of $0.73. To reconcile with GAAP earnings per share, subtract $0.07 for the charges related to IT and subtract $0.03 for the charge relating to the closure of the manufacturing facility. That brings us to $0.63 per share. Now, we'll compare our third quarter results with the third quarter of last year. Starting with a $1.61 in third quarter of last year, subtract $0.49 for a tax benefit associated with the reorganization of certain foreign subsidiaries. Add $0.06 for the termination of debt in the third quarter of last year, that brings us to a third quarter 2011 adjusted earnings per share of $1.18. Subtract $0.40 for North America operations as a result of less favorable market conditions for our pressure pumping product line, combined with Canadian activity being significantly lower than the third quarter last year. Add $0.04 for International operations resulting from improved profits primarily in the Middle East, Russia Caspian and Latin America. Subtract $0.02 for Industrial Services, primarily due to reduced demand for specialty polymers. Add $0.04 for the lower corporate costs and interest expense. Subtract $0.03 for higher taxes due to a higher effective tax rate. This, again, brings us to $0.81 per share before we subtract another $0.08 for the bad debt provisions in Latin America and Europe, as well as the Gulf of Mexico hurricane. From the adjusted earnings per share of $0.73, subtract $0.07 for the expenses related to IT. And finally, subtract $0.03 for the facility closure. That brings us back again to $0.63 per share. In Table 5 of our earnings release, we provide adjusted financial information, including the impact of this quarter's 2 identified adjusting items on each region's results. From this point on in the conference call, any comment on revenue, operating profit and operating profit margin refer explicitly to Table 5, unless otherwise stated. Moving on to North America. Revenue in North America was $2.7 billion, up $21 million or 1% compared to a year ago and up $70 million or 3% sequentially. North America operating profit was $321 million, down $281 million year-on-year and down $36 million sequentially. North America operating margin was 11.7%, down 1,040 basis points compared to last year and down 160 basis points compared to the previous quarter. Our North American operational performance can be summarized in 4 points: first, while Canada activity levels did increase following spring breakup, rig counts trailed the prior year by 26% on average, resulting in lower activity levels for our products and services. Our Canadian pressure pumping product line also began to realize pricing degradation as that market is now experiencing an overcapacity of equipment; second, in the U.S., our pressure pumping product line continued to face margin pressure with lower pricing for services and higher costs for guar; third, Hurricane Isaac resulted in a reduction of operations along the Gulf Coast with many offshore installations delayed by 2 weeks; and fourth, on a positive note, outside of pressure pumping, our other product lines continue to post good results despite rig counts declining 3% in the U.S. during the quarter. Moving to International. Revenue was $2.3 billion, up $149 million or 7% compared to a year ago and up $40 million or 2% versus the prior quarter. International operating profit was $248 million, flat year-on-year and down $72 million sequentially. This figure includes the provision for bad debt of $29 million previously highlighted. International operating margin was 10.8%, down 80 basis points year-on-year and down 290 basis points sequentially. Excluding the impact of bad debt, International margins would have been 12%, an increase of 40 basis points year-on-year and a decrease of 170 basis points sequentially. Again, excluding the impact of $22 million in bad debt in our Latin America segment, we saw year-over-year improvement in both revenue and margins. However, sequential revenue was down $21 million, with operating profit down $3 million. This would have resulted in an operating margin up 12.7% in Latin America, unchanged from the prior quarter. Overall, the revenue and profit reduction was driven primarily by reduced rig activity in Colombia and field lab project delays in Mexico. In Europe/Africa/Russia Caspian, revenue and margins were both above last year's third quarter levels. Sequentially, we saw a drop in revenue of $59 million with operating profits down $34 million, excluding the bad debt in Europe. This reduction in activity is primarily associated with a 20% decline in rig activity in Norway, resulting in significant project delays for drilling fluids, artificial lift and drilling services product lines. In Continental Europe, we saw reduced activity in our Drilling services product line as a significant customer put 2/3 of its active rigs into maintenance during the quarter. And finally, in Africa, our wireline services product line experienced