Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Weatherford International Ltd.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 30, 2003 was $3,462,804,089, based upon the closing price on the New York Stock Exchange as of such date.

      Indicate the number of shares outstanding of each of the registrant’s classes of common shares, as of the latest practicable date:

DOCUMENTS INCORPORATED BY REFERENCE

      Certain information called for by Items 10, 11, 12, 13 and 14 of Part III will be included in an amendment to this annual report on Form 10-K or incorporated by reference from the registrant’s definitive proxy statement for the annual meeting to be held on May 25, 2004.

Table of Contents

PART I

      Weatherford International Ltd. is one of the world’s leading providers of equipment and services used for the drilling, completion and production of oil and natural gas wells. Weatherford, as we know it today, was formed in connection with the May 1998 merger of Weatherford Enterra, Inc. and EVI, Inc.

      We were incorporated under the laws of Delaware in 1972 and re-incorporated in Bermuda in 2002. Many of our businesses, including those of Weatherford Enterra, have been conducted for more than 50 years. Our principal executive offices are located at 515 Post Oak Boulevard, Suite 600, Houston, Texas 77027. Our telephone number is (713) 693-4000, and our Internet address is www.weatherford.com. General information about us, including our Corporate Governance Policies and charters for the committees of our board of directors, can be found on our website. Our board of directors has adopted a code of ethics entitled “Code of Conduct,” which applies to all our employees, officers and directors and has also adopted a separate “Supplemental Code of Business Conduct” for our senior officers. Copies of these codes can also be found at www.weatherford.com. We make available, free of charge, on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file or furnish them to the SEC.

      We conduct operations in approximately 100 countries and have approximately 500 service and sales locations, which are located in nearly all of the oil and natural gas producing regions in the world. We are among the leaders in each of our primary markets, and our distribution and service network is one of the most extensive in the industry.

      Historically, we conducted our operations through three divisions. During 2003, we realigned our divisions into two principal operating divisions as part of an ongoing productivity initiative:

	•	Drilling Services — This division provides: (1) drilling methods, (2) well construction, (3) drilling tools and (4) intervention services.
	•	Production Systems — This division provides: (1) completion systems, (2) artificial lift systems and (3) production optimization.

      In addition to the above operations, historically we operated a Compression Services Division and a Drilling Products Division. In February 2001, we completed the merger of essentially all of our Compression Services Division into a subsidiary of Universal Compression Holdings, Inc. in exchange for 13.75 million shares of Universal common stock, or approximately 44% of Universal’s outstanding common stock. In April 2000, we completed the spin-off to our shareholders of our Drilling Products Division through a distribution of the stock of our Grant Prideco, Inc. subsidiary.

      The following is a summary of our business strategies and the markets we serve. We have also included a discussion of both of our divisions, including a description of our products and services offered and our competitors. Divisional and geographic financial information appears in “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 21.”

References to Weatherford

      When referring to Weatherford and using phrases such as “we” and “us,” our intent is to refer to Weatherford International Ltd. and its subsidiaries as a whole or on a divisional basis, depending on the context in which the statements are made.

Strategy

      Our primary objective is to provide our shareholders with above average returns on their investment through income growth and asset appreciation.

1

Table of Contents

      Principal components of our growth strategy include the following:

	•	Leverage our worldwide infrastructure to provide existing support and to introduce new products and services.
	•	Further develop and commercialize our production-enhancing products and services, such as our expandable technology, production optimization systems, drilling with casing and underbalanced services. These products and services either help increase well productivity, lower development costs or both. They also allow us to capitalize on important secular trends such as the maturation of the world’s major hydrocarbon reserves and the growth of deepwater activity.
	•	Continue enhancing our existing products and service offerings in our historical core market segments so we can maintain our leading position in the markets in which we operate. Our core market segments include well construction, well intervention, completion systems and artificial lift.

Markets

      We are a leading provider of equipment and services to the oil and gas exploration and production industry. Demand for our industry’s services and products depends upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of wells, the number of well completions and the level of workover activity worldwide.

      During the mid-1980’s, the drilling industry contracted sharply, correcting a condition of significant over capacity that existed in the supply of oilfield service and equipment. For the last 15 years, global rig count has cycled up and down with factors such as world economic and political trends that influence supply and demand for energy, the price of oil and natural gas and the level of exploration and drilling for those commodities.

      The majority of worldwide drilling activity, as measured by rig counts, has historically been concentrated in North America. Over time, activity in North America has become increasingly driven by natural gas consumption on the continent, particularly in the United States. The percentage of the United States rig count dedicated to natural gas drilling has increased from approximately 50% in the early 1990’s to more than 85% in late 2003. Canada has experienced a similar trend, with rigs drilling for natural gas increasing from less than 40% six years ago to nearly 80% by the end of 2003. A primary reason for the increasing emphasis on natural gas drilling is that North American gas wells have very high production decline rates, so that significant numbers of new wells need to be drilled over time to maintain ongoing natural gas production at desirable levels. Changes in the balance of energy demand and the supply of natural gas affect natural gas storage levels, commodity prices and the volatility of North American drilling activity. In 2003, the North American rig count averaged 1,404, 6% below the recent high in 2001 but 72% above the low of the last 15 years, 816, which occurred in 1992.

      Over the last decade, drilling and completion activity has grown faster in international markets than in North America. In 2003, approximately 60% of the worldwide drilling and completion expenditures occurred in international markets, according to Spears & Associates. Drilling activity outside North America tends to be less volatile than the North American market. Most contracts span two to three years due to the significant investment and complexity surrounding international projects. Drilling decisions relating to such projects therefore tend to be evaluated and monitored with a longer-term perspective in regard to oil and natural gas pricing. Additionally, the international market is dominated by major oil companies and national oil companies, which tend to have longer-term objectives than the typical independent producer in North America. In the last 15 years, the non-North American rig count has cycled between a high of 1,032 in 1988 and a low of 588 in 1999. In 2003, the international rig count averaged 770. Since 1999, the international market has recovered slowly; however, we believe the geological future of the industry is in international markets because of the maturity and declining production of North American fields.

      Historically, the majority of our business was concentrated in the United States and Canada. Following the merger of EVI and Weatherford Enterra in 1998, we began a concerted program to expand our operations and shift more of our business internationally by utilizing the strength of our Drilling Services Division’s

2

Table of Contents

      In 2003, our Drilling Services Division generated 56% of its revenues outside North America, and our Production Systems Division generated approximately 41% of its revenues from the same regions. With the increasing importance of international oil production, these divisions continue to focus on growth in international markets.

      Due to the maturity of the world’s oil and gas reservoirs, the accelerating production decline rates and the focus on complex deepwater prospects, technology has become increasingly critical to the marketplace. Customers continue to seek, test and prove production-enabling technologies at an increasing rate. Technology is an important aspect of our products and services as it helps us provide our customers with more efficient tools to find and produce oil and gas. We have invested a substantial amount of our time and resources in building our technology offerings. We believe our new, more efficient products and services are among the best in the industry and enable our customers to reduce their costs of drilling and production and/or increase production rates. Furthermore, these offerings afford us additional opportunities to sell our core products and services to our clients.

Drilling Services Division

      Our Drilling Services Division provides products and services used by oil and gas companies, drilling contractors and other service companies to explore for, drill for and produce oil and natural gas. We estimate approximately two-thirds of the products and services offered by this division are used in the initial drilling and completion of oil and gas wells. The remainder of the products and services are used in connection with the production phases of wells, including maintenance, re-drilling, re-completion and other remediation and well installations. The principal products and services provided by this division are drilling methods, well construction, drilling tools and intervention services.

      Our drilling methods operations consist of a broad range of systems and products used during the drilling and servicing of oil and gas wells. These offerings include:

      Underbalanced Services (“UBS”) — Underbalanced drilling occurs when the bottom hole pressure exerted by the hydrostatic head of the drilling fluid column is less than the pressure of the formation being drilled. In underbalanced applications, the reservoir is able to flow while the drilling takes place and thereby protects the formation from damage by the drilling fluids. Traditional drilling methods utilize weighted drilling fluids that not only prevent the flow of hydrocarbons during drilling but permeate the formation, causing significant formation damage and limiting the flow of hydrocarbons. The advantages to underbalanced drilling include faster rates of drill bit penetration, reduced formation damage, improved production rates and decreases in both circulation and the need for costly stimulations. Underbalanced drilling is considered to be particularly desirable for drilling in older fields and reservoirs where the downhole pressure has declined. We believe many older fields and reservoirs cannot be economically drilled other than through the use of underbalanced drilling. Although currently less than 5% of the world’s wells are drilled underbalanced, we estimate an increasing percentage, up to at least 20%, of the world’s wells are likely to be drilled underbalanced during the next 5 to 10 years as familiarity with underbalanced services and their production benefit grows.

