Weatherford International plc (WFRD) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Lori, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, today's call is being recorded. Thank you. I would now like to turn the conference over to Ms. Karen David-Green, Vice President of Investor Relations, Corporate Marketing and Communications. You may begin your conference.

Thank you, Lori. Good morning, and welcome to the Weatherford International Fourth Quarter Conference Call. With me on today's call from Geneva, we have Bernard Duroc-Danner, Chairman, President and Chief Executive Officer; and Krishna Shivram, Executive Vice President and Chief Financial Officer. Today's call is being webcast, and a replay will be available on Weatherford's website for 10 days. Before we begin with our opening comments, I'd 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 fourth quarter press release, which can be found on our website with the customary caution on forward-looking statements and a reconciliation of non-GAAP to GAAP financial measures. We welcome your questions after the prepared statements. And now I'd like to hand the call over to Krishna.

Thank you, Karen, and good morning, everyone. Let me start with a brief recap of our operating performance in the fourth quarter. Loss per share for the quarter before charges and credits was $0.13. Revenue of $2.01 billion for the quarter decreased 10% sequentially and 46% year-on-year. Operating income margins before R&D and corporate expenses declined by 255 basis points sequentially to 2.8%. Excluding the rigs business, our core business revenue decreased 9% sequentially with a 115 basis point deterioration in operating income margins to 3.9%. These margins do not benefit from any of the assets or other impairment charges recorded this quarter as these impairments were accounted as of December 31. In other words, the margins reflect the tightly run operations and cost management actions, something Bernard will touch on later. North America revenue declined 15% sequentially, in line with the reduction in rig count, coupled with continued pricing pressures with operating income margins dipping 312 basis points to negative 9.6%. International revenue reduced sequentially by 4.9%, marginally better than each of our larger peers, while operating income margins decreased slightly by 80 basis points to 12.1%. Eastern Hemisphere results were resilient in the face of activity and pricing reductions with revenue dipping only 2% sequentially, comfortably beating our peers, while margins improved 20 basis points to remain steady at 10.6%. In Latin America, revenue declined 11% and margins dropped by 245 basis points to 15.2%, reflecting client-led spending cuts in Brazil, Colombia and Mexico, coupled with our self-imposed reductions in activity in Venezuela and Ecuador. In the Europe, Caspian, Russia, Sub-Sahara Africa region, revenue was down 7%, reflecting seasonal winter declines in Russia and the North Sea, coupled with project cancellations across Sub-Sahara Africa, principally in Angola, while margins remained resilient at 11.4% as proactive cost management offset the impact of revenue declines. Revenue in the Middle East and Asia Pacific region grew 2% with a 64 basis point improvement in margins to 10%, with advances in Kuwait, China, Indonesia, Oman, Malaysia and Abu Dhabi more than offsetting declines in Iraq. Overall margins were positively impacted by our continued proactive cost management actions across all the regions. Our Land Drilling Rigs business recorded a 22% sequential revenue decline with the end of several drilling projects across the Middle East and North Africa region, mainly in Chad, Kuwait and India. The rigs business slipped to an operating loss of $17 million as cost-reduction actions were not quick enough to stem the loss of revenue. Below operating margins, R&D costs reduced by $4 million while corporate costs were flat. Our budget for 2016 comprises cutting nonessential projects to reduce R&D spend to $150 million for the full year. Corporate costs will also be reduced to $150 million for the year. The tax benefit recorded in the fourth quarter reflected the tax benefit on the losses in the U.S., partly offset by tax provisions internationally where we continue to be profitable. The tax rate for 2016 will be dependent on the geographical mix of earnings and will be heavily weighted by result in the U.S. The fourth quarter results include after-tax charges of $1.1 billion, which includes impairment of asset and inventory carrying values mainly in the United States in the pressure pumping and rental tool businesses due to the low activity levels. In addition, several international rigs, which are idle and not likely to sign contracts in the foreseeable future, were also impaired. The bulk of these charges are noncash in nature and reflect the difficult operating conditions of the current down cycle. We also conducted our normal annual goodwill impairment tests in the fourth quarter. As always, a detailed analysis was prepared in consultation with external experts, and this analysis was stringently tested. The conclusion was that there was no impairment of goodwill. Given the sudden deterioration of commodity prices most recently and as a matter of abundant caution, we updated our projections and analysis and retested the goodwill for potential impairment. Again, the conclusion was that there was no impairment of goodwill. Moving on to net debt and cash flow now. Net debt reduced by $191 million to reach $6.994 billion at the end of the year. This is the first time our net debt has dipped below $7 billion since March 2011. Free cash flow from operations in the fourth quarter was $168 million, resulting in a positive full year free cash flow number of $129 million. CapEx in the fourth quarter was high at $140 million, about $32 million higher than previously forecast. In order to preserve key vendor relationships, we took and paid for deliveries from vendors that had been delayed for several quarters. Cash severance costs paid in Q4 amounted to $43 million, which was $23 million higher than anticipated mainly as a result of a quicker execution of our headcount reduction program. Without these 2 cash overruns, our free cash flow for Q4 would have been $223 million. Both items will benefit free cash flow in 2016. Working capital generated $250 million of liquidity this quarter and $567 million for the year with strong customer collections and a