a significant reduction in activity due to contractual delays with a major customer in Algeria. The Middle East/Asia Pacific segment saw strong revenue growth year-on-year, primarily due to Saudi Arabia and Iraq. Sequentially, revenue was up $40 million due to increased completion sales in Saudi Arabia. Operating margins, however, were down due to higher operating costs, which were mostly transitory, again, in Saudi Arabia and Iraq. Our Industrial Services segment, which has been reclassified to now exclude our Process and Pipeline Services business, revenue was $193 million, down $6 million compared to the prior year and down $14 million sequentially. Operating profit was $14 million compared to $31 million last year and $26 million last quarter. The decrease in profit is primarily due to reduced sales in our specialty polymers business, which faced reduced demand, driven by sluggish economic conditions in the U.S., Europe and China. Turning to the balance sheet. For the quarter, we were cash flow positive, and our cash increased $215 million to a total of $1 billion. Total debt was $5.15 billion, up $113 million from the prior period. Our total debt-to-capital ratio remained at 23%, and capital expenditures for the quarter were $732 million. Now let me provide you with our guidance for the remainder of 2012, starting with rig counts. For North America, we expect the average annual rig count to contract by 1% this year versus last year or down 25 rigs year-over-year. In the U.S., for oil, we expect to exit 2012 with 1,369 rigs, which is an increase of 21% compared to Q4 of 2011 and a sequential reduction of 3% compared to the third quarter's exit rate. For natural gas, we expect to exit 2012 with 420 natural gas rigs in the U.S., which is a 13-year low for natural gas rigs and a 52% reduction year-over-year. Sequentially, it is a decline of 3%. In Canada, we expect the Q4 average rig count to be 340 rigs, which is a decrease of 28% compared to last year. Sequentially, this is an increase of only 15 rigs or 3%. Overall, this equates to a reduction in the North America rig count of 14% compared to Q4 2011 and sequential reduction of 4% relative to the third quarter. In the Gulf of Mexico, we expect continued activity and margin improvement as hurricane season ends and the deepwater rig count continues to rise. In U.S. land, we expect the decline in rig counts will partially be offset by continued improvement in the number of wells drilled. However, we do not anticipate an improvement in pressure pumping pricing and we could also begin to see pricing pressure in some of our nonproduction-related product lines. In Canada, activity levels are expected to be flat as we do not predict a meaningful increase in the Canadian rig count. And we expect pricing in some product lines could become an issue as service companies begin adjusting to the new market realities in Canada. On the cost side, there are 2 items which should work in our favor in North America: first, our actions to continue lowering our pressure pumping cost base will provide incremental benefits in the fourth quarter; and second, with the guar situation behind us, we can expect to see our costs decline. For the International rig count, we've reduced our full year 2012 over full year 2011 growth forecast to 3%. This excludes the impact of Iraq, which Baker Hughes began including in our rig count last year. This revised forecast reflects the recent contraction in the rig count during the third quarter, particularly in Brazil, Colombia and Norway. Also contributing is a reduction in fourth quarter expected growth. Compared to Q3, rig counts are expected to grow a modest 3% in Q4 with the most significant growth occurring in Saudi Arabia and China offshore, along with a moderate rebound in Brazil, Colombia and Norway. For Baker Hughes International segments, we are projecting fourth quarter sequential profit margin improvement in every international region. But we expect the Q4 international margins to be flat to slightly down compared to last year's exit rate. Industrial Services should see a decrease in revenue and an increase in operating profit in Q4 with margins around 10%. Process and Pipeline Services, which is now included in discontinued operations, should see its normal seasonal decline in Q4 with revenue declining approximately 25%. Moving to interest expense. We expect it to be between $55 million and $60 million for Q4. Corporate costs are now expected to be between $70 million and $75 million for Q4. Depreciation and amortization expense in Q4 is expected to be between $390 million and $400 million. Our effective tax rate for the full year is now expected to be between 32% and 33%, which is lower than previous guidance. This means we expect a tax rate of approximately 35% in the fourth quarter. Lastly, capital expenditures for 2012 are expected to be about $2.8 billion. At this point, I'll turn the call back over to Martin.