3

Table of Contents

      We help our clients safely improve the productivity of their reservoirs’ assets at less lifecycle cost by enhancing drilling and reservoir performance through a portfolio of UBS products and services, which include:

	•	Reservoir Analysis Techniques — Our Suitable Underbalanced Reservoir Evaluation (“SURE”) Process enhances a client’s ability to assess underbalanced drilling prospects with accuracy. The SURE Process targets the right reservoirs by comparing underbalanced versus overbalanced costs, production rates, projected revenue and net present value.
	•	Surface Equipment — Specifically designed self-contained mobile or skid-mounted compression and membrane-nitrogen generation systems, rotating control heads to control well pressures while circulating drilling mediums during drilling, skid-mounted separators to separate oil, gas, drilling media and cuttings, choke manifolds and solids recovery systems.
	•	Downhole Equipment — High temperature motors, wireline steering tools, drill pipe, air rotary hammer drills, casing exit systems, downhole deployment valves and downhole data acquisition equipment.
	•	Fluid Systems — Air drilling systems, mist drilling systems, foam drilling systems, including our patented Trans-Foam® Recyclable Drilling Fluid System and aerated fluid drilling systems produced by our specialty chemical subsidiary, Clearwater.
	•	Software/ Engineering — Engineering and software, including simulation modeling, candidate screening, corrosion mitigation, on-site engineering, data analysis and supervision.

      Directional Drilling Services — Directional drilling services are used to drill a well on a non-vertical path, which includes deviated and horizontal wells. Our directional business is strongly linked to our underbalanced systems business, since 75% of all underbalanced wells are drilled directionally. Our directional drilling services group provides drilling engineering services and mechanical drilling systems including electromagnetic measurement-while-drilling (EM/ MWD) services, downhole drilling motors, buttonhole assemblies, orienter sub assemblies, re-entry services and wireline guidance tools.

      Reentry Services — Our reentry services include casing exit services, and advanced multilateral systems. Conventional and advanced casing exit systems allow sidetrack and lateral drilling solutions for customers who either cannot proceed down the original well track or want to drill lateral wells from the main or parent wellbore. In addition, advanced multilateral systems are provided, including selective reentry systems (SRS^TM) that allow numerous sidetracks from parent wellbores, pre-milled windows utilizing patented “key way” technology and advanced multilateral junction solutions.

      Drilling with Casing (DwC^TM) — This technique eliminates the need for drill pipe and allows operators to simultaneously drill, case and evaluate oil and gas wells. Weatherford’s DwC technique eliminates downhole complexity and expensive rig modifications. Consequently, well construction is simplified, and productivity can be improved when drilling through the reservoir. Since January 2000, Weatherford has completed more than 385 DwC jobs and 2,000 Drilling with Liners jobs around the world. Weatherford’s DwC offerings include drillshoe systems, XpandaBit, liner drilling systems, torque head top drive casing, reamer tools and centralizers.

      Our well construction business spans tubular running, a full line of cementing products and liner systems.

      Tubular Running Services — These services consist of a wide variety of tubular connection and installation services for the drilling, completion and workover of an oil and gas well. We offer an integrated package of total tubular services management that allows our customers to receive all of their tubular handling, preparation, inspection, cleaning and wellsite installation needs from a single source. We are a leader in rig mechanization technology used for the installation of tubing and casing and offer various products and services to improve rig floor operations by reducing staffing requirements, increasing operational effectiveness and improving safety. We offer computerized torque monitoring and testing services to ensure the integrity of tubular connection makeup. We also specialize in critical service installations where operating conditions, such

4

Table of Contents

      Cementation Tools — Cementing operations are one of the most important and expensive phases in the completion of a well. According to Spears & Associates, we are the world’s leading producer of specialized equipment that allows operators to centralize the casing of the well and control the displacement of cement and other fluids. Our cementing engineers also analyze complex wells and provide detailed recommendations to help optimize cementing results. Our cementing products group also works closely with our Production Systems Division in designing integrated completion systems. Our cementing product line includes the following:

	•	Centralizer Placement Software — Software for calculating centralizer spacing for optimum standoff.
	•	Centralizers — A comprehensive range for varying applications and well conditions.
	•	LoDRAGTM and LoTORQTM Centralizers — Mechanical friction-reduction systems for extended reach drilling and underpressured conditions where differential sticking risk is high.
	•	Flow Enhancement Tools — Tools that improve cement flow.
	•	Float Equipment — Drillable shoes and collars with float valves that provide higher flow rates.
	•	Other Equipment — Cement baskets, guide shoes, retainers and bridge plugs, multiple stage tools and cementing plugs.

      Liner Systems — Liner hangers allow strings of casing to be suspended within a wellbore without having to extend the string to the surface, and are used to isolate production zones and formations. Most directional wells include one or more liners because of the difficulty of designing casing programs compatible with high tensile tubulars. We offer both drilling and production liner hangers. Drilling liners are used to isolate areas within the well during drilling operations. Production liners are used in the producing area of the well to support the wellbore and to isolate various sections of the well. Our inflatable packer product line is used to service liner systems and includes annulus casing packers, inflatable production packers and inflatable straddle packer assemblies. We also offer specialized high pressure, high temperature, high performance inflatable thru-tubing and completion packers.

      We offer proprietary and non-proprietary drilling tools to our customers on a rental basis. Our patented tools, including our drilling jars, rotating control heads and other pressure control equipment are designed and manufactured by us. We also offer a broad selection of third-party manufactured equipment and tools for the drilling, completion and workover of oil and gas wells. We offer these tools to our customers, primarily operators and drilling contractors, on a rental basis, allowing the customer to utilize unique equipment without the cost of holding that equipment in inventory.

      The rental of our proprietary and non-proprietary tools permits the equipment to be more efficiently used and allows us to receive value-added returns on the equipment. The breadth of our operations and locations allows us to manage and re-deploy our equipment to locations where the equipment is most needed. Our drilling tools include:

	•	Drilling jars, drill pipe and related drill stem tools, drill collars, heavy weight pipe and drilling jars.
	•	Fishing and downhole tools such as milling tools, casing cutters, fishing jars, spears and overshots, stabilizers, power swivels and bottom hole assemblies.
	•	Pressure control equipment such as blow-out preventers, high pressure valves, accumulators, adapters and choke and kill manifolds.
	•	Tubular handling equipment such as elevators, spiders, slips, tongs and kelly spinners.

5

Table of Contents

      Our intervention services help clients repair wells that have mechanical problems or that need work to prolong production to retrieve remaining oil and gas reserves. Our intervention products and services span the spectrum of fishing services, thru-tubing products and services, coiled tubing and wireline systems, production logging and solid tubular expandable technologies.

      Fishing Services — Fishing services are provided through teams of experienced fishing tool supervisors and a comprehensive line of fishing tools. Our teams provide conventional fishing services such as removing wellbore obstructions including lost equipment, tools, drill string segments and other debris that become caught during the drilling and completion of new wells. Specialty fishing tools required in these activities include fishing jars, milling tools, casing cutters, overshots and spears. Fishing services also provides well patches and extensive plug and abandonment services.

      Intervention Services — Intervention services includes wireline systems and services for completion activities, mechanical services, logging services, casing and tubing evaluation, production logging, perforating and pipe recovery. Intervention Services also provides thru-tubing services used in well re-entry activity that allow operators to perform complex drilling, completion and cementing activities from existing wellbores without removing existing production systems. Thru-tubing services and products include drilling motors, casing exits, fishing and milling, zonal isolation and other well remediation services.