lower year-end DSO compared with any of our peers, coupled with a significant drop in inventory balances of $743 million for the year. The Zubair project was cash positive in the fourth quarter as several milestones were achieved, triggering cash payments as per contract. Overall, at the company level, this is the first time we have generated positive free cash flow for the full year since 2010 in spite of much more challenging business conditions. As of December 31, available liquidity was $1.7 billion, meaning we have a large borrowing cushion available to us. I would now like to offer a view on free cash flow in 2016. We expect to generate between $600 million and $700 million of free cash flow in 2016, taking our net debt at the end of this year well below $6.5 billion and a targeted net debt level of below $6 billion by the end of 2017. Our long-term net debt target is $4 billion, which will get nearer when we sell the rigs business once market conditions improve. There are 4 key variables that give us enough confidence to project free cash flow at between $600 million and $700 million for 2016. The first variable is the net cash flow from the Zubair EPS contract in Iraq. As of today, all 6 trains have achieved mechanical completion, and 5 of the 6 trains have achieved the next milestone RFC or Ready For Commissioning milestone. We have also successfully introduced hydrocarbons in 3 of the trains. We now have a clear line of sight on the final milestones, which will trigger additional contractual payments. We also expect to reach a settlement on change order claims after contract completion. As 2015 was a net cash flow negative year for this project, the year-over-year swing is expected to be in the range of $200 million. The second key variable is cash severance and restructuring cost. In 2015, we spent $193 million in cash. In 2016, given the reduced level of headcount reduction of 6,000 versus 14,000, we expect to not exceed $80 million, meaning that year-on-year, we will have an improvement of about $110 million. The third key variable is capital expenditure. Based on the quantity of excess equipment we carry at year-end, we do not envisage any growth CapEx for 2016 even if activity levels increase. As a result of the acceleration of CapEx spend into Q4 of 2015 with a higher acceptance of vendor deliveries, we have reduced the CapEx budget for 2016 to $300 million, which is roughly the maintenance CapEx level we need for the estimated operating activity levels. If activity levels reduce further, we have the ability to dial back CapEx even more. On the back of reducing CapEx by 53% in 2015 versus 2014, we have developed a strong review and approval process, which forces equipment sharing and intensifies utilization. The value of approved but unspent AFEs going into 2016 is 81% lower than 12 months ago, which should allow us to comfortably meet the $300 million target. Finally, the last key variable is inventory. Despite a relatively large pipeline of vendor orders coming into 2015 from '14, we managed to reduce inventory balances by $743 million in 2015. Our target for 2016 is to reduce inventory balances by a further $550 million, generating cash in the process. With the low vendor order pipeline going into 2016, which is 66% lower in value compared with 12 months ago and a systematic process to approve new orders while encouraging sharing among locations, we believe this target can be achieved with relative ease. These 4 variables namely: the Zubair contract; gas severance cost; CapEx; and inventory reductions are factors within our control and relatively independent of business conditions. When you add the impact of these 4 variables together, the incremental cash flow in 2016 versus 2015 is about $500 million. We are confident that variations in earnings and accounts receivable should nullify each other. Given the free cash flow for 2015 was $129 million adding the $500 million on the key variables will provide -- that the key variables will provide allow to realistically target a free cash flow goal of between $600 million and $700 million in 2016. We believe that the free cash flow performance in 2015, the available liquidity at year end and the expected free cash flow number for 2016 should allow access to more than enough cash to repay both the maturity of $350 million this month and the June 2017 debt maturity of $600 million. I would now like to update you on our short-term credit facilities. You will remember that our current facility expires in July 2017. Having said that, it is good practice to proactively address the replacement of this facility early. We will launch a new facility shortly after this earnings call, maintaining the overall size at $2.25 billion but extending the facility out over the next 3 to 4 years. We have ongoing discussions with our bank group with respect to the terms and conditions of such an extended facility, and we are confident we can conclude this new facility by the end of the first quarter. Also, purely as a measure of abundant precaution and mostly to reassure our equity holders, we have successfully renegotiated the covenant on our current revolving credit facility from a 60% debt-to-cap ratio to a 70% ratio. At the end of the year, the calculated debt-to-cap ratio, including the extraordinary asset and inventory impairment charges taken in Q4, is 55.6%. This includes a $1.6 billion adjustment for the accumulated currency impact on nonmonetary, non-U.S. dollar assets. As previously mentioned, all our assets, including goodwill, were tested stringently for impairment in Q4, resulting in an after tax charge of $1.1 billion. And without this impairment charge, the covenant calculation would have been 51.4%, which is slightly better compared to the third quarter. Nevertheless, the newly negotiated covenant of 70% leaves ample headroom of about $2.8 billion to trigger the new covenant. This means that there is no realistic possibility of a covenant breach. We enjoy an excellent working relationship with our banking group, and this is evidenced by the unanimous acceptance of the recent change in our debt-to-cap covenant. We anticipate no difficulty in renegotiating and extending out our short-term financing facilities. I would like to also remind you that our long-term bonds totaling $5.8 billion at year-end represents 77% of our total debt and do not carry any debt-to-cap or any other ratio-driven covenants. With that, I will now turn the call over to Bernard.