Thanks, Peter. I'd like to begin with our review of our North America business, starting with Canada where delays in customer spending has meaningfully reduced activity levels. Canada has traditionally been a predominantly natural gas-driven market, and while our customers are largely targeting oil plays, their existing natural gas assets still account for a significant part of the revenue base. And with uncertainty over forward-looking commodity prices, our customers are taking a conservative approach to their business right now. For us, that means activity in Canada did not ramp up as high as expected. And looking ahead, we only predict a slight activity improvement through the rest of the winter drilling season. Faced with a lower rig activity, our Canadian operations are leveraging their strength in non-drilling-related -- non-drilling, rig-dependent product lines such as upstream chemicals and artificial lift. For example, we are targeting growth in the SAGD market with the CENtigrade Ultra Temperature ESP System. More importantly, this technology allows for higher production temperatures resulting in a larger steam chamber. Our customers are seeing production increases by as much as 50%. The same market adjustment and realignment we saw in Canada is also occurring in the United States, albeit more modestly as liquids-rich basins are more prevalent, larger and more mature in their development cycle. Although rig counts are declining, there's no debating the fact that rig efficiencies are improving, resulting in increased well deliveries and this is partially offsetting the decline in rig count. In fact, during 2012, the average number of wells per rig in the United States jumped by more than 15%, meaning each rig now drills, on average, about 4.5 wells per quarter. This material increase in efficiency can be attributed to our customers transitioning from exploration to development, more efficient pad drilling practices, and in a large part, to the products and services that we deliver to the well site as we continue to position Baker Hughes as the experts in well construction. In fact, I'm pleased to report that even amidst declining U.S. activity, our U.S. line completions and drilling systems product lines had record revenue during the quarter. Our sliding sleeve technology continues to displace plug and perf operations in the oily basins as well. And drilling systems continues to grow share with rotary steerables as the AutoTrak Curve system reached another milestone this quarter, having drilled 2 million feet in the United States, and that's another 1 million feet in the last 4 months. In addition, demand for artificial lift and upstream chemicals remains strong and we posted near record revenues for these product lines. That all said, the North American pressure pumping market remains very challenging. Over the past 2 quarters, we've highlighted the steps we've taken to improve our business, including increasing the amount of work that is under contract, improving fleet utilization through more 24-hour operations, improving our supply chain and logistics as well as technology solutions to enhance our efficiency and reduce dependency on commodities such as guar. To that end, our MaxPerm product has now replaced 50% of guar in linear gel applications. And I'm happy to report that during the quarter, we extensively and successfully field-tested CLEARSTAR, our cross-linked inorganic alternative. During the quarter, we also secured several new contracts with a favorable customer mix to provide pressure pumping services in the Rockies, the Permian and the Eagle Ford Basins and our contracts for these products and services will have a positive impact starting in early 2013. And these wins are about more than just revenue, however. These customers are 100% aligned with our objective to increase 24-hour operations and our infrastructure is close to their infrastructure, so we're on the right path to purposely manage our cost base and improving asset utilization. So let me assure you the strategic initiatives we've outlined to improve the pressure pumping business are on track and I'm -- and enhancing our ability to compete in this current market. In the Gulf of Mexico, we are very pleased with our performance and believe this region will drive meaningful growth for Baker Hughes. For the past several quarters, we have predicted strong activity gains in the Gulf and that activity is materializing as anticipated. Our teams in the Gulf have done a tremendous job winning work and we are executing as planned in the deepwater. We told you this was a priority of ours, and I'm pleased to report that Baker Hughes is now the leading provider of drilling services on the shelf and the deepwater Gulf. In addition, our stimulation vessels are beginning to secure long-term contracts for 2013 and beyond. Also, we've recently introduced a series of advanced wireline services into the Gulf of Mexico. These include Nautilus Ultra, a suite of evaluation tools designed to operate at extreme temperatures and pressures; GeoExplorer, a high-resolution formation imager; MaxCOR, a large diameter rotary coring service; and a newly introduced advanced fluid sampling service. These technologies target the deepwater exploration and development market and provide the industry with leading petrophysical analysis and fluid characterization in extreme operating environs. Based on these product launches, our wireline business is also gaining share in deepwater. This success is in addition to our strong position on the shelf where we are leaders in the deployment of high-pressure, high-temperature wireline evaluation technologies as we've highlighted in previous calls. And finally, as we said before, the deepwater completions market is expected to ramp up in mid-2013, and as a leading provider of completions technology in the world, we are uniquely poised to leverage this opportunity. Our investment in our Center for Technology Innovation is enabling us to deliver differentiating technology for deepwater completion applications. Now turning to our International business. I'm disappointed with our results this quarter. As Peter mentioned earlier, the drop in rig activity impacted our Latin America, Europe/Africa/Russia Caspian segments. More specifically, Brazil, Colombia and Norway rig counts were down collectively by about 17% and these are all meaningful markets for Baker Hughes. In the Middle East/Asia Pacific region, our margins also dropped despite an increase in revenue. Here, we experienced costs and delays due to the movement of equipment into Iraq. And even though Iraq contributed to the international margin compression this quarter, I firmly believe that being in Iraq is the right thing to do for Baker Hughes in the long term and we are committed to making our Iraq operations a meaningful contributor to our portfolio. And looking to the fourth quarter, as Peter said, we project sequential improvement in our International margins in every segment. This is the result of a rebound in activity in areas such as Norway, Continental Europe and Colombia. However, we do not expect International margins to exceed last year's exit rate and here's why: first, the rig count is lower than we originally planned in Latin America and Asia Pacific, specifically; and second, we expect the Iraq start-up costs to continue for at least another quarter. Looking beyond the fourth quarter, Baker Hughes is very well positioned in areas where we project the strongest growth in 2013. In Saudi Arabia, for example, we're combining our strong local content, improving shale gas technologies to target the unconventional market and we're seeing results. This quarter, we've been awarded a multi-well campaign in unconventionals, which includes pressure pumping services. In Norway, we continue building scale and have already begun mobilizing resources and started work under our new integrated drilling services contract. And in Africa, we see our activity on the East Coast growing and we've opened a new facility in Mozambique to support our long-term growth opportunities for this region. So looking ahead, as I said earlier, succeeding in this market requires differentiating technology and capital discipline. We continue to invest in the right technologies and commercialize new products and service. And we are allocating capital to the product lines and regions that provide differential earnings growth, while at the same time, we are reducing investment in product lines and geomarkets that are non-core or do not provide the required rate of return. In the near term, our top priority is improving the quality of our earnings, increasing returns on capital and generating positive cash flows. And to that end, we project around a 25% reduction in capital expenditures for 2013. With that, Trey, let's open up for some questions.