      Solid Tubular Expandable Technologies — Proprietary expandable tools are also being developed for downhole solid tubular applications in well remediation, well completion and well construction. Solid tubular expandable products at Weatherford include the Expandable Liner Hangers (ELH^TM), used to create liners and seals, and Metal Skin^TM, used for well cladding to cut off zones, retro-fit corroded sections of casing and strengthen existing casing. Solid Tubular Expandables utilize both fixed cone and our compliant roller expansion technology. Weatherford currently expects to commercialize additional solid expandable applications during 2004 for well construction purposes, including slimbore and monobore applications. Both slimbore and monobore systems are designed to allow significant cost reductions by reducing consumables for drilling and completion of the wells, smaller rig platforms and reducing cuttings removal needs. The benefits are derived because of expandable technologies’ potential to significantly reduce or eliminate the reverse-telescoping technique used historically for well design.

      Our Drilling Services Division’s products and services are provided worldwide, and we compete in a variety of distinct segments with a number of competitors. Our major competitors are Baker Hughes, Halliburton, Schlumberger, Smith International and BJ Services. We also compete with Precision Drilling, Franks International and other regional suppliers that provide a limited range of equipment and services tailored for local markets. Competition is based on a number of factors including performance, safety, quality, reliability, service, price, response time and in some cases, breadth of products. We believe we are the industry leader in underbalanced services and tubular running services, and one of the largest providers of drilling products and cementing products in the world.

Production Systems Division

      In 2003, we formed our Production Systems Division, which provides completion systems, all forms of artificial lift and production optimization.

      We offer our customers a comprehensive offering of completion products as well as engineered and integrated completion systems for oil and gas fields.

      These products and services include:

      Cased Hole Completion Systems — These systems are incorporated into the tubing string used to transport hydrocarbons from the reservoir to the surface. We offer a wide range of devices used to enhance the

6

Table of Contents

      Sand Screens — Sand production often results in premature failure of artificial lift and other downhole and surface equipment and can obstruct the flow of oil and gas. Conventional sand screen products are used in the fluid-solid separation processes and have a variety of product applications. Our primary application of well screens is for the control of sand in unconsolidated formations. We offer premium, pre-pack and wire-wrap sand screens.

      The Production Systems Division also operates the water well and industrial screen business of Johnson, which was acquired in 2001. Served markets include water well, petrochemical, polymer/extrusion, mining and general industrial applications.

      Expandable Sand Screens (ESS^TM) — Our Expandable Sand Screen systems are proprietary step-change sand control devices that reduce cost and improve production. The ESS consists of three layers, including slotted base pipe, filtration screens and an outer protective shroud. The ESS can be expanded utilizing a fixed cone and/or our proprietary rotary expansion systems. This system enables the ESS to be compliant with the walls of the well, which aids productivity because it stabilizes the wellbore and prevents sand from migrating into it. The ESS can replace complex gravel packing techniques in many sand control situations.

      As of December 31, 2003, we have expanded almost 30 miles of ESS in 250 installations around the world.

      Flow Control and Tool String — Flow control systems include completion and intervention equipment that provide the ability to manage production throughout the life of the well. Our flow control systems include standard flow control products such as nipples, locks, running and pulling tools, plugs and rolling systems. We also offer comprehensive engineering, design and installation capabilities.

      Artificial lift systems are installed in oil wells that do not have sufficient reservoir pressure to raise the oil to the surface or that need to supplement the natural reservoir pressures to produce oil from the well. There are six principal types of artificial lift technologies used in the industry. We are the only company in the world able to provide all forms of lift including progressing cavity pumps, reciprocating rod systems, gas lift systems, electrical submersible pumps, hydraulic and other lift systems.

      Progressing Cavity Pumps — A progressing cavity pump (PCP) is a downhole pump controlled by an above-ground electric motor system connected to the downhole pump via sucker rods for the production of oil. These pumps are among the most operationally efficient and are designed to work in wells of depths up to 6,000 feet with production between 10 to 4,500 barrels of oil per day. We are also developing high temperature progressing cavity pumps for steam assisted gravity drilling (“SAGD”) applications. PCP’s have had particular success in heavy oil producing basins around the world.

      Reciprocating Rod Lift Systems — A reciprocating rod lift system is an artificial lift pumping system that uses an above-ground mechanical unit connected to a sucker rod and a downhole pump. It uses an up and down suction process to lift the oil from the reservoir. Reciprocating lift is used primarily for the production of oil from wells of depths up to 14,000 feet and production rates from 20 to 8,000 barrels per day. Reciprocating lift systems are generally more expensive to install than other systems but less costly to operate. We offer a complete package of products for rod lift applications ranging from traditional pump jacks to the state-of-the-art RotaFlex® long stroke pumping unit, as well as all downhole components, including the Corod® continuous sucker rod, traditional sucker rods and tubing anchors.

      Gas Lift Systems — Gas lift is a form of artificial lift that uses natural gas to lift oil in a producing reservoir to the surface. The process of gas lift involves the injection of natural gas into the well through an above-ground injection system and a series of downhole mandrels and gas lift valves. The gas injected into the system is either produced from and reinjected into the well, or is injected from gas produced from nearby wells. The injected gas acts as the lifting agent for the heavier oil. Gas lift systems are used primarily for

7

Table of Contents

      Electrical Submersible Pumps — An electrical submersible pump (ESP) is an electric pump and motor placed downhole near the producing reservoir that is driven by an electric motor controller and supply system above ground. ESPs are designed to operate at depths of 9,000 to 12,000 feet with volumes from 800 to 20,000 barrels per day. Prior to 1999, we did not provide ESPs to the industry. In 1999, we entered into an alliance with Electrical Submersible Pumps, Inc., the world’s third largest supplier of this type of pump, to supply us with ESPs and to distribute them in selected markets. In 2002, we began manufacturing and distributing our own proprietary line of ESPs.

      Hydraulic Lift Systems — Hydraulic lift is a form of oil pumping system that uses an above-ground surface power unit to operate a downhole hydraulic pump (jet or piston) to lift oil from the reservoir. These systems are designed for wells at depths up to 20,000 feet with volumes up to 15,000 barrels per day. Hydraulic pumps are well-suited for wells with high volumes and low solids.

      Other Lift Systems — We also offer other forms of lift such as “plunger lift.” Plunger lift is the only artificial lift system that requires no assistance from outside energy sources. The typical system consists of a plunger (or piston), top and bottom bumper springs, a lubricator and a surface controller. The plunger cycles between the top and bottom bumper springs. As it travels to the surface, it creates a solid interface between the lifted gas below and produced fluid above to maximize lift energy. The travel cycle is controlled by a surface controller. Plunger lift is a low cost, easily maintained method of lift. It is particularly useful for dewatering gas wells and increasing production from wells with emulsion problems. Plunger lift also keeps wells free of paraffin and other tubing deposit problems and can be used to produce a well to depletion.

      Production optimization is the process of increasing production, reducing production costs, or both, of oil and gas fields. The ultimate goal is to assist the operator in making better decisions that maximize profits. One of the major benefits of production optimization is that more production can be squeezed through existing infrastructure, deferring capital spending on the debottlenecking processes.

      We were one of the first companies to provide complete artificial lift well optimization services and products. We now offer proprietary software that works with artificial lift and intelligent completion systems to remotely monitor and control wells, as well as optimize field production, from a central location.

      Well Optimization — By providing intelligence at the well site and intelligence at the desktop, we provide the producer with a unique solution for optimizing each well individually. For well site intelligence, we offer specific controllers for each type of artificial lift. These controllers contain computers with specific logic to control the well during changes in the reservoir, artificial lift equipment or the well components. The operational changes are based on the parameters set by the well operator, either at the well site or at a desktop computer. The desktop software provides advanced analytical tools that allows the operator to make changes by controlling the well directly or by changing the parameters that the controller is using to operate the well.

      Reservoir Optimization — Our Intelligent Completion Technology (ICT) uses optical sensing to allow operators to remotely monitor the downhole pressure, temperature, flow rate, phase fraction, and seismic activity of each well and the surrounding reservoir. This advanced monitoring capability allows the operator to monitor the reaction of the reservoir to the production of the well. Combining this monitoring with multiple-zone downhole flow control allows field pressure management and shut off of unwanted flows of typically water or gas.

      Work Processes — We provide tools for optimizing work flow. These software tools assist the operators in tracking the needed operations to operate the field optimally. Tasks such as chemical injections, well workovers and injection allocation can easily generate unnecessary expenses by misprioritization of tasks, poor record-keeping and lack of analysis of the effectiveness of the total field operations. Our experienced

8

Table of Contents

      Production Services — Engineered Chemistry^TM combines proprietary chemical solutions with internally developed oilfield equipment technologies. Our high-performance chemistry solutions include custom tailored chemical solutions for production, refining, completion, water treatment and other industrial processes, a total service package — product selection, application and optimization, precise formulations and multi-functional chemical formulations that include the only formulas certified for capillary injection.