Thank you, Krishna, and good morning, everyone. It's difficult to describe a quarter in which we remain unprofitable and where large asset impairments are successful. But operationally, it was. The obsessive focus and discipline on core cost cash is paying dividends and will continue to do so. Our direction won't move an inch. The drive and intensity will only increase. Decrementals are a good metric of operational performance. Decrementals overall were 28.1% on 10% sequential decline in revenues. Without rigs, the core decrementals was 16.6% or 9% decline revenues, which is just about best-in-class. Our performance was a tale of 2 hemispheres. The Eastern Hemisphere was essentially flat both on revenues and operating income, which is best-in-class. We gained share in a wide cross-section of the hemisphere, and stringent cost cuts in prior quarters helped. Both factors made up a continued market erosion and severe pricing pressures, which are widespread in the Eastern Hemisphere. The Eastern Hemisphere is a growing area of relative strength for Weatherford. The revenues and profitability declines occurred in Western Hemisphere, both NAM and Latin America. North America did markedly better than Latin America. North America reported a 15% decline in revenues but held the decrementals to 10.9%. The outstanding decrementals are a reflection of structural changes brought about in the operations. North America has been entirely reorganized and transformed. Its costs, operating practices and talent bench forged the new operation, the results of the prior 4 quarter's relentless drive. Latin America stood out as the low performer with a 10.6% decline in revenues and a punitive 38.4% decremental. The explanation was in part a further market weakening in Colombia and Brazil, but by far the largest -- the larger factor was the self-imposed reduction in activity in Venezuela and Ecuador. Venezuela alone was half the quarterly revenue decline and more than all the profitability decline. By contrast, Argentina and some of the smaller regional markets continue to grow. Put another way, Latin America's Q4 reflects primarily self-imposed discipline also in performance. In fact, without our Venezuela and Ecuador's purposeful pullback, the region would have shown level profitability on Q3 or slightly up, very much like Eastern Hemisphere. Taking stock of the full year '15, 2 markers of how much the company has changed and performed. The year-on-year '15 on '14 operating income decrementals were held at 28.1% on 36.7% revenue declines. This is ignoring the effects for foreign exchange on revenues incidentally. By comparison, '09 on '08 decrementals were 153.6%. Second, in the year of massive decline and reduction in force, Weatherford achieved its highest metric for employee safety worldwide in its recorded history. Safety achievements is seldom compatible with the disruptions and retrenchment, and safety is a proxy for quality and reliability. I'll focus the rest of my comments on 3 areas: further operating underpinnings of the Q4 results; forward views and our direction; and the endpoint for transformation of the company. Operation underpinnings of Q4. Rather than a superficial oversight of all regions in Q4, I want to provide granularity on North America as an illustration of the transformation of Weatherford. I'll focus more specifically on the U.S. while the same commentary could be made on the Canadian operations. NAM's outstanding decremental performance was earned through the systematic transformation of our operating organization. The driving factors were cost cuts. We're early and we went deep and we didn't pause. Year-end '15 versus year-end '14. We lowered our payroll and headcount by 41%. This quarter in Q1, we're taking down another 15% of our U.S. headcount, meaning that from January 1, '15 to date or just about 15 months at the end of Q1, we'll have lowered our U.S. headcount and payroll by 50%. What we addressed goes beyond lowering headcount. We delayered the organization, rationalized the facility and infrastructure, and upgraded the talent bench both internally and through outside hires. Specifically, we rationalized infrastructure with a total of 126 facility closures. There's another 25 or so scheduled for Q1. We went from 7 subregions to 3, and we moved from 5 reporting operating layers from regional leaders to the well site to an average of 3. Beyond the payroll reduction number, it is the structure and the culture of operations, which has been fundamentally changed. The other thing we worked on is product line focus. Close to half of the sequential revenue decline in Q4 for NAM was the pressure pumping and Drilling Tools, otherwise known as rentals. This decline was one of choice. We purposefully scaled back operations for those 2 product lines and therefore, share. By all measurement, we continue to gain share steadily in our other product lines, which is the intent here -- for here on now and highly desirable long term. The stock reality -- so without pressure pumping, NAM in Q4 would be close to profitable even in this deep depression. In fact, with our pressure pumping and drilling tools, which together combined in Q4 still add up to about 20% of our NAM revenues, NAM will be profitable and compared to the operating income margins by a larger peer group. In both cases, the pressure pumping and drilling tools are essentially low barriers to entry, massive supply of equipment and unsustainably punitive economics. We won't pursue contracts that have punitive returns. We don't have to and we won't. We'd rather let others do so. We are doing fundamental efficiency work in the U.S., addressing the structure as well as the cyclical and the talent bench. The U.S. will be transformed operationally when finished. We expect this trend to continue in the first half of this year. We're ready to address any market conditions both to manage down decrementals in the event of further market declines in the first half of '16 and exploit large incremental gains when the recovery comes. We are in the midst of the same operating changes internationally as we have effective in NAM. You should expect the same results, which brings me to the outlook for the first half of '16 or the outlook of '16 altogether. The overall market and our own results will be weaker in Q1 than in Q4 in both NAM and the international markets. First, seasonality suggests the lower Eastern Hemisphere and Latin America as is always the case in the first quarter. Second, other consequence of our oil pricing. We will experience, in all markets, further volume declines and pricing pressures. We're ready for this. We're addressing both and continuing to aggressively managing down our cost structure in a very focused product line strategy by geographic market. Assuming $25 to $30 average pricing for the first half of the year, that's for oil of course, we believe our Eastern Hemisphere and Latin America operations will trough in Q1. We expect Eastern Hemisphere to seasonally recover some in Q2. Latin America will also--but it will be a slower and more pained recovery. Still, international, in our judgment, will trough in Q1. And we expect Eastern Hemisphere to remain in Q2 and thereon. In Ireland, relative strength for the balance of the year. The rig operations will see modest improvements in financial results most likely by late Q2 thereon. By midyear, a number of stacked rigs would have been mobilized on location and operating. This will lead to better results for the second half of the year. Our rig operations remain segregated from the core in management, operations, IT and financial results all the way to separate audits. They remain a noncore asset which we, nonetheless, manage very carefully. They will be divested when market conditions improve. The proceeds will be used to further de-lever the company. Lastly, we have set, as an internal target, to reach earnings breakeven by Q3 based on cuts in '16 and carryover from '15 as well as Eastern Hemisphere performance. This will be a hard objective to achieve given what we expect in the marketplace but one we believe is achievable. Free cash flow remains an unyielding priority. The range of free cash flow for '16, as Krishna mentioned, will