Thank you, Martin. At this point, I'll ask the operator to open our lines for your questions. [Operator Instructions]

[Operator Instructions] Your first question comes from the line of James West.

Martin, on the pressure pumping side of the business in North America, we've seen Schlumberger start to stack equipment. We saw Halliburton, at least, announce on Wednesday they're kind of drawing a line in the sand, if you will, around pricing. Are you guys taking similar initiatives with respect to kind of pricing trends to kind of help stabilize this market? I recognize you have other initiatives underway such as going 24 hours and upgrading your customer base, but are you also, like others, kind of trying to stop the bleeding here on the pricing side?

Absolutely. And if you remember, I think we kind of led the dialogue around the fact that we weren't going to put any more horsepower into the market until we could be assured that it would be beneficial to our business. And the supply chain continues to, a quarter ago, produce equipment, and we simply, if you will, cold stacked it. And we've added no more horsepower for that exact reason. So I mean, we're 2 quarters into this effort to try to stabilize pricing in the market and we're very pleased with the discipline that the market seems to finally be realizing.

And is that helping to actually stabilize pricing to this point?

At this point, I'd say -- no, I'd say no. I'd say the pricing -- there's quite a bit, not for us, frankly. I mean, we've been in the spot market right or wrong for all this year. There's quite a bit of contracts that are still rolling off for some of the suppliers. And I think as that happens, it breeds a little bit more aggressiveness as those contracts come up and I think that's going to be with us, if you will, for probably another couple of quarters, James.

Yes, James. James, this is Peter. Just another observation. We're hoping -- I shouldn't say hoping, but we were expecting pricing to sort of flatten out starting in Q3, but it hasn't. It's been dropping at the same rate all through Q3. So there's still some momentum. If you just think about the technical on it, there's still some momentum that it could go down further.

Okay, okay. That's helpful. And then just one follow-up on the International side, the International margin guidance for the exit rate for this year. If we were to exclude the start-up costs in Iraq, would you be up year-over-year? I mean, is that really the big driver of it being down? Or is there something else going on there?