      Gas Services International (GSI) is a unit of our Production Systems Division, which offers total process system solutions for all aspects of natural gas production, including compression, processing and offshore floating production systems. GSI is located in Singapore and primarily services the Asia Pacific and Middle East regions.

      In our Production Systems Division, our principal competitors across all product lines are Baker Hughes, Halliburton and Schlumberger. We also compete with various smaller providers of completion equipment. In the area of intelligent wells, our main competitors are Schlumberger, Baker Hughes and WellDynamics. Robbins & Myers, Harbison Fischer, Lufkin, National-Oilwell and Dover Corporation are competitors exclusive to our artificial lift products. The principal methods of competition are performance, quality of products and services, reliability, price, technological innovation and industry reputation. According to Spears & Associates, we are a leading provider of completion equipment in the world and the world’s largest provider of progressing cavity pumps, reciprocating rod lift pump systems and hydraulic lift systems and are the only fully integrated provider of all lift systems.

9

Table of Contents

Properties

      Our operations are conducted in approximately 100 countries. We currently have 85 manufacturing facilities and approximately 500 sales, service and distribution locations throughout the world. The following table describes the material facilities owned or leased by us as of December 31, 2003:

10

Table of Contents

(1)	Facility is shared by our Drilling Services and Production Systems Divisions.

Other Business Data

      We purchase a wide variety of raw materials as well as parts and components made by other manufacturers and suppliers for use in our manufacturing. Many of the products sold by us are manufactured by other parties. We are not dependent on any single source of supply for any of our raw materials or purchased components; however, the loss of one or more of our suppliers in our Production Systems Division could disrupt production.

11

Table of Contents

      Our principal customers consist of major and independent oil and natural gas producing companies. During 2003, 2002 and 2001, none of our customers accounted for more than 10% of consolidated revenues.

      Our backlog consists of customer orders for which a purchase order has been received, satisfactory credit arrangements exist and delivery is scheduled. The respective sales backlog for our Production Systems Division was approximately $141 million as of January 2004 and approximately $89 million for the comparable period in the prior year. All backlog is expected to be shipped during 2004. Our Drilling Services Division does not have backlog as it is primarily service related.

      We maintain world-class technology and training centers in Houston, Texas and Aberdeen, Scotland whose activities are focused on improving existing products and services and developing new technologies to meet customer demands for improved drilling performance and enhanced reservoir productivity. Our expenditures for research and development totaled $82.9 million in 2003, $79.6 million in 2002 and $50.8 million in 2001.

      As many areas of our business rely on patents and proprietary technology, we have followed a policy of seeking patent protection both inside and outside the United States for products and methods that appear to have commercial significance. In the United States, we currently have 523 patents issued and over 450 pending. We have 857 foreign patents issued and over 1,200 pending. We amortize patents over the years expected to be benefited, ranging from 3 to 20 years.

      Many of our patents provide us with competitive advantages in our markets. Important patented products and technologies include (1) our expandable slotted and solid tubular products, many of which are sold pursuant to a license from Shell, (2) our underbalanced drilling products and services, including our “Virtual Riser” offshore pressure control system, Williams high pressure rotating heads, internal riser rotating control head for deepwater drilling and our chemicals and foam technology and (3) fiber optic sensing systems for intelligent completion systems.

      Although in the aggregate our patents are of considerable importance to the manufacturing and marketing of many of our products, we do not believe that the loss of one or more of our patents would have a material adverse effect on our business.

      Weather and natural phenomena can temporarily affect the sale and performance of our products and services. Spring months in Canada and winter months in the North Sea tend to negatively affect operations, but the widespread geographical locations of our operations serve to mitigate the impact of the seasonal nature of our business.

      We currently carry a variety of insurance for our operations. We are partially self-insured for certain claims in amounts we believe to be customary and reasonable.

      Although we believe we currently maintain insurance coverage adequate for the risks involved, there is always a risk our insurance may not be sufficient to cover any particular loss or that our insurance may not cover all losses. For example, while we maintain product liability insurance, this type of insurance is limited in coverage and it is possible an adverse claim could arise in excess of our coverage. Finally, insurance rates have in the past been subject to wide fluctuation. During 2003, our cost of insurance and self-insured retention levels increased substantially. Changes in coverage, insurance markets and our industry may result in further increases in our cost and higher deductibles and retentions.

12

Table of Contents

      Our operations are subject to federal, state and local laws and regulations relating to the energy industry in general and the environment in particular. Environmental laws have, in recent years, become more stringent and have generally sought to impose greater liability on a larger number of potentially responsible parties. While we are not currently aware of any situation involving an environmental claim that would likely have a material adverse effect on our business, it is always possible that an environmental claim with respect to one or more of our current businesses or a business or property that one of our predecessors owned or used could arise that could have a material adverse effect.

      In 2001, we paid an aggregate of $152,682 to the EPA to settle as a de minimus party to the Casmalia, California Superfund Site. In September 2001, we were notified by the Texas Commission on Environmental Quality (“TCEQ”) that we were named as a party to the Voda Petroleum site in Clarksville City, Texas. This matter is in the preliminary stages, and based on the information provided by the TCEQ, it appears that we will be a de minimus party.

      In October 2002, we were notified by a third party that we may be a potentially responsible party to the Force Road Oil and Vacuum Truck Company Superfund site in Brazoria County, Texas. This matter is in the preliminary stages, and based on the information provided, if we are named as a party by the TCEQ, it appears we will be a de minimus party.

      Our 2003 expenditures to comply with environmental laws and regulations were not material, and we currently expect the cost of compliance with environmental laws and regulations for 2004 also will not be material.

      We currently employ approximately 16,700 employees. Certain of our operations are subject to union contracts. These contracts, however, cover less than one percent of our employees. We believe that our relationship with our employees is generally satisfactory.

Forward-Looking Statements

      This report, as well as other filings made by us with the Securities and Exchange Commission (“SEC”), and our releases issued to the public contain various statements relating to future results, including certain projections and business trends. We believe these statements constitute “Forward-Looking Statements” as defined in the Private Securities Litigation Reform Act of 1995.

      From time to time, we update the various factors we consider in making our forward-looking statements and the assumptions we use in those statements. However, we undertake no obligation to publicly update or revise any forward-looking events or circumstances that may arise after the date of this report. The following sets forth the various assumptions we use in our forward-looking statements, as well as risks and uncertainties relating to those statements. Certain of the risks and uncertainties may cause actual results to be materially different from projected results contained in forward-looking statements in this report and in our other disclosures. These risks and uncertainties include, but are not limited to, those described in “Risk Factors” below and the following:

	•	A downturn in market conditions could affect projected results. Any material changes in oil and gas supply and demand, oil and gas prices, rig count or other market trends would affect our results and would likely affect the forward-looking information provided by us. The oil and gas industry is extremely volatile and subject to change based on political and economic factors outside our control. Through the beginning of 2002, prices for oil and natural gas decreased, reflecting diminished demand attributable to political and economic issues. In the latter part of 2002, prices for oil and natural gas increased. However, with the exception of Canada, producers did not increase drilling due to the political and economic uncertainty. During 2003, North American drilling activity increased; however, if an extended regional and/or worldwide recession would occur, it would result in even lower demand