be $600 million to $700 million. Net debt by year-end will decline to well under $6.5 billion. The objective is well understood, planned for and prioritized by all in the organization, both financial and operations. We will deliver this double free cash flow. Direction. Our direction is clear to all within Weatherford. We're changing the rules of engagement in all of our business dealings. We focus on core cost cash. We build on our operating progress to date with more efficiency, cash discipline, systematic talent upgrade and selected market share focus. We delever the balance sheet through free cash flow quarter-after-quarter with no exceptions and eventually with more divestments. This is our direction. Our action centers around improving 4 things and doing so in a perennial way: lower cost structure through cycles; capital allocation and cash generation as a company-wide discipline; leapfrog talent bench and talent development as a culture; focus on quality and reliability for all product lines. We'll summarize some of the accomplishments in '15 and the work in progress for '16. Reduction in-force. We'll reduce our payroll overall by 41% over '14 and '15. As a reminder, we had 67,400 employees on January 1, '14; 55,400 on January 1, '15; and we stand at 39,500 employees at year-end '15. We'll reduce our employment further by 6,000 positions to 33,500. This will get done in Q1 and completed before the end of Q2. We took down a support ratio from 59% in '14 to where it presently stands at 38.0%. A 21% decline support ratio is a colossal structural change in record time. To do this during a cyclical downturn is doubly difficult. It's also a structural change which will provide us with outsized incremental margins through the recovery years. We'll push down further our support ratio to 35%. Operations, we'll streamline with consolidation geographic segments, starting with the reporting organization, scaling down regional headquarters and push the country closer to the sand phase. Supply chain initiated a 2-year restructuring productivity leapfrog. Manufacturing, logistics and procurement are in the midst of a fundamental productivity and efficiency change. This is an economic breakthrough for operating cost structure and flexibility adjustment to changes in business volumes. Now here comes the synthesis of all the work done in '15 on the cost side. So acted-upon cost cuts in '15, add up to $984 million cost cuts in headcount and $402 million in supply chain and facility closures. We add them together, that's in total $1,386 billion -- $1.386 billion or with just over half has been realized in '15 because of timing. The full balance or roughly $650 million will accrue to '16 results. Moving over to the balance sheet. Inventory declined by about $600 million before any book impairment. We expect similar reduction of inventories in '16. We remain long in equipment and inventories as we enter '16. Receivables are run with the tightest control. You'll find that our Q4 and year-end DSOs are best-in-class amongst our peers. As Krishna mentioned, CapEx were cut by 55% in '15 to $650 million. We'll take them down to $300 million in '16. And R&D will be cut by 35% from $230 million to $150 million, preserving only the essential technological research. With the exception of R&D, which is going to be caught up quickly with a recovery, we're not cutting into muscle. We entered the depression with a large pool of excess equipment and heavy organizational structure. Much of what we're doing is as much perennial efficiency transformation and volume-related direct cost adjustments. And we are continuously adding muscle by high grading our talents. We're, in fact, constantly acting on new hires into now internal promotions for operating positions worldwide to strengthen our bench. This also reaches out to senior operating management levels. By the end of Q1, we'll bring on, as an officer, a new leader for a product lines to complete the senior operating team. Product lines require a number of focal points, with the most critical centering around quality and reliability. At the other end of the spectrum, this year, we're hiring upwards of 500 new graduates from engineering schools around the world. It is an ongoing commitment which would -- we will do in good and in bad years. They are the future of the company. Weatherford is in a midst of a transformation from cost structure, cooperating practices and quality focus, returns objective and a culture of sales. We are a completely different company in the making. Our performance in this trough through the first half '16 will bear this out on all metrics. Our performance and recovery will surprise to the upside. Our incrementals will stand out like our decrementals did, a synthesis. A word about the macro. The oil industry, as you know, is massively underfunded and massively underinvested, defies the imagination what is going on in reservoirs around the world. Pessimism rules in all aspects of analysis and interpretation. Yet if current oil pricing and oil selectivity endure, the industry will not be able to manage required oil demand as early as '17. This means oil demand will not be met by existing oil capacity. Existing oil capacity just about equates to existing production rates. Inventory overhang will help, by definition, that is more than a stopgap solution. All this is a physical fact, or even though it has no effect on the psychology of oil pricing and forward curve. The Black Swan issue is a possibility of a worldwide recession, which would abruptly arrest the growth in oil demand. There's much focus on the sustainability of GNP growth rates in various countries, particularly all-important China. And obviously, worldwide recession would adjourn all considerations of oilfield recovery for the duration of the recession. To the extent, though, there are no apparent factors that could precipitate a domino effect of country recessions and there is a web of stimulating counterbalancing factors, the obsessive focus from a oils standpoint ends up being on whether demand growth in '16 will be 1 million barrels per day or 1.5 million barrels a day or anything in between. Those are important differences, but they pale compared to the gathering storm. The declines in production akin to declines in capacity. Other than a few barrels coming from Iran, by our assessment, the industry has no spare capacity beyond the present operating rates. Furthermore, elasticity of supply response is being ignored or overstated. In my 30 years in the oilfields and my prior years watching my father operate in the same, I have never seen anything like it. As one level it is unthinkable. At another, those are the choices made by market economy in response to geopolitical decisions. But even the latter will become soon enough academic when supply curve crosses demand on its way down with no immediate or obvious short-term solutions to address it. It isn't all bad. The present state of industry depression offers us great opportunities. We're positioning Weatherford into very focused industry segments, deemphasizing or exiting others, using our product-line strengths, infrastructure and specific technological leadership. We are using the brutal recession to fundamentally change our cost structure, quality, efficiency, returns culture and, emphatically, our talent bench. This is the unique opportunity for us to make a quantum change, keeping what is good and promising at Weatherford for fundamentally changing what wasn't. We are today already a very different company. Our operating and management capabilities are immeasurably stronger than they historically were. We have still a worldwide infrastructure, so there's support second to none. We're confident of our technological strengths, product-line breadth and market potential for organic growth. And finally, paramount to us in bad and good markets, we maintain a strong free cash flow, and that will not change. Our numbers will prove out the merits of our direction in this brutal down cycle and just as much when the market turns. Our direction will deliver high shareholder returns at the lowest risk, and this direction will not change. With that, I will turn the call to the operator for Q&A.