No, it's an Iraq story and a timing issue and all the logistics. So the answer to your question is oh yes, we'd be up if it wasn't for Iraq.

Your next question comes from the line of Kurt Hallead.

So yes, I want to try to get a general sense now. You've provided some very good commentary and outlook for the very near term into the fourth quarter. I think everybody is now setting their sights on 2013 and trying to get some assessments on that front. In the context, we've heard some recent commentary from some land drillers and from Halliburton the other day about a pickup in U.S. activity heading out into the first quarter. Just wanted to get your perspectives on that and what do you expect to see in the U.S. land market out and into the first quarter and whether or not you might -- we might see an acceleration as you head out through the year.

I think an acceleration as you head out into the second half of next year, Kurt. We're still forecasting a bit of a dropoff in U.S. land in Q4, a pickup in Canada, a pickup in the Gulf of Mexico. You add them all together, I'd say Q4 rig count is still down a little bit and into Q1, let's say flat and then picking back up in Q2 excluding the effect of Canada. So I'd say that we're pretty much flat here on out, down a little bit near term. And then Q2, Q3, which is a pretty far away out, let's -- I mean, let's face it, that's quite a forecast out, but we're more optimistic longer term.

Yes, we did -- in my commentary, Kurt, we did talk about the rig count being down sequentially going into Q4, so it's not exactly flat. We do expect the rig count to come down in Q4 from Q3 and sort of flatten from there.

So the other thing you guys mentioned was 4.5 wells per rig now. So what kind of -- are we at a new plateau, or do you see that well count per rig continuing to increase and to what degree?

I think -- I'd say we're only on second base in terms of what our rig contractor friends are capable of doing and what we're capable of adding to the whole mix as well. I'm not smart enough to forecast where we're going to go from this 4.5 per rigs except I feel confident telling you it's going to get better and I think there's quite a bit of opportunity. And as well, as I said, Kurt, and you know this, the customer community is getting increasingly comfortable with the reservoirs now and moving into full-scale rapid development of these. So I think they're going to push harder and harder and things like the AutoTrak Curve, the sliding sleeve technology, is really, really facilitating our customers in that effort.

Okay. And just to close out on that question once again, so a 15% increase wells per rig, is that a kind of rate that you think we can continue to see as you head out into '13?

Yes, absolutely.

Your next question comes from the line of Bill Herbert. William A. Herbert - Simmons & Company International, Research Division: Martin and Peter, North America margins, fourth quarter, recognizing the fact that frac pricing continues to go lower and domestic activity is slipping as well, Gulf of Mexico coming back, guar cost inflation becoming deflation, so that should help. Could margins be flat in the fourth quarter, if not better?

One thing we're not having this fourth quarter, Bill, is the Gulf -- sorry, that Canada is not coming back anywhere near where it used to. So you could expect Canada to be flattish to up a little bit; Gulf of Mexico, up a bit. We are looking at a rig count, Q3 to Q4, down 3% in U.S. land and you combine the rig count being down and pricing, so it feels like you've got some pretty strong negative forces. And the question is, will our cost savings in guar and further refinements in headcount, logistics and R&M, which have been pretty good cost savings over the past couple of quarters and I think we'll still have cost savings there into Q4, the balance is whether or not we can cost-save our way against the headwinds and that's a tough thing to call right now. William A. Herbert - Simmons & Company International, Research Division: Okay. But it sounds like the guar deflationary tailwind is large enough where you're actually having to think about whether margins will even be down or not in the quarter. I mean -- is that correct?

Yes, yes. William A. Herbert - Simmons & Company International, Research Division: Okay. And then along the lines of your North American rig count prophecy, we exited Canada at 360. Last week, we were at 360, and yet you're calling for an average rig count of 340. Do you see specific visibility from customers that lead you to conclude that activity is going to fall off pretty sharply here between now and year end?

I think our rig count numbers on Canada -- Bill, this is Martin. I disagree with what you just said here. We're showing Canada up 15 rigs. William A. Herbert - Simmons & Company International, Research Division: No, no, no. I got that. But I mean I'm just saying exit, right? So we average 325. I mean, I can do this offline, but -- and we exit 360 and then last week was 360 and you're calling for an average of 340, which implies a pretty steep decline from this point forward.