13

Table of Contents

		and lower prices for oil and gas, which would adversely affect our revenues and income. At this time, we have assumed increases in worldwide demand will continue throughout 2004.
	•	Our future success depends upon our ability to adapt to the changing market environment in North America. There is an excess investment in capital assets in our industry in the North American market. In addition, there are low barriers to entry. Our success depends on our ability to lower our cost structure. Our forward-looking statements assume we will be successful in reducing our cost structure and adapting to the changing environment.
	•	A material disruption in our manufacturing could adversely affect some divisions of our business. We have undertaken an initiative to consolidate and outsource certain of our manufacturing operations. Our forward-looking statements assume any manufacturing consolidation and outsourcing will be completed without material disruptions. If there are disruptions or excess costs associated with manufacturing changes, our results could be adversely affected.
	•	Availability of a skilled workforce could affect our projected results. The workforce and labor supply in the oilfield service industry is aging and diminishing such that there is an increasing shortage of available skilled labor. Our forward-looking statements assume we will be able to maintain a skilled workforce.
	•	Our long-term growth depends upon technological innovation and commercialization. Our ability to deliver our long-term growth strategy depends in part on the commercialization of new technology. A central aspect of our growth strategy is to innovate our products and services, to obtain technologically advanced products through internal research and development and/or acquisitions, and to expand the markets for new technology through leverage of our worldwide infrastructure. The key to our success will be our ability to commercialize the technology that we have acquired and demonstrate the enhanced value our technology brings to our customers’ operations. Our major technological advances include, but are not limited to, those related to underbalanced drilling, expandable solid tubulars, expandable sand screens and intelligent well completion. Our forward-looking statements have assumed successful commercialization of, and above-average growth from, these new products and services.
	•	Nonrealization of expected benefits from our 2002 corporate reincorporation could affect our projected results. We expected to gain certain business, financial and strategic advantages as a result of our reincorporation, including improvements to our global tax position and cash flow. An inability to realize expected benefits of the reincorporation in the anticipated time frame, or at all, would negatively affect the anticipated benefit of our corporate reincorporation.
	•	Nonrealization of expected benefits of our change in divisional structure could adversely affect our projected results. In 2003, we realigned our operational structure from three divisions to two divisions. Our forward-looking statements assume there will be no material disruption to our operations and we will realize anticipated cost savings.
	•	A decline in the fair value of our investment in Universal that is other than temporary would adversely affect our projected results. In the third quarter of 2002, we determined the decline in Universal’s stock price was other than temporary and recorded a write-down in the carrying value of the investment. In connection with the reduction in the carrying value, we recognized a tax benefit related to the difference between the book carrying value and the tax basis of the investment. We can make no assurances that there will not be an additional decline in value of our investment in Universal or that any such decline would be temporary. Any decline may result in an additional write-down in the carrying value of our investment in Universal and would adversely affect our results.
	•	The cyclical nature of or a prolonged downturn in our industry could affect the carrying value of our goodwill. As of December 31, 2003, we had approximately $1.6 billion of goodwill. Our estimates of the value of our goodwill could be reduced in the future as a result of various factors, some of which are beyond our control. Any reduction in the value of our goodwill may result in an impairment charge and therefore adversely affect our results.

14

Table of Contents

	•	Currency fluctuations could have a material adverse financial impact on our business. A material change in currency rates in our markets could affect our future results as well as affect the carrying values of our assets. World currencies have been subject to much volatility. Our forward-looking statements assume no material impact from future changes in currencies.
	•	Political disturbances, war, or terrorist attacks and changes in global trade policies could adversely impact our operations. We have assumed there will be no material political disturbances or terrorist attacks and there will be no material changes in global trade policies. Any further military action undertaken by the United States or other countries could adversely affect our results of operations.

Risk Factors

      An investment in our common shares involves various risks. When considering an investment in our company, you should consider carefully all of the risk factors described below, as well as other information included and incorporated by reference in this report.

      Low oil and gas prices adversely affect demand throughout the oil and natural gas industry, including the demand for our products and services. As prices decline, we are affected in two significant ways. First, the funds available to our customers for the purchase of goods and services decline. Second, exploration and drilling activity decline as marginally profitable projects become uneconomic and are either delayed or eliminated. Accordingly, when oil and gas prices are relatively low, our revenues and income will be adversely affected.

      Historically, the market price of common shares of companies engaged in the oil and gas industry has been highly volatile. Likewise, the market price of our common shares has varied significantly in the past. News announcements and changes in oil and natural gas prices, changes in the demand for oil and natural gas exploration and changes in the supply and demand for oil and natural gas have all been factors, among others, that have affected the price of our common shares.

      Like most multinational oilfield service companies, we have operations in certain international areas, including parts of the Middle East, North and West Africa, Latin America, the Asia Pacific region and the Commonwealth of Independent States that are inherently subject to risks of war, political disruption, civil disturbance and changes in global trade policies that may:

	•	disrupt oil and gas exploration and production activities;
	•	negatively impact results of operations;
	•	restrict the movement and exchange of funds;
	•	inhibit our ability to collect receivables;
	•	lead to U.S. government or international sanctions; and
	•	limit access to markets for periods of time.

      Approximately 30.6% of our net assets are located outside the U.S. and are carried on our books in local currencies. Changes in those currencies in relation to the U.S. dollar result in translation adjustments, which are reflected as accumulated other comprehensive income (loss) in the shareholders’ equity section in our Consolidated Balance Sheets. We recognize remeasurement and transactional gains and losses on currencies

15

Table of Contents

      In certain foreign countries a component of our cost structure is U.S. dollar denominated, whereas our revenues are partially local currency based; therefore, a devaluation of the local currency would adversely impact our operating margins.

      The concentration of our customers in the energy industry may impact our overall exposure to credit risk, in that customers may be similarly affected by prolonged changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. While we maintain reserves for potential credit losses, we cannot assure such reserves will be sufficient to meet write-offs of uncollectible receivables or our losses from such receivables will be consistent with our expectations.

      Although we maintain insurance to cover potential claims and losses, we could become subject to a judgment for which we are not adequately insured. Additionally, the terrorist attacks that occurred in the U.S., as well as other factors, have generally increased the cost of insurance for companies, including ours. Significant increases in the cost of our insurance and more restrictive coverages may adversely impact our results of operations.

      In the ordinary course of business, we become the subject of various claims and litigation. We maintain insurance to cover many of our potential losses and we are subject to various self-retentions and deductibles with respect to our insurance. Although we are subject to various ongoing items of litigation, we do not believe any of the items of litigation we are currently subject to will result in any material uninsured losses to us. However, it is possible an unexpected judgment could be rendered against us in cases in which we could be uninsured and beyond the amounts we currently have reserved or anticipate incurring.

      We are also subject to various federal, state and local laws and regulations relating to the energy industry in general and the environment in particular. Environmental laws have in recent years become more stringent and have generally sought to impose greater liability on a larger number of potentially responsible parties. While we are not currently aware of any situation involving an environmental claim which would likely have a material adverse effect on our business, it is always possible that an environmental claim with respect to one or more of our current businesses or a business or property that one of our predecessors owned or used could arise and could involve the expenditure of a material amount of funds.

      On June 26, 2002, the stockholders and Board of Directors of Weatherford International, Inc. approved our corporate reorganization and Weatherford International Ltd., a newly formed Bermuda company, became the parent holding company of Weatherford International, Inc. The realization of the tax benefit of this reorganization could be impacted by changes in tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof or differing interpretation or enforcement of applicable law by the U.S. Internal Revenue Service or other taxing authorities.

      The terrorist attacks that took place in the U.S. on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially impact our businesses. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other

16

Table of Contents

      See “Item 1. Business — Properties” on page 10 of this report, which is incorporated by reference into this item.

      In the ordinary course of business, we become the subject of various claims and litigation. We maintain insurance to cover many of our potential losses, and we are subject to various self-retention limits and deductibles with respect to our insurance.

      See “Item 1. Business — Other Business Data — Federal Regulation and Environmental Matters” on page 13 of this report, which is incorporated by reference into this item.

      Although we are subject to various ongoing items of litigation, we do not believe any of the items of litigation to which we are currently subject will result in any material uninsured losses to us. It is possible, however, an unexpected judgment could be rendered against us in the cases in which we are involved that could be uninsured and beyond the amounts we currently have reserved.

      No matters were submitted to a vote of shareholders of the Company during the fourth quarter of the year ended December 31, 2003.

PART II

      Our common shares are traded on the New York Stock Exchange under the symbol “WFT.” As of March 1, 2004, there were 1,443 shareholders of record. Additionally, there were 1,568 stockholders of Weatherford Inc. as of the same date who had not yet exchanged their shares. The following table sets forth, for the periods indicated, the range of high and low sales prices per common share as reported on the New York Stock Exchange.

17

Table of Contents

		International Ltd. Thus, the stockholders of Weatherford International, Inc. became the shareholders of Weatherford International Ltd.

      On March 1, 2004, the closing sales price of our common shares as reported by the New York Stock Exchange was $46.67 per share. We have not declared or paid cash dividends on our common shares since 1984, and we do not currently anticipate paying cash dividends on our common shares at any time in the foreseeable future.