[Operator Instructions] Your first question is from Bill Herbert of Simmons.

Krishna, could you run through the components of the free cash flow generation in 2016? Because it seems like you arrived at a $500 million number plus adding the $150 million thereabouts for 2015 to get to $650 million. When, I think, you said Zubair $200 million year-over-year positive delta for free cash flow; severance and restructuring severely reduce in 2016 versus '15, so that's $110 million; capital spending down $380 million; and then I thought you said inventory reduction of $550 million, but then you -- those 4 buckets you arrived at a net free cash flow increase of $500 million. Am I missing something or no?

Yes, Bill. Basically, I'm saying that inventory will come down $550 million, but inventory came down in '15 by $750 million. So the net between the 2 years is lower liquidity from inventory by about $200 million. So that's your missing piece.

Okay, got it. And...

Add all that, you get $500 million, and then you add the $129 million, we are very comfortable what is in between the $600 million, $700 million number.

$129 million, got it. And then the February debt maturity, that gets paid out of your credit facility, or what?

Yes, it's going to be paid out of our credit facility next week, yes.

And the amendments to your covenants and the extension of your credit facility, what does that do to your cost of debt?

Well, that is to be determined. We are going to work with our bankers in the next 6 weeks to put in place a longer-term credit facility, as I said. And there will be the customary type of slew of guarantees and securities that commensurate with our credit rating, and the cost will be marginally higher, but it's not going to be material to Weatherford's results. We are talking in -- probably in the $10 million to $20 million annual range, so it's not really material.

Got you. And Bernard, back to your outlook. Assuming that essentially when you roll up kind of national oil company and large natural resource holder international capital spending declines, 2016, it seems as if at least the early indications point to a 20% reduction year-over-year. Juxtapose, sort of Weatherford's revenue performance against that benchmark, if you will, why would it be better? Why would it be worse? Why would it be in line?