Remember the holiday season and so whether we're talking exits or averages. I think that given our size in Canada and our intimacy with the customer community, you obviously have some big operators, Bill, but you have a high density of mid-caps to small caps and their ability to raise funds and money. And if you parachute into Calgary right now, I'd say that in the customer community, not our community, but in the customer community, there's just a lack of enthusiasm given where gas prices are and differentials. So it's going to be up in the winter drilling season, as I said, but I wouldn't model in too much activity relative to where we are right now. Up, but not a lot, okay? William A. Herbert - Simmons & Company International, Research Division: Okay. And if I understood you correctly, in response to another question, you seem to have a high level of conviction that apart from MEA, Latin America and Europe, Africa, CIS margins were going to be up nicely year-over-year versus Q4 of last year, is that correct?

Yes.

Your next question comes from Angie Sedita.

As a follow-up on that question on Q4 for North American margins, obviously, you're getting a little bit of benefit from guar help in the Gulf of Mexico, Canada's not helping, also some benefit on the cost side, but still obviously seasonally lower on utilization. Is it possible that North American margins in Q4 decline to the high-single digits, or do you expect to stay in the double digits?

Angie, can you ask -- what did you say on the double digits? Could it decline high-double digits?

Could it decline to the high-single digits for North American margins in Q4, or will it stay in the low-double digits?

I don't think it would be that bad.

Yes, I think it's a double-digit number just based on where we are today.

Okay, that helps. And then the benefit of guar, I would expect you expect a partial benefit from guar in Q4 and a continuation of some tailwinds into Q1 as well?

Correct.

Yes.

Correct. The majority should be in Q4 and then tapering off into Q1, maybe even Q2 depending on the usage volumes, Angie, as well as the substitution rate of these new products, which, frankly, are accelerating. So we may see some guar inventory still being queued up in Q2.

Okay, okay, very helpful. And then on the International margins, entering into Q1, clearly some onetime issues both in Europe, Africa, Russia and Middle East. But going into Q1, should we assume Q3 is our baseline and you have a continuation of some of that, at least in Iraq in Q1, or will we go back to more normalized levels that we saw in Q2 of this year?

We said on the call we think we got another quarter of the cost issues in Iraq. We play that quarter-by-quarter. We're optimistic we'd get those behind us and then we should -- that should help us out. The Q1 typically is a dip from Q4, as you know. I think we do have some product sales in Q4 typically. So maybe we can get the Iraq problem solved in Q4 to help out, but Q1 is typically softer than Q4 as it has been for many years.

Angie, I think I'd add that as we said, 4 is better than 3, 3 had some very unusual activity kicks that didn't work in our favor. But it's one quarter, you move on. And as Peter said, we have some rebounding in Q4, then you have some seasonal impacts that you generally have in Q1. But the outlook in International is, I can tell you, favorable. Activity should be up from where we are today. We don't have the drama around the pricing that affected all of us in '12. Hopefully, that's behind. We have a stabilizing Iraq situation, as Peter highlighted. So we're optimistic about '13 from an international perspective.

Okay, very helpful. And just to clarify one thing you said, would I assume that Q1 is higher than Q3?

I would think so.

Yes, yes, I would think so as well.

Your next question comes from the line of Jim Crandell. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: I think you made a comment in your prepared remarks that you would begin to -- or you could begin or would begin to see pricing pressure in non-pressure pumping drilling-oriented product lines in the -- maybe in this quarter. Could you elaborate a little bit on that?

Yes, we said we could and that's just for the benefit of transparency, Jim. Given the size of the pressure pumping spend and its relative percentage of an AFD today, with pressure on that particular product line, and as James asked right out of the blocks, until we see stabilization and hopefully sooner rather than later, you're going to get some drag-on effect on these package type of pricing and so forth. And so have we seen it? Not really. But could we see it? Yes, we could see it and that's, at this stage, all we can say on it. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: And Martin, some of these wins you've had recently in pressure pumping have been for integrated packages where you're putting in your bits and fluids and completion products, et cetera, into the bid?

The ones that I highlighted on this call are predominantly, I believe, entirely significant, significant pressure pumping contracts only. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: Okay, but it does require -- does remain a key part of your strategy to try to...