      In addition to our common shares, we currently have outstanding $910.0 million face amount of Zero Coupon Convertible Senior Debentures due 2020. These debentures were issued by Weatherford International, Inc. and have the following material terms:

	•	Mature on June 30, 2020.
	•	Original discount of $408.4 million, providing the holders with an annual 3% yield to maturity.
	•	Holders may convert at any time prior to maturity at a conversion rate of 9.9970 common shares per $1,000 principal amount at maturity.
	•	We may redeem these debentures on or after June 30, 2005 at the accreted principal amount at the time of redemption.
	•	Holders also may require us to repurchase these debentures on June 30, 2005, June 30, 2010 and June 30, 2015 at the issue price plus accrued original issue discount, and we may, at our election, repurchase the debentures for cash, common shares or a combination thereof.
	•	Are an unsecured obligation ranking equal in right of payment with all other unsecured and unsubordinated indebtedness and ranking senior to any future subordinated indebtedness.

      On July 3, 2003, we completed a public offering of ten million common shares in exchange for $400.0 million in cash proceeds. The proceeds were used to redeem the $402.5 million principal amount of our 5% Convertible Subordinated Preferred Equivalent Debentures due 2027.

      On March 1, 2002, we issued a warrant to purchase up to 3.2 million of our common shares at $60 per share as part of the consideration given to obtain a worldwide license to Shell Technology Ventures’ expandable technology. This warrant has a nine-year exercisable life beginning one year after the issue date.

      Information concerning securities authorized for issuance under equity compensation plans is set forth in Part III of this report under “Item 12. Security Ownership of Certain Beneficial Owners and Management — Equity Compensation Plan Information,” which section is incorporated herein by reference.

18

Table of Contents

      The following table sets forth certain selected historical consolidated financial data and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included elsewhere herein. The following information may not be deemed indicative of our future operating results.

      This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) describes the matters that we consider to be important to understanding the results of our operations for each of the three years in the period ended December 31, 2003, and our capital resources and liquidity as of December 31, 2003 and 2002. Our discussion begins with an executive overview which provides a general description of our company today, a discussion of industry market trends, insight into management’s perspective of the opportunities and challenges we face and our outlook for 2004. Next, we analyze the results of our operations for the last three years, including the trends in the overall business and our operating segments, followed by a discussion of our severance, restructuring and asset impairment charges. Then we review our cash flows and liquidity, capital resources and contractual commitments. A summary follows of the critical accounting judgments and estimates that we have made which we believe are most important to an

19

Table of Contents

      The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in “Item 8. Financial Statements and Supplementary Data.” Our discussion includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on certain assumptions we consider reasonable. For information about these assumptions, you should refer to the section entitled “Item 1. Business — Forward-Looking Statements.”

Overview

      Weatherford provides equipment and services used for drilling, completion and production of oil and natural gas wells throughout the world. Historically we operated as three segments: Drilling and Intervention Services, Completion Systems and Artificial Lift Systems. In April 2003, we made a strategic decision to realign our three segments and we now operate under two segments: Drilling Services and Production Systems.

      As a result of this realignment, the discussion of our results of operations is based on the new segments. In addition to these two segments, we historically operated a Compression Services Division. In February 2001, we completed the merger of essentially all of our Compression Services Division into a subsidiary of Universal Compression Holdings, Inc. in exchange for 13.75 million shares of Universal common stock, or approximately 44% of Universal’s common stock currently outstanding.

      Effective June 26, 2002, we changed our place of incorporation from Delaware to Bermuda. Weatherford International Ltd. (“Weatherford Limited”), a Bermuda exempted company, became the parent holding company of Weatherford International, Inc. (“Weatherford Inc.”) following a corporate reorganization. Each share of common stock of Weatherford Inc. automatically converted into the right to receive a common share of Weatherford Limited. Thus, the stockholders of Weatherford Inc. became the shareholders of Weatherford Limited. The reorganization has been accounted for as a reorganization of entities under common control and accordingly, did not result in any changes to our consolidated amounts of assets, liabilities or shareholders’ equity.

      Changes in the worldwide demand for and price of oil and natural gas affect all of our businesses. The price of oil and natural gas is subject to much volatility. Over the last several years, rig counts have fluctuated due to world economic and political trends that influence the supply and demand for energy, the price of oil and natural gas and the level of exploration and drilling for those commodities. In the last three years, oil reached a high of $37.83 per barrel in March of 2003 and a low of $17.45 per barrel in November of 2001. Natural gas prices topped at $9.82 per MM/ BTU in January of 2001 and bottomed at $1.83 per MM/ BTU in September of 2001.

      The following chart sets forth certain statistics that reflect historical market conditions:

(1)	Price per barrel as of December 31 — Source: Applied Reasoning, Inc.
(2)	Price per MM/ BTU as of December 31 — Source: Oil World
(3)	Average rig count for December — Source: Baker Hughes Rig Count

20

Table of Contents

      Historically, the majority of worldwide drilling activity has been concentrated in North America. From mid-1999 through mid-2001, North American rig count improved steadily, peaking in the first quarter of 2001 at 1,717 rigs. The level of drilling and completion spending in North America also improved steadily for this same time period with an overall improvement greater than 100%. During the latter part of 2001, the rig count started to decline, and the decline continued through mid-2002. Since mid-2002, the North American rig count has improved to a fourth quarter 2003 rig count average of 1,516 rigs; however, the level of drilling and completion spending in North America has not returned to 2001 spending levels. According to Spears & Associates, the 2003 level of spending remained approximately 30% less than 2001 spending levels.

      Drilling and completion spending has grown faster in international markets than in North America. According to Spears & Associates, international drilling and completion spending has steadily increased since 1999, and the total spending in 2003 reached record levels of over $45 billion. The international market experienced a 5% improvement in 2003 average annual rig count as compared to 2002. Rig count activity improvements of 14%, 5% and 4% in Latin America, the Middle East and Asia Pacific, respectively, offset slight declines in Europe and Africa.

      The demand for our products and services is cyclical due to the nature of the energy industry. Certain of our products and services, such as our well installation services and well completion services, depend on the level of exploration and development activity and the completion phase of the well life cycle. Other products and services, such as our artificial lift systems, are dependent on production activity.

      We are in the midst of a major secular change in the industry. Capital spending is leaving the U.S. oilfield. Production decline rates are accelerating worldwide and are the most pronounced in North America where the fields are the most mature. Capital that until recently was invested in the U.S. is being redistributed internationally, primarily in large project developments underway in Russia, the Caspian Region and the Middle East. Excluding China and the CIS, international expenditures for drilling and completion already represent about 60% of the industry total. Opportunities will exist for those companies that can capture a large share of the Eastern Hemisphere growth without incurring undue risk. We have developed a strong service infrastructure throughout all of the world’s major oil and natural gas producing areas excluding Russia. Leveraging our extensive footprint outside of North America and our expansion into Russia have become increasingly important components of our international growth strategy, and management intends to execute these components of our strategy either through organic means or acquisitions, or a combination thereof.

      While leveraging our international footprint, we must reduce our cost structure in the mature U.S. land markets. The primary barrier to this strategy is the ability to reduce the cost structure without disrupting the normal course of business. To improve our returns worldwide, we began a company-wide cost reduction effort in 2002 and are continuing to work towards a further reduction in our manufacturing costs. Initiatives such as plant consolidation, engineering rationalization and third party outsourcing were undertaken. Productivity gains and cost reductions are expected to be realized gradually throughout the upcoming years.

      The maturity of the world’s oil and gas reservoirs, the accelerating production decline rates and the focus on complex deepwater wells are causing changes throughout our industry. Customers are demanding more efficient tools to produce oil and gas. We have invested a substantial amount of our time and capital into developing production-enabling technologies, and a component of our growth strategy depends upon the successful commercialization of these technologies. A technology-based growth strategy offers both opportunity and risk. For example, two of our initial technology offerings were our underbalanced drilling services and expandable sand screens. Our underbalanced services have achieved worldwide market acceptance and are now a key component of our core business. The commercialization of our expandable sand screens has been more difficult. During 2002, we pulled the expandable sand screen product line off the shelf for re-engineering. Although the product has been re-introduced to the marketplace, the necessary re-engineering required additional investments and delayed customer acceptance. During 2004, we expect to have the opportunity to accelerate customer acceptance of this product.