First, if you just look at 20% decline, our rough judgment would be that we'd probably, just in terms of natural share gains, pick up about half of the decline. In other words, if it's down 20%, we're going to be down 10%. This is the first judgment. Why? Simply because we have low market shares in a number of places, which we are gradually inching back. So it's a continuation of what we've done. It really happens in Eastern Hemisphere, happens in Latin America, x Venezuela and Ecuador, which in essence we are not -- we have a very, very small presence and it will keep it small. The other factor in when we look at our assessment for '16 is not a top line factor. It is a cost factor. In reading the prepared comments, it's always hard to be able to highlight the parts that are particularly useful. But when we count everything that we've done in '15, we're very honest about it. We have just under $1.4 billion of measurable, I mean really measurable, cost actions, $1.385 billion exactly. We know that we'll need just about $730 million. We actually realized as we went through the P&L in '15, maybe because of the timing of these things. So you got a little over $650 million on the cost side, which have been acted upon that are coming in, now, in January, in February, et cetera, in '16, we're taking further actions as we're taking down 6,000 people more company-wide and some more actions around supply chain. So the point being that combination of natural share gains that are nothing spectacular than just that they are -- at the end, the dollars are not large, we're not that large of a company at the end of the day. But in a number of the areas, we have unnaturally low market share, so it's sort of quite easy to gain if only because in the areas we specialize in we have good performance, and then you have that. And then you have simply a very strong tailwind, which is on the cost side, probably stronger than just about any other companies, because we've been obsessive about it and we have more to cut.

Right. And the 3 markets, if memory serves with regard to your market share gains where you have essentially marginalized or for whatever reason not nearly as active as you have been historically, Saudi, Algeria and Angola, are those the 3?

Yes, yes, I think you hit it. First of all, it's Middle East, the primary one. It's not only the Middle East, but you got pockets also in FSA. You're absolutely correct, and you're spot on. You also have some areas of Asia Pacific also, which is a very difficult market. I'm not minimizing the difficulty of the market. It's quite the contrary. But within the difficult markets you can have relative performance. And also, we had very, very low presence in Asia Pacific in a few markets. I would tell you the management that we have in the field is, and I hope they're listening to this call, is immensely more talented than the other were, so the drive in Asia Pacific, the drive in the Middle East, just name those 2, and also some other areas in Eastern Hemisphere here and there, is do we get back or get at least some market share, and we can. And the product lines are what you would expect within services or formation valuation, completion, of course, and well construction, more so the lift [indiscernible] okay?

Your next question comes from the line of Ole Slorer of Morgan Stanley.

Krishna, just a clarify on the costs of -- clearly most of the questions we get on most companies right now are centered around the balance sheet and financing and sustainability, so sorry about getting back to that. But the $10 million to $20 million that was specified, was that to do with the cost of changing the covenants from 60% to 70%? Or was that the total cost of that and what you expect to be the case on the $2.25 billion facility extension?

No, it's anticipated increase on cost for the extension we're talking about. There was hardly any cost for the change from 60% to 70%, miniscule. So it's a range, okay. That's in our minds. But it has to be still negotiated and nailed down with the banking group, and we feel very comfortable that we will be able to do so.

Okay, so you're comfortable that you can extend and incur an incremental cost within $10 million to $20 million. I think that would be a great relief for a lot of us. And when it comes to the cash flow, to what extent will the $500 million be back-end loaded? Do you see any chance that you'll be free cash flow positive in the first quarter?

We will be marginally free cash flow positive in the first quarter. As you know, first quarter is always seasonally challenged not only from a result standpoint but also from a cash flow standpoint as customers, mainly national oil company customers, they typically slow down payments to operating companies, to service companies, and this year is no exception. And also, you have a kind of a lot of payments for the prior year bonuses for employees and all the rest of it. Working capital does take a little bit of a hickey in the first quarter, which is seasonal. So I do expect to be marginally cash flow positive in Q1 and then building up as the year goes on. If you look at our history, Q1 has always been the most challenged free cash flow quarter, and this year is going to be no exception with the one difference being that we expect to be marginally positive.

That would be a very strong start if you can do that. Just finally, Bernard, just your thoughts on Iran, if you could just share what opportunity you see for the international service industry, or your kind of high-level thoughts on what can be easily done in Iran with respect to export capacity?

I -- look, the capacity that Iran can operate at circles around 3.5 million barrels a day. Before -- just before the opening of the markets, best to my knowledge, they were around 3.15 million, giving a swing of 350,000 barrels a day. Then we get to the issue of the grade of oil. I wouldn't even belabor that point because there are issues of marketability of the oil. So that's 350,000 barrels looking for a home. Now it is also true that the 350,000 barrels a day is not really available from a production capacity. It will require a few months just to -- because that 3.5 million barrels a day capacity is not truly functional, but it will be functional shortly. More interestingly -- that's actually a very, very small number. More interestingly, if you go above 3.5 million barrels per day, the next 500,000 barrels per day, to the best of my knowledge -- and I don't have a bias either way, neither optimistic nor pessimistic, just realistic, you are talking at about not far from a couple of years, regardless of public pronouncements, to go from 3.5 million to 4 million. So if you're going to be reasonable, I think you could get there by the end of next year. And I would also say that given the nature of the reservoirs, the size, the level of facturation that they have, their vintage of exploitation, I would say that my particular view -- and it's not my -- I'm not the only one who has that view, is that on and around 4 million barrels a day, Iran is capped. Iran is above all the gigantic gas cap. It is above all in issue of gas. Gas is an entirely different discussion for Iran. I think very quickly, the time and attention, and the capital, and so on, will be moved to gas, and then oil will be an issue trying to keep Russian capacity in the range of 3.5 million to 4 million. Iran is not an oil issue. Iran is a gas issue, and that's where the money is for them. And ultimately, the oilfield service industry will also be where the money will be made. It's all supporting the gas development. I mean, that's a very long term discussion.