Yes, absolutely. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: Do the integrated jobs? Okay. Secondly, my other question was, if you look at your margins in Europe, Africa, CIS, I know you explained it, but it seems like an awful sharp margin drop being the -- given the drop in revenues. Could you elaborate on that region a little bit and specifically what caused that?

First of all, I agree with you. Sharp is putting it mildly. But, Jim, when you work through the numbers, Norway, and particularly the mix in Central Europe, but Norway was down 22% rig count. Given our position there, that's just -- and as you know, the cost structure, there's not much variable cost that's going to go away in Norway when it's so abrupt. But I think, as most people know, those rigs are already back to work, as well as Central Europe. So -- but it doesn't -- it's a high fixed cost business and it doesn't take much drop in revenue to almost fall to the bottom line $0.80 on the dollar. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: So you would attribute a large part of that big incremental margin drop to Norway.

No, almost all, well, all of it. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: All of it, okay.

Very close to all of it.

Your next question comes from the line of Jud Bailey.

Wanted to discuss Middle East. You touched on Iraq and I wanted to see if you could give us an update on how things are progressing for you guys in other parts of the region, specifically, Saudi Arabia, and how things are looking for 2013.

Jud, that's a good question. And I tell you, it's very optimistic, led by Saudi Arabia. As I highlighted in our prepared remarks, there's a continuing movement into the unconventionals. We were awarded a nice pressure pumping contract. I think that goes hand-in-hand with our commitment to the unconventional engineering that's going there with our research center that we opened up 2 quarters ago, as well as some of the integrated operations that we have in the neutral zone, as well as Shaybah and some others. So 2013, Saudi Arabia should be much, much stronger even over this year. And Oman and Kuwait, and I would say there's some pricing gains to be made in the Gulf, Abu Dhabi, our share position continues to grow on the drilling, as well as the wireline. So Middle East continues to be, and no doubt that it will continue to be one of the best stories we have on the Eastern Hemisphere.

Okay. My follow-up is on Latin America. It sounds like you guys probably got hit pretty hard with the rig count decline in Colombia. And I was wondering if you could give us a little more color maybe into what's going on there and kind of maybe the prospects for a turnaround and perhaps timing as we think about the next couple of quarters.

Yes, it's likely to recover in a quarter or 2. The driver there is, frankly, permitting issues around some environmental concerns. There's some geopolitical issues in that region that's slowing activity. I think on the geological success side, our customers are satisfied. I won't say ecstatic at this case, but I think they still remain bullish on that region. So if we get some of these permitting issues behind us, they'll get going again. The thing that -- yes, that was part of our Latin America contraction, as well as the bad debt provision that Peter highlighted. But, Jud, the other thing was, in Brazil, there was rig count decline as the drillships, particularly in the pre-salt area and some other Santos Basin moved from the drilling into the work-over completion phase. And given our position on the drilling front, that didn't help us. But that's temporary. It generally happens every year in Q3, maybe a little bit in Q4 as they try to hit their production figures.

Your next question comes from the line of Scott Gruber. Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division: Martin, I want to inquire more about the international strategy, quite a lot of detail on what's happened recently. But when I think about what's happened over the past decade or so, last cycle Baker was growing at the low end of the peer group range, you had the FCPA issue. But it seems to be playing out again this cycle even looking beyond this quarter at the last few. Now previously, you weren't willing to chase a lot of the low-margin work that was being offered, and there's significant pricing competition for some contracts. But I also thought that we're starting to show some better relative margin improvement. So Martin, are you starting to think about doing anything different from a strategy perspective on the international side to close the growth in margin gaps, or do you think the current plan is sufficient after we get through the near-term headwinds?

Scott, that's a great question. And certainly, the thing that's not playing out again is the FCPA challenges, so let's make that clear. The issues on the, say, revenue growth, we've been open and honest about it. We're not chasing revenue for revenue's sake. It doesn't do us any good. It doesn't do you any good. It doesn't do our customers any good on the long term. I'm very satisfied with the strategy that's rolling out. We spent -- we're at a different point in the investment cycle, as you well know, relative to some of our peers. We are just now completing the build out phase this year and a lot of the infrastructure in our move from west to east. I really am happy with our market share gains in the Middle East, in Russia, our solid positions in the key markets of Latin America and Europe, particularly in Norway and Central Europe. But we have a lot of upside potential obviously, as you highlighted in terms of revenue, but we're not going to chase revenue for revenue's sake. And the other thing I'd tell you is while our build out is taking place, is it fully up and running in all that locations? No, it takes a little bit of time. And we still have some portfolio management is all I'd say is on the heels of the reorganization. Would I tell you that all of our mix is exactly what we want it to be? The honest answer is no. So we've got to look at that a little bit more sharply. But we're on the right track, we're doing the right things and I'm satisfied with the execution of our strategy by our Latin America, as well as our Eastern Hemisphere team. Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division: Now you provided guidance that overall CapEx would take a big 25% reduction in '13. What's the direction of International CapEx given that you are at a different point in the cycle?

International CapEx is up from here, but the mix is changing significantly from, let's say, roofline into some feeding the rental tool contracts in places like Norway, Middle East on the wireline and drilling and completion areas. So it's up in terms of dollars and it doesn't take much of a reduction in North America given the size of the North America CapEx budgets the last few years, Scott, to shift some money to the East and still have savings to help the balance sheet. So but there's also a mix shift besides just a dollar increase. Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division: And if I could slip one last one in, the International CapEx, is that -- I know you're still probably finalizing your budget, but is it going to be up double digits? Is that the right ballpark?

Too early to say, too early to say.

Your final question comes from Jim Wicklund. James Knowlton Wicklund - Crédit Suisse AG, Research Division: Yesterday, on the conference call -- on Halliburton's conference call the other day, they talked about a lot of their customers having exhausted budgets. You mentioned it earlier in the presentation. They talked about how there would probably be more vacation days taken this year, reminding us of 2007. Are you guys seeing that in your North American business as well?

Frankly, no. But I think the other way to look at that -- have we heard that particular reason being? No. I think what there is, is just a continuing bit of lack of urgency given just the cautious posture North American customers have. So will they use the excuse that it's holiday season and slow down? Perhaps. But they're certainly in an environment where there's just a kind of a wait-and-see posture. And so, I guess, I'd agree with the end result. I'm not sure I'd agree with the reason that's driving it. James Knowlton Wicklund - Crédit Suisse AG, Research Division: Okay. So either way you're taking that into account, the slowdown for the rest of the...

Yes, that's why we show the U.S. land rig count declining, as Peter highlighted, 3 to 4, okay? James Knowlton Wicklund - Crédit Suisse AG, Research Division: Okay, my follow-up question, I know we've beat Iraq to death, but what are -- are these start-up costs, are these delays, are these losses on the contract? And the part that Peter didn't sound like he actually -- you all were completely sure how long these, whatever these costs were, will continue, can you give us an idea of what they are so we can have a better idea of the impact?

I can, I can, Jim. And these are not costs associated with getting stuck or losing a well or something. These are costs associated, frankly, with the institutional inefficiencies of where Iraq is right now in trying to run its own business. I don't mean us, I mean the country. Two rigs came off-line, had to be moved. To be moved, they had to go into a free zone. To go into a free zone -- there's just no tariff structure. Jim, we're not going to -- we're going to do things the right way. You got to wait to read the rules. And if the rules are being written or rewritten, you stand down and wait for it to get sorted out. So there's a great deal of inefficiency, but the country -- and you know I've been there multiple times, the country is in its early stages. But as I said, it's the right place to invest and we'll look back at these inefficiencies as just a real quick snapshot in time, a blink of an eye. James Knowlton Wicklund - Crédit Suisse AG, Research Division: We can hope. Is it getting better?

Yes, absolutely. Security front's getting better and they're working through their issues. But as I say, hopefully, and as Peter highlighted, hopefully we'll get them digested in Q4. But I think to say that it's just going to operate like expected, it's going to operate like a Saudi Arabia in 2013 is being way too optimistic. It's in its early stages.

Thanks, Jim. That concludes today's presentation. Thanks for your time this morning.

Thank you for participating in today's Baker Hughes Incorporated conference call. This call will be available for replay beginning at 9:30 a.m. Eastern Time, 8:30 a.m. Central and will be available through 11:30 p.m. Eastern Time on Friday, November 2, 2012. The number for replay is (800) 585-8367 in the United States or (404) 537-3406 for international calls and the access code is 59811229. You may disconnect now. Thank you.