21

Table of Contents

      In 2004, we estimate an approximate 4% increase in both worldwide drilling activity as well as worldwide drilling and completion spending as compared to second half 2003 levels. We expect top line growth from both our core businesses and our technology driven new product and service offerings. More specifically, we expect the markets and our business strategies to affect our results as follows:

      North America. The North American market is a very mature market, and we expect our business in both the U.S. and Canada to remain relatively flat for 2004. We anticipate the U.S. annual rig count will average slightly above the 2003 average level of 1,032 rigs; however, we do not see any improvement in the Gulf of Mexico for the year. Furthermore, we do not anticipate any improvement in pricing trends. Canada will have its seasonal trends with a strong first quarter and then a decline during the second quarter for spring breakup.

      International. Overall, we expect international drilling activity to improve 8% in 2004 as compared to the second half of 2003. The Middle East, Russia and the Caspian Region are projected to have the strongest growth. Africa should continue to see improvement in drilling activity in 2004, as it was the site for a number of world-class oil and gas discoveries in recent years. Furthermore, drilling activity in Europe is expected to be positive, reversing a two-year downtrend, while activity in Latin America and Asia Pacific is expected to remain relatively flat.

      We expect our business to grow by about 10% to 15% over fourth quarter 2003 levels in the Eastern Hemisphere and selected Latin American markets. Our business in the Middle East is projected to outperform activity levels due to the introduction of new products and our ability to leverage our global footprint. The intensity of revenues per international rig or well drilled will rise consistently throughout the year as the international markets carry 2004 earnings growth.

      Technology. We expect revenues from our technology products to grow approximately 25% from 2003 levels. We also expect these technology products will fuel much of the prospective performance in our international markets. Our underbalanced services is our fastest growing technology. We anticipate an increase in underbalanced margins as months of high engineering and training expenditures are behind us. Our drilling with casing technologies are gaining acceptance throughout international markets and have the potential to become a core business. Our production optimization is expected to do well in both the Eastern Hemisphere and Latin America, as it is used for field rehabilitation. The engineering and commercialization of our intelligent completion systems is on plan and expected to become profitable in 2004. Our near term outlook is cautiously optimistic as it relates to our expandables technology.

      Overall, the level of market improvements for our businesses in 2004 will continue to be heavily dependent on our ability to reduce our cost structure in the North American markets, our gains in market share outside North America and the acceptance of our new technologies. The continued strength of the industry is uncertain and will be highly dependent on many external factors, such as world economic and political conditions, member country quota compliance within OPEC (Organization of Petroleum Exporting Countries) and weather conditions. The extreme volatility of our markets makes predictions regarding future results difficult.

22

Table of Contents

Results of Operations

      The following charts contain selected financial data comparing our consolidated and segment results from operations for 2003, 2002 and 2001. We are unable to provide certain information regarding our results excluding the impact of acquisitions due to the integration of these acquisitions into our operations. Comparative revenue trends excluding acquisitions only exclude those acquisitions for which revenue information has been separately maintained.

23

Table of Contents

Company Results

      Consolidated revenues increased $262.5 million, or 11.3%, in 2003 as compared to 2002 primarily as a result of growth in international business, revenue contributions from our 2002 acquisitions and technology product lines. This increase was partially offset by weaker U.S. pricing. North American revenues increased $202.7 million, or 18.5%, due to a 28% increase in the average annual North American rig count and a $33.6 million contribution from 2002 acquisitions. Our international revenues improved $59.8 million, or 4.8%, as compared to a 5% increase in the average annual international rig count. Revenues from our Latin America and Middle East and North Africa regions increased 20.4% and 9.3%, respectively, and were offset by a 14.8% decline in our Asia Pacific region.

      Consolidated revenues in 2002 were flat as compared to the prior year. The incremental revenues from acquisitions and our technology products, specifically our underbalanced drilling services, expandables and intelligent completions, were offset by the impact of deteriorated market conditions, primarily in the U.S. Our technology products increased approximately $60 million and comprised 12% of our 2002 consolidated revenues. International revenues improved 18.0% despite a relatively flat average annual international rig count. Our international acquisitions contributed more than $107 million to our revenue growth. Most international regions experienced significant gains, led by a 30% increase in the Middle East and North Africa, excluding the impact of acquisitions. North American revenues declined 14.6% due to a 26.9% decline in the average annual rig count and were offset by incremental contributions of more than $85 million from acquisitions.

      Our gross profit percentage has continued to decrease from 34.4% in 2001 to 30.0% in 2002 and to 29.4% in 2003. The sequential declines are primarily attributable to continued pricing pressures in the U.S. market and a shift in our product mix. In the fourth quarter of 2001, the U.S. market started to weaken, and we experienced the beginnings of lower volume and pricing pressures that continued throughout 2002 and 2003. Our 2002 gross profit percentage was also impacted by our restructuring and asset impairment charge recorded during the year.

      Research and development expenses increased $3.3 million, or 4.2%, in 2003 as compared to 2002 and $28.8 million, or 56.7%, in 2002 as compared to 2001. Research and development expenses as a percentage of revenues were 3.2%, 3.4% and 2.2% in 2003, 2002 and 2001, respectively. In 1999 through 2001, we made significant acquisitions in several production-enhancing products and services. The increases in expenditures beginning in 2002 reflects our commitment to developing and commercializing these products and services,

24

Table of Contents

      Selling, general and administrative expenses attributable to segments as a percentage of revenues was 14.2% in 2003, 13.6% in 2002 and 13.9% in 2001. The increase in 2003 from 2002 is due primarily to $5.6 million of additional intangible asset amortization, $4.8 million in increased insurance costs, $2.0 million of severance and severance related costs recorded in connection with the realignment of our segments and $1.0 million of employee stock-based compensation expense. Selling, general and administrative expenses as a percentage of revenues decreased in 2002 as compared to 2001 primarily related to the non-amortization of goodwill in 2002. Goodwill amortization attributable to segments in 2001 was $36.1 million. The decrease was partially offset by a $8.0 million increase in intangible asset amortization and costs associated with the expansion of our underbalanced services infrastructure.

      Our 2002 corporate general and administrative expenses included $4.5 million of transaction related expenses in connection with our reorganization in 2002. On a comparative basis, excluding these transaction costs, 2003 corporate general and administrative expenses increased by $2.6 million due primarily to increased insurance costs and additional employee benefit expenses, including the expensing of employee stock-based compensation resulting from the adoption of SFAS No. 123.

      Our 2002 equity in (earnings) losses of unconsolidated affiliates includes a $217.1 million write-down of our investment in Universal, as we determined the decline in market value was other than temporary.

      Interest expense decreased $8.8 million, or 10.3%, in 2003 as compared to 2002, primarily related to the August 2003 redemption of our $402.5 million Convertible Preferred Debentures, the full year benefit generated by interest rate swaps on our 7 1/4% Senior Notes and lower interest rates on our short-term borrowings. This decrease was partially offset by additional interest expense associated with the October 2003 issuance of our $250.0 million 4.95% Senior Notes.

      In 2002, our interest expense increased $11.5 million from 2001 primarily due to a full year of interest on our $350.0 million 6 5/8% Senior Notes issued in November 2001, partially offset by the incremental benefit from our interest rate swaps on our 7 1/4% Senior Notes and lower average interest expense on floating rate debt.

      Our other income increased $7.2 million in 2002 as compared to 2001 primarily due to an increase in asset sales.

      Our effective tax rates were 26.0% in 2003, 44.3% in 2002 and 36.3% in 2001. Excluding the write-down in our investment in Universal, the restructuring and asset impairment charge and related taxes, our 2002 effective tax rate was 32.3%. The decrease in the effective tax rate from 2003 to 2002 reflects the continued benefits realized from our June 2002 corporate reorganization. The decrease in 2002 over 2001 is primarily due to the impact of non-amortization of goodwill on earnings before taxes in 2002, benefits of our corporate reorganization and the favorable settlement of several audits in various taxing jurisdictions.

25

Table of Contents

Segment Results

      Drilling Services revenues increased $118.7 million, or 8.6%, in 2003 as compared to 2002 and decreased $66.2 million, or 4.6% in 2002 as compared to 2001. North American revenues increased 16.7% in 2003, primarily as a result of a 28% increase in the average annual North American rig count and were offset by lower pricing in the U.S. International revenues increased 3.1% in 2003 as compared to a 5% increase in the average annual international rig count. The most significant 2003 international growth was in our Latin America and the Middle East and North Africa regions, where revenues increased 19.1% and 8.8%, respectively. This was offset by decreases of 3.1% and 3.0%, respectively, in Europe and West Africa and Asia Pacific. In 2002, international revenues improved in nearly all markets and were led by a 36.4% increase in the Middle East and North Africa and a 29.5% increase in Europe and West Africa. North American revenues declined $179.8 million, or 24.4%, in 2002 due to an average annual rig count decline of 26.9%. Acquisitions contributed more than $45 million in incremental revenue during 2002.