Your next question comes from the line of Jim Wicklund of Crédit Suisse.

Krishna, thanks for so directly addressing some of the issues around debt. Like both Bill and Ole have said, the questions we get are around debt as much as equity these days, but the details about the debt impairments in a good challenge, the 70%. Guys, when is Zubair going to actually be finished, I mean like done and we don't talk about it anymore?

It's actually not in our hands. It's in the hands of the client. We really fundamentally are waiting for oil to be able to put it through the facility. The scope and scale of the work we're doing is now down to almost skeleton. Now as we finish the work, we're waiting just for the hydrocarbons and running through the facilities for 90 days, and that's it. So we're just waiting on hydrocarbons in the outside. These are provided by the clients, not by us.

Okay, but that's going to be this year you think?

Oh, yes.

Oh my goodness, yes. I mean, look, if it's started, we're beyond the scope of the contract completely.

We are looking at between Q1, and then depending on the when the hydrocarbon set each trend, Q1 or early Q2.

I just wanted to hear you all say that in public. Okay. My second question. Bernard, the transformations that you describe sound very impressive, a quantum change. You're a very different company. But you're the CEO. What changed in your outlook, your management focus? What caused you to make and start this transformation over the last 2 to 3 years after many years of running Weatherford?

That's a very difficult question to answer in public, so I'm just going to answer it as honestly as I can. Normally what happens when a company grows as fast as we have grown since 1987 from nothing and very successful, possibly too successful, and then, of course, discovers at some point in time it's not terribly well managed, the person that was responsible for the growth and everything else but probably did not pay enough attention to how well it's been managed is replaced and someone else comes in and doesn't have to answer that question. I, on contrary, get to answer the question, which makes it a little bit difficult. But I'll tell you. Above all, I want Weatherford to do well. There is nothing to do with me personally. I want Weatherford to do well. I know what Weatherford has and what it doesn't have. I know the wealth of Weatherford that is there to be harvested, I know what's missing, a little bit like one would know a child. When I realized all the trouble we went through, and it was extraordinarily painful to our shareholders, the management too but for our shareholders above all, that was before oil declined, I realized what had to be done. To extent I am able to guide the company so that it does what needs to be done, which is essentially operational and financial discipline, that's it. There's no strategic issues. You can argue we should have this, we should have that, it doesn't matter really. What we have is enough. So to the extent that I can help the company guide both operationally and in the financial discipline -- on the financial discipline, I rely immensely on my close colleague Krishna, and then I think it's quite straightforward, the progress that we'll deliver. Now oil tends to both mask all of this and at the same time, facilitate all of this. They did helps also. We can go much further, much faster, also masks to a degree the level of progress because it's such a horrific environment, yes. But to -- our shareholders or the financial markets should know that when it comes to us, we're not just fighting hard to adapt to a lower level of activity. We are transforming the company, and it is first and foremost an operational issue and the under-- financial underpinning so that to accelerate it and also measure it and keep it disciplined. But it is above all an operational issue, and we're way advanced in it, far more than it would have helped.

Your next question comes from the line of James West of Evercore ISI.

I wanted to go back to the international markets where you talked about increasing market share as we go through '16 and even with the market probably being down the 20% that Bill mentioned and we certainly agree with that. You could only be down about half of that. Is this market share gains that you've already achieved in your contracts that are won? Or is this in the bag? Or do you need to win more contracts to achieve that type of result?

It's not in the bag, James. And so far, I wouldn't take any contracts that we bagged as been reliable, the point being that in the time of extreme strain, I would be -- dishonest for me to tell you "All well, we booked it". The fact is that when we look at what we have, it is essentially committed to. But I'm thinking a discount simply because I know that in this world and at this time, clients can adjourn. They can postpone. And what is your full-service play going to do about it? Nothing, just wait. So the answer is, there is some risk that we don't -- that the assessment that we can hold back, if you will, the volume declines to about half what the market will be, there is some risk that we are not successful. I will point out to you the place where we will play the hardest, which is Eastern Hemisphere, so far we haven't really gotten our stride yet. We kept our own. In fact, we've done more than keeping our own. So I'll summarize by saying we have the business. It is not in my judgment reliable because it's not reliable for anybody in this environment, but we do have the business already. Let's assume we'll lose some or have to paddle our canoe harder to gain some more. I think we can. Of all of the calibration we give '16, there are also the midpoints between conservative and more aggressive. This one is also the same. We actually have a more conservative view and also a more aggressive view. This is the really a reasonable midpoint.

Okay, got it. And then if we switch over to North America, where the decline has been and is probably going to be a lot worse at least based on initial CapEx guidance from your customer base, you have a lot of -- you have the positives of the artificial strength in artificial lifts, but you have little more exposure to Canada. How do you think you fare in the North American market versus your peer group?

I think, to the extent we're backing off, remember, 20% of what we do is identified into our 2 product lines that we personally will only play if we can make a living, which is pressure pumping and drilling tools. To the extent we de-emphasize this, I would say that perhaps on the revenue side, we won't fare so well because we'll -- we may step back from these businesses, not entirely but as the case may be more than anybody else. At the same time, I would say, on the profitability side, we may actually fare better. So my suggestion is that as the Q1, Q2 sort of roll out, going to Q3, which as I mentioned, we -- our internal objective is to bring it to a breakeven quarter, we may very well in North America show -- continue to show great resilience at the profitability level, but not so great revenue performance simply because de-emphasizing loss leaders, as the other product lines do more than hold their own.

Your next question comes from the line of Angie Sedita of UBS.

So on the CapEx side, and certainly I understand you're sitting on quite a bit of inventory, but as you slash CapEx in 2016 and 2015, are there business lines or regions that continue to be, obviously, your top priority and then certain business lines or regions that you are a lower priority, obviously, in this type of market? And are there product lines or regions that you could exit and maybe unlikely to return to in the coming near-term year?

I'll say a few words and, Krishna, you might want to come in also on this. That's a very good question, Angie, but it's a bit difficult to answer it on the call. But we have, we are -- we have and we are going through a meticulous process. We're not doing it ourselves. It's been done by the field and product-line leadership. We're going through every single segment in which we play around the world. And you can imagine that with 12 different product service lines as we're organized and with worldwide infrastructure we have, there's lots and lots of questions to be asked. And we asked ourselves: Could we do more? Should we stay? Should we do less? Should we pull? In simple terms. We're doing this. And what are our metrics, financial metrics and also strategic as inclined and reservoir metrics. They balance one another. So yes, we will pull out in certain countries and regions on certain product lines and so forth. At the same time, we'll push much harder on others not only for now because they -- as little business there is, we can do better than we have, but also because the potential longer term. There isn't an overriding theme though, Angie, as in -- are we putting up this, putting up that? No. I would say, in general, overall, it's fair to say that Eastern Hemisphere -- overall, there are differences in Eastern Hemisphere, we'll tend to fare better. I am not saying necessarily fare well but better than any other parts what we have, although there are pockets Latin America also show fare well. In North America, we will become and has become a fortress of efficiency. So but -- so net-net, we will pull out of certain involvements in certain countries, certain product lines, but there is an overriding theme. The core is the core. We like the core. We try to make it as profitable as we can for now and for long term, but the core hasn't changed.

Okay, that's helpful. I appreciate that. So on the cost side, obviously, transformation, as you've said, for some period of time here has been necessary. But when you think through your headcount as well as your nonlabor portion of your cost base, how much of that do see is structural and necessary and permanent and how much is cyclical, which could return in 2017, '18 and beyond?

Krishna will answer that.

So, Angie, we estimate that about 1/3 of our cost reductions right across '14 and '15 are structurally permanent, because they have to do with the delayering the organization and working on the support structure with a lot of focus. So if you add the 2 years together, we had $1.4 billion of annualized savings in 2015, another $600 million in 2014, which we did not talk about itself, 1/3 of that is, I would say, permanent. And this is when the recovery does happen, we just have to constrain 2 things. We have to constrain the support costs, of course; keep the permanent -- production permanent, of course; and the second part is to constrain CapEx. And we believe our incrementals, both in earnings and in cash flow, free cash flow, will be enormous. We're not even talking pricing. We're just talking...

Yes, it seems a bit academic for us to focus on the upside and the recovery, and we don't speculate, notwithstanding my comments on oil, probably not terribly, terribly new. We don't speculate at all anytime in the market. We operate the company as if we are in a dismal environment for the very long term. We still also think, though, that if that is not going to be the case. But structurally, changing the economics of the company at a high level operations, clearly a strong recovery if that was to happen, we would not be able to hold the indirect flat where they are today forever. But there will be a period of time and level of volume increase where we can, and hence, the strength of the incrementals. This 1/3 of $2 billion is not just a Wall Street story. We've long given up on our Wall Street stories. This is actually real. So $600 million to $700 million in our cost structure at Weatherford today are perennial. That means a $0.60, $0.70 per share, if you want to look at it that way in a normalized manner, and our cost structure have gone away in an up-market. That's all.

All right. Okay, that's helpful. And then one final quick one. As you said that you gained some share on the Artificial Lift side in the international markets, there's something -- is there bigger push in this environment in the Eastern Hemisphere with Artificial Lift? And is there more to be gained on the market share in 2016? And it looks like that's helping your margin there.

I think actually, Angie, I'd love to say yes. The reality is that lift, yes, but not any more than any completion probably is just as much, probably more share gains. I think are things that we very seldom talk about. Like, liner hangers, for example, and cementation have share gains that are possible. Managed crusher drilling share gains in an expansion of a type of technology which was not used very much. I'd say in general, Formation Evaluation has. And sounds like it's almost everything, but it really depends where. But if I was going to say which one has the -- of all of them, as far the strongest share gains in percentage and all that sort of stuff today, I'd say completion probably, more so than lift. The lift is fine, but one is actually likely to grow at a higher rate than the other.

Right. Thank you, Angie, and thank you all for joining us today. We have approached the hour, so this does conclude our conference call. You may now disconnect.