      Gross profit as a percentage of revenue declined from 38.0% in 2001 to 31.5% in 2002 and remained flat during 2003. The decline was due to pricing pressures and lower volumes in the U.S. market, as well as a change in product mix. This division was also impacted in 2002 by the deterioration in the United Kingdom related to E&P tax disputes between the UK government and the North Sea operators and the decline in Venezuelan activity.

      Research and development expenses increased $8.5 million, or 25.5%, in 2003 and $5.6 million, or 20.3%, in 2002 as compared to the prior year. These increases reflect this division’s continued focus on developing and commercializing its expandable solids technology.

      Selling, general and administrative expenses as a percentage of revenues were 13.4% in 2003, 12.9% in 2002 and 13.3% in 2001. The increase in 2003 is related primarily to an increase in costs associated with the continued expansion of our underbalanced services infrastructure and well interventions group and higher intangible asset amortization. The decline in 2002 from 2001 primarily relates to the non-amortization of goodwill, partially offset by costs associated with the initial expansion of our underbalanced services infrastructure.

      Revenues in our Production Systems segment increased $143.7 million, or 15.1%, in 2003 and $93.4 million, or 10.8%, in 2002 as compared to the preceding year due to higher technology product sales and the incremental revenue contributions from acquisitions integrated into this division. In the fourth quarter of 2002, we acquired Clearwater International, which provides this division key proprietary products and fluid technology for underbalanced drilling services as well as the pipeline and specialty services business. Johnson Screens, acquired in November 2001, is a global provider of screens for the fluid-solid separation process and was a significant source of 2002 incremental revenue. Our North American revenues increased $109.6 million, or 20.4%, in 2003 related primarily to higher activity levels in Canada and incremental revenue contributions from a 2002 acquisition. International revenues increased $34.1 million, or 8.2%, over 2002 and were led by revenue growth of 37.9% in Europe and West Africa and 21.8% in Latin America. These increases were offset by a 24.0% decline in revenues in our Asia Pacific region. Our 2002 international revenues, excluding acquisitions, as compared to 2001 were flat as a result of the 1.7% decline in average annual rig count. Revenue growth of 17.5% in the Middle East and North Africa and 11.0% in Europe and West Africa during 2002 was nearly offset by the decline in our Latin America region. Excluding acquisitions, revenues in North America decreased 12.4% during 2002 compared to an average annual rig count reduction of 26.9%. Acquisitions contributed more than $75 million internationally and $80 million in North America during 2002.

      Our gross profit percentage was 25.9% in 2003, 27.7% in 2002 and 29.0% in 2001. The decline in the gross profit percentage in 2003 as compared to 2002 is due primarily to a shift in our product mix and lower absorption in locations where manufacturing facilities were in the process of being closed. Our gross profit

26

Table of Contents

      Research and development expenses decreased $5.2 million, or 11.3%, in 2003 and more than doubled in 2002 as compared to 2001. The level of research and development expenditures and the increase from 2001 to 2002 reflects our continued focus on developing and commercializing technology-related product lines, specifically expandable sand screens and intelligent well completion.

      Selling, general and administrative expenses as a percentage of revenues was 15.4% in 2003, 14.5% in 2002 and 14.8% in 2001. The increase as a percentage of revenues in 2003 as compared to 2002 is primarily related to increased insurance costs, $1.4 million of severance and related costs recorded in the second quarter of 2003 associated with our initiative to permanently reduce our cost structure and higher intangible asset amortization.

      Until the February 2001 merger date, our Compression Services Division contributed $26.9 million of revenues and an operating loss of $0.6 million. On February 9, 2001, we completed the merger of essentially all of our Compression Services Division into a subsidiary of Universal in exchange for 13.75 million shares of Universal common stock, which approximated 48% of Universal’s then outstanding shares. Following the merger, Universal, in unrelated transactions, has issued additional shares of common stock reducing our ownership to approximately 44%. We retained $10.0 million in accounts receivable and part of the Compression Services Division, namely our Singapore-based GSI business, which is now consolidated within our Production Systems Division.

      We entered into a Registration Rights Agreement in connection with the February 2001 merger with Universal, pursuant to which we were granted certain demand and piggyback registration rights for our shares of Universal common stock. Pursuant to the terms of the merger agreement, we also appointed three members to Universal’s Board of Directors. As long as we own at least 20% of Universal’s outstanding common stock, we have the right to designate three board members. If our ownership interest falls below 20%, we may designate only two directors. As of December 31, 2003, we had appointed three of Universal’s eight board members, including both our Chairman, President and Chief Executive Officer and our Chief Financial Officer.

Severance, Restructuring and Asset Impairment Charges

      During the second quarter of 2003, we recorded approximately $7.7 million, $5.6 million net of taxes, in severance and severance related costs in connection with the realignment of our segments.

      Severance and severance related costs summarized by segment and by financial statement classification were as follows:

27

Table of Contents

      In accordance with our announced plan to terminate employees company-wide, we recorded severance costs for 515 specifically identified employees. As of December 31, 2003, all employees had been terminated.

      During 2002, we recorded $15.4 million, $10.0 million net of taxes, in restructuring and asset impairment charges related to a rationalization of our business. We undertook initiatives to rationalize our business in light of the lower activity levels and continued economic uncertainty. The plan approved during 2002 included a reduction in workforce, primarily in the United States, and the closure of two facilities.

      Components of the charge include $8.6 million of severance and related costs, $11.5 million of asset impairment charges and a $4.7 million reversal of an unutilized prior period charge. The severance and related costs were for 849 specifically identified employees. As of December 31, 2003, all employees had been terminated. The asset impairment charges of $11.5 million primarily related to the write-down of equipment and facilities as a result of the decline in market conditions. Certain of the assets were sold and the remaining assets are held for use and have a carrying value of $4.8 million as of December 31, 2003 and are classified in Property, Plant and Equipment, Net on our Consolidated Balance Sheets. In 2000, we recorded a charge of $56.3 million in connection with the merger of our Compression Services Division with Universal, of which $4.7 million of estimated transaction costs were not incurred and were reversed in 2002.

      During the first quarter of 2003, we modified our restructuring plan and reversed $3.1 million of unutilized accruals recorded by the Production Systems segment. We also expensed $2.0 million during the first quarter 2003 for other facility impairments within the Production Systems segment. The amounts related to the modification were recorded in Cost of Products in our Consolidated Statements of Operations. The charge related to the 2002 plan is summarized by segment and by financial statement classification in the following table:

      In the third quarter of 2002, we recorded a write-down of our investment in Universal of $217.1 million, as we determined that the decline in the market value was other than temporary. In connection with the reduction in the carrying value of the investment, we recognized a tax benefit of $70.9 million, reducing the deferred tax liability related to the difference between the book carrying value and the tax basis of the investment. As of December 31, 2003, our carrying value of our investment in Universal was $287.5 million and the market value of our ownership interest in Universal was $359.7 million.

28

Table of Contents

Liquidity and Capital Resources

      Our historical cash flows for the two years ended December 31, 2003 were as follows:

(1)	On July 3, 2003, we completed a public offering of ten million of our common shares in exchange for approximately $400.0 million in cash proceeds. The proceeds were used to redeem our outstanding 5% Convertible Preferred Debentures due 2027. Our Convertible Preferred Debentures were convertible into 7.5 million of our common shares and had annual interest payments of $20.1 million.

      Our sources of liquidity are reserves of cash, cash generated from operations and committed availabilities under bank lines of credit. We have also historically accessed the capital markets with both debt and equity offerings to generate cash as needed.

      Cash flow from operations is expected to be our primary source of liquidity in 2004. We anticipate cash flows from operations, combined with our existing credit and securitization facilities, will provide sufficient capital resources to manage our operations, meet debt obligations and fund projected capital expenditures.

      The following summarizes our short-term committed financing facilities and our usage and availability as of December 31, 2003: