斯倫貝謝公司 (SLB) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Schlumberger second quarter conference call.

As a reminder today's call is being recorded.

Now I like to turn the conference over to the Director of Investor Relations, Mr. Christian Lange.

Please go ahead, sir.

Thanks John.

Good morning.

Firstly I would just like to welcome and thank you for joining us on this half yearly conference call.

With me today we've got Jean-Marc Perraud, the Chief Financial Officer, and Andrew Gould, Chairman and Chief Executive Officer of Schlumberger.

Jean-Marc will open today's call with a few prepared remarks on the key financial achievements of the quarter followed by Andrew's prepared comments.

At the conclusion of which we will open up the questions.

First by now you should have received a copy of our second quarter earnings release and FAQ document released last night.

If not, one is available at slb.com.

Additionally this conference call is being recorded and webcast and the replay will be available later today.

So with that said, I would now like to turn the call over to Jean-Marc and Andrew.

Thank you, Chris.

Ladies and gentlemen, good morning and thank you for joining us on today's conference call.

I will now take a few minutes to cover the key financial achievement of the second quarter.

First, the strong activity in oil field services coupled with the impact of cost reduction program announced earlier this year for oil field services, Western Geco and SchlumbergerSema produced a strong earning per-share of 38 cents from continuing operations and excluding refinancing charge of 14 cents.

This 38 cents compared to 26 cents in the first quarter of this year and 33 cents in the second quarter last year.

Net income from continuing operations before charges was $224 million, a 51% increase sequentially and 18% increase year-on-year.

EBITDA of 761 million, 22% of revenue represented increases of 15% sequentially and 8% year-on-year.

The return on capital employed reached 9.9%, exceeding our cost of capital.

This compared to 7.3% in the first quarter and 6.6% in the second quarter last year.

This result was achieved through the combination of improved margin and tighter capital discipline.

Capital expenditures including $43 million of multi-client service reached $277 million representing 7.9% of revenue.

For the same period last year, the corresponding figures were $442 million, 13.5% of revenue, including $97 million of multi-client service.

As announced earlier this year by Andrew, managers' performance is now measured after the deduction of a charge on capital employed in their operations.

This new incentive program is promoting sharing of equipment and focus on capital control, in general.

The liquidity generated during the quarter was $160 million bringing down the net debt to 5.1, $5.2 billion.

Unusual items this quarter were first the negative trend rate effect of $241 million due to the straightening of the Euro, a 6% re-evaluation during the quarter.

And second, there had been $106 million proceeds from the sale of grand prodigal stock.

We are maintaining our target of $4 billion net debt for the end of the year.

As announced earlier, we signed a contract for the sale of NP Test, our Semiconductor test business and more recently the sale of the electricity metering business for total gross proceeds of 475 million.

We sold one of our remaining drilling rigs in July and expect to finalize the sale of a second one in August.

Additionally, we have filed for the sale of a $173 million note from handover compressor.

Overall, we expect to generate at least $700 million of proceeds from this transaction between now and year-end.

Our future exporter to the Euro and the Pounds Sterlings were reduced significantly through the issuance of convertible and the buyback of 1.5 billion Euro and Sterlings bonds in June and July.

On June 4th, we issued $1.4 billion of convertible, the energy sectors largest ever-convertible transaction in two trenches.

First trenches of $975 million was a 1.5 coupon and a conversion price of $72.33 and a call put of five years and a second trench of $450 million with a coupon of 2.125% and a conversion price of $80 and a call put at seven years.

Between June 12th and July 22nd, we launched and concluded tender offers on three of our outstanding European bonds.

We bought back $1.3 billion of principal for a total cost of 1.5 billion including premium and tender cost.

The total one-time loss on the tender was $168 million of which 81 million was recorded in the second quarter with a balance to be recorded in the third quarter.

The savings on interest generated by this refinancing is estimated at $46 million per annum and the total MPV of the operation is approximately $60 million.

The refinancing will be accretive in 2004 on a fully diluted basis.

Given the date of the (inaudible) of convertibles and the bonds repurchased, we have affectively maintained the overall debt maturity schedules of the group.

As a final point, I would like to add that the company will start recording stock option expense in the second half of 2003 retroactive to January 1st, 2003.

The effect on the third and fourth quarters of 2003 earnings is estimated at about one cent per-share and per quarter.

Thank you.

I will now pass the call over to Andrew.

Good morning, ladies and gentlemen.

Thank you for joining us this morning.

First of all let me say that the second quarter results of Schlumberger are particularly encouraging and progress has been made on a number of the objectives that we set in March this year.

Oil field services benefited from strong activity trends in the North American land gas market, a return to more normal activity levels in Venezuela and high growth in Mexico.

Good performance in the North Sea and West Africa was helped by strong technology penetration in the completion and directional drilling markets.

The strong operating results were accompanied by a cost reduction program that began at the end of last year.

The program coupled with stronger activity led to a very satisfactory sequential growth in pre-tax income.

Oil fee services pre-tax operating margins are now well-off the chart reached in the fourth quarter of last year and are beginning to approach the 20% level that marked the top of the cycle in 1997 and early 1990 and nearly 2001.

WesternGeco-both land and marine product lines were profitable.

However, Western Geco overall showed a pre-tax loss due to lower sales of multi-client data.

In terms of technology, considerable progress was made with the introduction of Qmarine that continues to show remarkable examples of reservoir quality data for which our customers are recognizing the benefits and are prepared to pay premium pricing.

In addition, WesternGeco has begin to license Qdata as part of our highly focus multi-client program over some of the most perspective acreage in the Gulf of Mexico.

SchlumbergerSema continues to focus on IT services in the energy market.

The second quarter saw a series of contract awards that promised well for meeting our declared objective of double-digit growth with this activity.

In other markets SchlumbergerSema had a satisfactory quarter helped by continued cost cutting and the strength of the Euro versus the Dollar.

The overall IT services market in Europe remains lackluster, although there is expanding activity in the public sector in the U.K.

I would like to make a number of remarks to follow up on the initiatives I mentioned at the meeting in March.

The continued success of integrated project management in certain markets, particularly South America and Asia, confirms our belief that there is no demand for this type of service in the coming years.

Profitability in this activity is very satisfactory.

For example, the profitability of our activity in Mexico compares very favorably with other geo markets outside North America.

The penetration in the first half year of our directional drilling, logging log drilling and advance completions offering coupled with a rapid improvement in our capacity to integrate and analyze drilling and production data and images in real-time is an encouraging sign that our strategy of including IT capabilities in our technology offering is working.

It is helping our customers make some extraordinary improvements in their performance and efficiency.

While the results of Western Geco remain unsatisfactory, we are beginning to make progress.

The company has done a remarkable job of reducing cost.

The marine land and processing businesses were all profitable in the second quarter and are going into the third quarter with a favorable backlog.

The problem is still multi-client where revenue has declined.

The overhang in this business remains the biggest single problem in the seismic industry and it will be some time before it is corrected.

Most encouraging is the increasing recognition from our customers of a value of the truly remarkable seismic images that Q technology is producing.

Oil field services management has responded well to the overall initiative to reduce structural cost and improve capital discipline.

It is important to understand that the earlier gains are the easiest and that from now on quarter-to-quarter improvements are likely to be less spectacular than those of the first half-year.

The easy to attain cost has been cut and from now on gains will depend more on system changes that are slower to implement.

Also, there is only so much improvement that you can obtain from sharing equipment.

Future improvements will also depend on our ability to increase prices.

However, overall I'm extremely pleased with the results so far and how the organization has responded to the challenge.

Jean-Marc has already described to you where we stand on our liquidity objective and our divestiture program.

We are substantially on track to meet our goal of net debt of $4 BILLION by the end of 2003.

Activity for remainder of the year is going to be mixed.

In North America, recent high reinjection rates into gas storage in response to reduced demand and unusual weather patterns may mean that further near-term increases in the land rig count would be small.

We do not see any substantial improvements in the Gulf of Mexico.

Outside North America overall activity is likely to remain at about the same level as the second quarter.

Strength in Latin America, particularly Mexico, we will offset some seasonal decline in the North Sea later in the year after a very strong summer season.

We're not forecasting any significant change in activity level in Africa or the Middle East while we see some improvement in Asia.

Russia should remain strong although some confusion around the current restructuring of Russian oil industry may temporarily slow activity.

In the longer term, as we said at the end of the previous quarter, our customers are going to need evidence of increasing oil demand from economic recovery to increase their reinvestment rates.

We will now turn the session over to questions.

And, ladies and gentlemen, if you would like to ask a question, please press the "*" then "1" on your touchtone telephone.

You'll hear a tone indicating that you've been placed in queue.

If your question is answered you just wish to remove yourself from the queue, please press the "#" key and we ask if you're using a speakerphone if you please pick up your handset before pressing any numbers.

Once again, if you do have a question please press "*" then "1" and, ladies and gentlemen, we ask if you please ask a question and one follow-up question.

Our first question from the line of Michael LaMotte with J.P. Morgan.

Please go ahead.

Good morning.

Good day, Michael.

Good quarter, Andrew.

Thank you.

Couple quick questions just on the P&L.

First is the reclassification of the research and engineering expenses, can you -- can you address that sequentially on a pre-restated basis, it looks like that number fell and yet sort of looking at the comps in the first quarter, the second quarter and the second quarter press release it looked flat quarter-to-quarter.

Is that because of the asset -- identified asset divestitures or is that actually reclassification of expenses?

Jean-Marc will answer you Michael.

The only reclassification which affected the R&D line were linked to the discontinued operations and NP test and verification systems.

So that -- the only change in this line, Michael, basically what you have right now is a flat R&D between Q1 and Q2 of about $150 million.

Okay, thank you.

This one is really for you, Andrew.

In the recent past you've mentioned that morale in the oil field was something that you have spent a good time working on in your first six months as CEO.

In looking at the incremental margin, particularly in the eastern hemisphere, how much of that would you say is straight cost reduction versus perhaps in employee productivity due to improvement in morale?

Is that something you can quantify and then sort of as follow-on to your statement of the easy, the low-hanging fruits have been achieved, can productivity gains get us even further without much price increase?

Well, I think it is tremendously difficult to quantify the effect of better morale, Michael.

What is true is that people are out there fighting much harder than maybe they were fighting in the last couple of years.

I just came from Operations Manager Meeting in Stalanga (ph), which, you know, where we had 150 oil field operations managers from all over the world and I can tell you that, you know, their morale is fine.

I mean, they feel that they have a clear sense of direction.

They're happy with a lot of the technology that they're getting.

They feel that, you know, we're listening to them, so morale is fine.

So and what I would say also is that particularly in the eastern hemisphere, in certain product lines pricing is good.

I mean, there is no -- you know, it is not universal but in the higher technology services, pricing is good at the moment.

So, yes, I think there is still some road to run.

What I have -- but the basic cost cutting we're taking out of the structural head count, the easiest stuff to do is done.

And you know more of that structural cost cutting is going to come when we start implementing new systems.

Okay, great.

Thank you.

Our next question is from the line of James Stone with UBS.

Please go ahead.

Good morning.

Couple of things.

First of all, can you -- when you look at the multi-client side of the business and you had -- the fall-off in revenues sequentially from 100 to 83, you still had about 37 million ahead kind of had zero basis.

Can you talk some more why the loss was so large in multi-client?

I mean is it just that change in sequential revenue drives, you know, all of that drop down -- vast majority of that drops down to the bottom line?

Okay, can I -- this is Jean-Marc Perraud.

The portfolio of multi-client service, we amortize over a full year basis.

In other words, it's gone either through sales or through amortization.

After four years we ensure that no survey has a residual net book value.

So what happens is that if the cumulative level of sales is not sufficient then the amortization charge start to kick in.

And that's what is happening right now this quarter is that the level of sale cumulatively has not been sufficient to generate enough reduction of the -- through the cost of product, if you want.

Is that --

That's fair to say that somewhere you need somewhere around $100 million a quarter of multi-client, right now to break even?

I think it's fair to say it obviously depend on the mix of the service so --

And then just, Andrew, you know, there's been a lot in the press recently about potential discussions between Schlumberger and DSD regarding parts of Sema.

I figured someone was going to ask so I might as well be the one.

I would be amazed if no one had asked, Jimmy.

So, we don't comment on speculation in the press.

As you know, we have an awful lot of activities for sale in Europe, one form or another, so it is not very surprising that there is speculation.

And the other thing that I have always said is that to the extent that the European IT services industry starts looking at consolidating, then obviously we would be stupid not to look at that.

And there are lots of investment bankers out there who are dying for that sort of thing to happen but we have no direct comment on the speculation in the financial plans.

Okay, thank you.

Our next question is from the line of Bill Herbert with Simmons & Company International.

Please go ahead.

Thanks, good morning.

Good morning, Bill.

Andrew, getting back to the cost cutting for a second here, we had essentially a $70 million improvement quarter-to-quarter in oil field of the operating income line.

How much that came from cost cutting?

Jean Marc is going to answer.

On the services quarter-to-quarter it's 20 million.

20 million great, thank you.

And then secondly, notwithstanding the efforts with respect to printing costs of WesternGeco, I think in the first quarter press release we talked about $200 million pre-tax annually, $15 million a quarter.

How much of that flowed through in terms of the cost cutting benefit in the second quarter?

Of the 50, how much hit the P&L in Q2?

We're not sure of the exact figure, Bill, but I would say it substantially -- has to be a fairly high portion of it because most of the cost cutting was over in the first quarter.

Okay.

So we're not necessarily looking forward to the benefit of that initial cost cutting effort to manifest itself more prominently in the second half of the year in order to sort of mitigate the challenges that you face in WesternGeco?

It's going to mitigate -- not mitigate.

The improvement in the direct product line - Marine land acquisition and data processing is going to be fully present in the remaining half of the year.

Yes.

And they will do fine.

The question is, cost cutting cannot affect multi-client sales so the question is what is the level of multi-client sales going to be --

Right.

in determining the level of sales for the year.

Got it.

The last question is we had a very welcome and substantial improvement quarter-on-quarter in Latin America.

Profits went, I think, pre-tax profits went from 34 to almost $60 million.

How much of that was directly attributable to Venezuela?

I don't have the exact number.

But quite a bit.

Quite a bit, yeah.

Listen, thanks a lot.

Next we'll go to the line of James K. Wicklund with Banc of America Securities.

Please go ahead.

Good morning, gentlemen.

Jean Marc, on the tax issue it appears the 81 million related to (inaudible) of debt wasn't tax affected which brought the operating number to 38.

Can you address that and what your tax rate we should use for the rest of this year?

Okay, for the first part of your question is accurate, the 81 million charge were in countries, France and actually the U.K. where we didn't take any tax effect due to the tax situation in these two countries.

So there will be another charge coming, a refinancing charge coming in Q3, as you know of, approximately the same amount with the same amount of tax effect I would say.

In terms of the operations, you can use I think we give as a guideline yesterday a effective tax rate in the upper 20's and that is what you should use.

My follow-up, Andrew, the U.S. rate count you don't expect to particularly move up dramatically at least at the end of this year.

It had a nice move so far.

Somebody else will come and the wells are getting deeper and we're seeing price improvements.

Can you address what your expectation is not for rig count but for profitability, pricing, et cetera, in the North American markets for the rest of this year?

Well, obviously we're going to get some third quarter carryover effect from the full quarter of increases that took place in the second quarter.

That is going to get a lot deeper in this year, I don't know.

And I think we're at a stage now where there is a little bit of pricing leverage but really not a great deal.

You know, my fear is personally that you look at the re-injection rates into the storage over the past few weeks, if it carries on at that rate then storage is going to be full on time and, therefore, the incentive to go on increasing the rig count at this point is going away.

Now, if the rest of the summer is 100 degrees everywhere and we air-condition to death, that could change.

But the trend over the last four weeks has been a very high re-injection rate compared to what is the normal rate of this time of year.

And we're all praying for a hot August.

All right, gentlemen, thank you.

Our next question is from the line of Jeff Keiberts (ph) from Smith Barney.

Please go ahead.

Thanks, good morning.

Jean-Marc, a question on the discontinued operations, I didn't quite -- couldn't quite figure out where we get a five cent loss from discontinued operations or $30 million.

Could you break that down for us?

Yes.

Actually, you had two main pieces in that line.

One is related to NPTest and that was about half of the amount, and the other one is related to another business called Verification Systems that we're in the process of finalizing this sale at just about the same amount as well.

And the half that was NP Test, was the $12 million loss that was booked on the sale?

That's right.

And then similarly the verification was an operating loss or a loss on sale?

Loss on sale.

Okay.

For Andrew, you mentioned, you know, in terms of further improvement, one of the things that, you know, you're going to need to see for the oil field improvement is pricing.

You've kind of -- you've touched on the U.S. and some of the international markets.

I just wondered if you could kind of highlight for us where you see today the best near-term opportunities for meaningful price improvement?

I mean I think that the business where we're probably experiencing the best worldwide ability to sustain our improved price, depending where you are in the world is drilling the measurements.

And overseas oil line and then I would say that for high-end advance completion systems, you know, these things are not particularly price sensitive.

And the rest is very much depends on capacity in the areas where you are.

So, you know,.

Any particular markets where you would see just outright utilization of capacity being, you know, a broad-based driver of pricing improvements?

No, I don't think we could -- I don't think I would say that is the case anyway yet just.

Okay.

And just related to that, you know, you've got a 9.9% return on capital employed.

Your target is set out in March was 10%.

Are you revising that target?

No, not yet.

Okay.

Still have a few things to do, Jeff.

Very good.

Thank you.

Yes.

Our next question is from the line of George Gaspar with Robert W. Baird.

Please go ahead.

Yes, good morning, Andrew and Jean Marc.

Good morning.

The first question is to pursue a little bit on this drilling outlook worldwide.

Do you see any drilling mix change between oil and gas and can you spot anything regionally that is worth mentioning?

I think that, you know, that there has been a significant shift to gas drilling in the Middle East but it's not something that you can relate to this quarter, George.

It's something that has been taking place over the last two years and I suspect is likely to continue.

I don't think there is a big mix shift in the Far East where it is pretty much the same.

I suspect that in the coming coupled of years you will see more gas drilling than we have been seeing in Russia but, you know, these trends are much longer overseas than they are in the United States.

So, you know, I can't put a shift point to any particular one in this quarter, George.

Okay, thank you.

And secondly, on the discontinued operations, is there a future marker point date-wise when you could indicate the elimination of the loss in discontinued operations or what you may have as an objective date?

Let me, I'm not sure I get -- is the question basically when are we finalizing our program of divestitures or --

Right, right.

That would eliminate this discontinued loss.

Well, I think as I mentioned and, you know, in relation to our objective for the $4 billion net debt, we still have a few transaction to come, right?

Starting with electricity metering and so, and some other small business actually in Europe.

So I think we will have some more discontinued operation probably in the next two quarters.

What do you think this would be contained totally to ground zero by the end of the year?

I don't think -- I don't think we can say that, George.

I mean, we have a lot of small stuff that has existed, you know, which comes from the old measurement systems and TNT groups around the world that it is going to take us a long time to get rid of some of that stuff.

Believe me if we could go faster we would.

But I can't guarantee you that the whole notion of discontinued operations will be over by the end of the year.

Okay, all right.

Thank you.

And next we'll go to the line of Brad Handler with Blaylock & Partners.

Please go ahead.

Hi, thanks.

You made a couple of references both in your comments this morning as well as in the release this morning with respect to the North Seas.

I was hoping you could speak to that a little bit.

Sounds like IPM was a strong source of opportunity for you in the second quarter and pretty seismic as well.

Are you seeing the impact of the independence moving into the market already, perhaps would be a little bit faster than others that suggested it would happen?

No.

I think we're seeing more of the impact of a very good portfolio contracts we have and the desire of the existing play players to do a lot of drilling during the summer season and some of the drilling we're doing is to outreach to small pockets from existing infrastructure and, therefore, it is extremely complex and that is what is giving us the big boost in the North Seas.

It is not seismic; it's drilling and measurements.

Okay.

I guess as a follow-up and unrelated question, if I look at the sequential incremental margins in oil field, obviously help from cost cutting, pushed at above 40% this quarter, would you care to -- what are you over the next couple of quarters?

What incremental margins should likely be if you're not talking about a lot of price improvements then it is just sort of a gradual -- a gradual activity pickup?

Where should that number fall?

I'm not going to give you a number but it's not-- it would be very difficult to sustain the rate that we had in this quarter because, you know, as I said earlier, the effect of the easy cost-cutting really came through in this quarter on us.

It will come through a bit in the third quarter but not to the same extent.

Fair enough, thanks.

Our next question is from the line have Stephen Gengaro.

Please go ahead.

Thank you.

Good morning, gentlemen.

Could you talk, you know, back to the margin issue, but you talked a little bit about particular oil field margins.

Can you give us an idea, a). given the current cost in pricing structure where you think you can get margins to in the oil field and then b) kind of where your goal is over the next say 12 to 18 months?

Well, you know, we set a goal of getting it back above the level of 1997 in pre-tax operating margins and I think that we'll get there quite easily.

Where we go from there is really going to depend a great deal on what the mix of activity looks like over the next few years.

And, you know, it's going to depend to the extent to which there is growth in overseas activity as opposed to U.S. activity and I really, you know, don't feel like speculating on what we could ultimately get to.

So I think it is better than what we did in '97.

And also I think we should, you know, not ignore the fact that we need a substantial improvement in Western Geco if we're going to make a meaningful improvement in the overall margin that we have arrived from all oil field services and that improvement from Western Geco is something that is not going to come in a large way this year hopefully it will start to improve more in the years afterwards.

Okay, thank you.

That is helpful.

Our next question is from the line of Terry Darling with Goldman Sachs.

Please go ahead.

Thanks.

I was wondering if you could help us with the list of items driving the changes in EPS Q3 versus Q2.

You've mentioned interest expense benefit from the refinancing, 11 million, 12 million a quarter.

Can you tell us where the fully diluted shares are likely to be?

You mention the higher tax rate.

I'm wondering, also, what the impact of the drilling rig divestitures are?

Does the P-GAAP gain continue?

Just take us through the list of items here.

Well, Terry, I read your paper this morning and there is one thing in your paper that is a little bit misleading.

The P-GAAP was offset by the provision we made against the patent litigation.

Therefore the effect of P-GAAP in EPS was very small.

Okay and the net between those two was basically zero.

Zero

Okay, that is very helpful.

And we have two small rig gains in Q3, well Marc,-- which we will identify for you.

Fully diluted shares, basically, you know, you have to assume that it's 19 million - the conversion price is about 75 -- $75 weighted between the two trench so it is about 19 million shares.

So, it is a 3% dilution on the share side and obviously on the earnings you've got to exclude the interest paid on the -- on this convertible, right?

It is 606 million sound about right, Jean-Marc, do you recall?

I mean it sounds about right, Terry.

We don't have a calculation in front of us.

And just to -- the P-GAAP to gain that does not continue, correct?

No.

Okay.

Sorry, Terry, it sounds about correct.

Okay.

And I hear you on the gain on the drilling rigs but what about the loss income from those rigs?

How big is that number?

Compared to Q2?

Yes.

It's not going to be that big because one of the rigs is already idle.

Okay.

Andrew, a follow-on question more strategic in nature, I wonder if you can talk us a little bit more on your view on Russia and Schlumberger's strategic position.

I think most in the industry would agree that you have got a pretty sizable lead but I am wondering if you can share with your thoughts on two points?

Number one, timing of when we get through I think you used the word restructuring or consolidation and second point, do you expect to be an active participant in making acquisitions in some of the oil companies selling their service capabilities?

So on the first point, I think the restructuring such as it is, we don't know how long it's going to take.

It could be over in a month.

It could take the rest of the year.

I don't know.

I think what we're seeing at the moment, which we find very encouraging is that some of the Russian companies who were just not open to using western services are beginning to open up, and I'm not mentioning names deliberately because I don't want all my competitors rushing around for the same deal.

And only acquisitions, yes, we will be an active participant in things that interest us; in other words, we are not going to buy vast quantities of rigs just because they are associated with lugging geo physics or pumping companies.

We're going to be extremely selective in what we purchase.

And we also have a little bit of experience because we already have two joint ventures, one with U-cost (ph) and one with seg-most) where we have gradually taken over a portion of their service assets and they fully realize that we cannot take responsibility for all of their service assets which, you know, employed in rigs, you know, camps, trucking fleets and all the rest of it.

So on a selected basis the answer is yes, Terry.

Thanks very much.

The next question is from the line of Mark Earnest with Merrill Lynch.

Please go ahead.

Yes, good morning.

Andrew, I wanted to ask, you talked about the fact that your customers need to see an increase in oil demand in the form of higher economic growth to increase their reinvestment rate, which has been quite low.

What do you think it's going to take for them to increase their reinvestment rate?

I think that if we went into 2004 with an outlook that energy demand was going to move back to 1.7, you know, anywhere between 1.5 and 2% a year so that is an additional $1.2 million a year and probably in the first phases of recovery it will be higher than that.

I think that it would encourage them look at increasing their budget but they're going to have to feel fairly confident about it.

Because the reverse side of that is that some stage if there is no increase in demand, the excess production capacity builds to a point where you lose confidence in the sustainability of the price.

Thank you.

Follow-up question relates to the strong growth you saw sequentially in revenues much higher in the rig count in most markets you eluded to strong technology penetration and completion products in directional drilling.

Can you elaborate on the importance of technology and helping you grow at a faster rate than the market?

Well, I deliberately selected those two in this quarter because they were the ones where the fair capacity through technology to capture additional work was fairly spectacular.

Another one which is mentioned in the press release which is having a lot of success is the suite of analysis - of lugging tools which we called analysis behind casing which allows you to, you know, perform a full suite of measurements through the casing and when you are revisiting oil wells looking for bypass production and the displacement of water or other events that are going to allow you to improve performance of those wells, that is a very useful tool to have.

So, yes, it's, you know, technology continues to be the way that we will try to capture additional market.

Thank you.

Our next question is from the line of Kenneth Sill with Credit Suisse First Boston.

Go ahead.

Yes good morning, gentlemen.

And Andrew, I'm very impressed with how your people have been responding to the new regime.

A couple of questions on Sema.

One of the things you' clearly making progress year-over-year and sequentially in the energy business.

Yes.

But it doesn't seem like it's translating into revenue growth outside of kind of core in Europe, Middle East, Africa.

Is there some revenue that is going to be coming outside that core area from any of these recent contract awards and could you give us a feel for it, how that revenue stream is going to ramp because you cited that as a double revenue grower?

Well, you say we don't have revenue outside the core Middle East and Africa?

I mean if you look at the year-over-year changes in revenues in Sema, it is almost all, you know, Europe, Middle East, Africa and most of that is in foreign currency translation on a revenue gross side.

I'm looking at, you know, at the segment information that you guys put out.

I was just trying to wonder, you know, you have 51 million of revenue in Asia, telecom was down, North America, South America was down.

The energy revenue growth, you know, is too small of a number to affect that trend I think in each of the regions.

The areas where we're having the most success, which is quite natural, are the more remote areas so we have very good revenue in Africa.

We have significant contract awards across South America and we have significant contract awards, which are not only all coming through in revenue yet in Asia.

So the energy thing is fairly well spread.

And so we should start seeing some of that ramp-up in Asia and Latin America?

Yes, but I mean, these are not $100 million revenue streams.

They get built incrementally, so I'm not sure in any quarter.

Over time you'll see it.

I'm not sure in any quarter you are going to be able to say 'aha' now energy is made a big difference to the whole of stream of Europe, Middle East, and Africa.

Okay, and a follow-on question to earlier.

How big the press's comment on the potential sale of parts of Sema?

How big is the out sourcing business of Sema?

The percentage of your business, how much is out sourcing versus IT consulting and systems?

I mean, the total out sourcing for everything is probably just short of a billion.

And that's on an annual basis?

Yes.

And then you did site that double-digit revenue growth as a target for the energy business, is that still a target for next year for Sema overall on a revenue side?

No, we haven't given a target for Sema's revenue growth overall and we don't -- I don't want to do that because I don't want this business until the market for IT services improves, I don't want this business to be driven by growth improvements.

I want it to be driven by margin improvements.

Okay, thank you.

And next go to the line of Ole Slorer with Morgan Stanley.

Thank you very much.

Andrew, can you comment a little bit on the chart you gave in your March presentation, which showed your projects for oil -- your projections for integrated project revenues.

If I read the chart correctly it looked like you had a forecast of roughly 0.9 billion in 2003 growing to about 1.3 billion in '04 and ramping up to 1.8 billion in '05 on the basis of a bunch of probable projects.

Yes.

I wonder whether you can kind of give us a little bit of an update on how you view that part of the business?

I mean, your highlight is in the North Sea is one of the reasons why I may take market shares there.

Was that through majors?

Was it smaller USMP companies going into the North Sea?

Or what was driving that?

Maybe also a follow-up, whether are some changes in other places so this model is gaining or losing traction?

I would say that if you want to calibrate the figures that I gave you in March, Ole, the 0.9 is fine.

The 1.3 is fine and the 1.8 still has a degree of uncertainty in it.

Uh-huh.

Now, you know, the absolute key market for this, which is sort of driving everything as you have been seeing in Mexico, we have traction in the North Sea but they are not enormous projects.

We have traction in the Middle East and Asia on projects that we probably -- we have not announced yet.

So it is not just -- it is becoming fairly well spread.

I wouldn't describe it -- we're very careful to internally not use project management as a market share tool.

We did it because we managed projects well and because we construct people's wells or develop their fields properly, we don't try and bundle services to use it as a market share weapon.

Now that you -- since you have been accused of dumping prices in Mexico by some of your competitors yet looking at the and others it looks like successful integrated project and looking at the sequential margin improvement in Latin America backing Venezuela, looks as if Mexico was your most profitable region.

How do you explain the acquisition of price dumping for that pretty strong margin?

I don't think that in the projects like that it is very easy for people to accuse you of price dumping.

Typically you're quoting an overall project cost, which is in the hundreds of millions of dollars, and the gap is between the people who bid are really quite small.

So for people to go around shouting a price dumping I think is not really an accurate description of what happens.

Now what is obvious is that critical mass helps and also believe me experience helps.

In other words, I don't know how many wells we have drilled on Vargas, but it is an awful lot.

And I know for example that the well times we do on Vargas today compared to well times we did when we first started working on Vargas, there is absolutely no relation from one to the other.

And your margin comes in parts for your capacity to execute within a budget not a specific service cost and, you know, as you say, the result is that, and I mentioned it in my opening remarks, the results of the Mexico Geo Market compare very favorably with any market we have outside of North America.

Is there any chance that Venezuela has been through a tremendous change and Petrones has used to be able to more capable oil companies in terms of being bidding on the product line basis, they just sacked 14,000 people, whatever.

Any signs that that market is turning more into the same shape as the Mexican market?

Well, don't forget we currently have a project called Presa on lake Marc aba which is three drilling barges and three work over barges which is an integrated project management contract that we signed with PEDVESA for 10 years and it is in about year before so they are quite happy -- they were quite happy to what was modeled before what happened inside PEDVESA.

Now I don't know that and I don't want to speculate on what form PEDVESA may use to contract people in the future but they -- this is a model that they're not a stranger too and they're quite used to.

In fact, we had a similar project in Venezuela, Falasmo that PEDVESA approved.

So it is not something that they aren't familiar with.

Is this model you think like a take share going forward given the term PEDVESA or does it have the same kind of share percentage?

Ollie, I don't want to speculate because I don't know how PEDVESA is going to organize themselves in the future.

If they want rapid access to capability, it will be a logical model for them to adopt.

Okay.

If we just maybe move on a little bit to the seismic I have one follow-up question there.

If you assume for one reason or the other that the first half run rate on multi-client sales from the 3D is going to be the run rate going forward, what will your strategy be?

Will it be to just amortize down the liability to get it down to the right size in the next couple of years and have that create large losses for the seismic division or would it be at some point just write the liability down to the level you feel it has the economic value reflected by the run rate on multi-client sales?

Well, I mean, firstly, I -- I think that we will see some improvement in multi-client as we go forward and, secondly, you know, the - the accounting rules under which we do an impairment test are there and what is the procedure, Jean-Marc that we have to do one a year or look at it once a year?

We certainly - we do continuous monitoring but we certainly do the exercising that's once a year, yes.

And could you give any indication of the size or the required write down of this business was to be bit profitable in today's market condition?

No, because it has to be done survey by survey.

Yeah.

And you mention that you're doing now Q-marine multi-client seismic search.

Could you - can you tell us that this will in any way cannibalize your existing 3D or --

You know, we may not be very smart but we are smart enough not to overshoot our own 3D's.

Okay, I hope doing so.

And in terms of free funding, by what are the free funding levels are you looking for there?

Pretty high.

Close to 100%?

Close to a 100%.

Yes.

Okay, well, thank you very much.

Our next question is from the line of John Dowd with Sanford Bernstein, please go ahead.

Good morning.

I was hoping to get a better understanding of the tax rate.

Are these lower taxes primarily due to losses in Western Geco and if so does the forecast for higher taxes in the remaining quarters of the year imply improving visibility into multi-client sales?

Okay, on the tax rate for this quarter, it does impacted in this order, by Western Geco mix and as compared to Q1, Western Geco actually had losses in some country which were not tax affective and actually most of its profit in the U.S. which were tax affected.

In the second quarter we had a bit of a reversal of that situation and actually they had losses and to say in the U.S. and profit outside.

So you had quite a swing on the tax line in Western Geco.

That's the first and most important factor.

The second factor impacting the affected tax rate in the second quarter is again on P-GAAP 2.

We had deferred that gain from the dilution of the discussion; the negotiation with Hanover compressor.

The gain of $14 million barrels is actually without any tax.

So, that has also an impact on the affected tax rate.

And the third factor again in this order is just a mix, a geographic mix of oil field services, which was tolerable.

Okay and the following up a little bit on the P-GAAP 2, where in the segment results was that $14 million gain recorded?

That was recorded at the level of -- that was not recorded at the level of the segment but at the level of Schlumberger limited.

And likewise, the patent infringement, that was a discontinued operation?

No, the patent infringement although it is related actually to something, which will be discontinued operations, the electricity metering, was not treated as discontinued operation in Q2.

So, we had a 25 million pre-tax charge at the level of the SL elimination as well.

After-tax that was $16 million charge and that's basically nearly offset the gain on P-GAAP-2 of $14 million.

Okay, separately margins in the Middle East and Asia, because of the segment increased significantly.

What drove that increase?

Do you think this new level is sustainable or was this more the result of some opportunistic business?

Well, the first thing is that you will notice that in the Middle East the gain on the sale of one of the rigs was included.

Yes, that's right.

You have to be careful not to extrapolate that rig gain forward.

Right, 4 million, I got that.

Yes.

And beyond that I know I think that they will be sustained at round about the same level.

Okay.

So that wasn't something that was contributing to the lower tax rate?

No.

Well, yes, yes, yes, but as Jean-Marc explained it was only a part of it.

Okay, thank you.

And next we'll go to the line of Robert Mackenzie of Friedman, Billings, Ramsey.

Please go ahead.

Good morning.

You gave a good example of what is in terms of some of your customer's spending in the international markets.

I was wondering if you could go over your baseline outlook right now or where you see the different international market spending going in 2004?

I know you mentioned near-term it appears flattish, net/net.

Is that the same case in '04 or do you see growth in select markets picking up again next year?

No.

I think there is an underlying body of very large project spending which is basically across Africa.

The Caspian and parts of the Middle East, which is going to be there in 2004.

Then I think the swing factor is going to be how much people put back into the more marginal markets, so when I say marginal markets, markets in which they're doing production in and some of those small projects as opposed to very large project.

And I would say that those swing type markets are Russia, the North Sea, parts of North Africa, parts of the Middle East and places like Indonesia in Asia.

But I think, you know, there is an underlying body of very large project work, deep water development, large development in the Caspian, et cetera, which is likely to remain at around about the same level, is unlikely to increase very much.

Okay, so your baseline is project spent to keep spending an activity in lean with swing markets sequentially impacting that.

Yes.

In terms of the swing markets you already addressed Russia in terms of its -- the timing that is uncertain there.

You see North Sea in particular coming back following the Chanslor Brown tax or is that still --

No, I think that next year North Sea will provided the tax situation is clear, we have enough people who come in to look at it that if the oil prices is any where reasonable, it will be a good year in the North Sea -- next year.

Okay.

Just one quick follow-up.

In terms of your customers predominantly the majors and national oil companies, oil price expectations for many years they have used a mid cycle oil price in their budgeting probably in the mid, maybe the high teen range.

Are you getting any indications at all that that paradigm may be shifting or is that persisting?

I don't have any indications that is moving.

Okay, thanks very much.

John, we can go for a couple of more questions now.

Okay, We'll go to the line of Mike Irwin with Deutsche Bank.

Go ahead.

Thanks, good morning.

I wanted to follow up on the international market a little more.

You kind of talked about the macro outlook roughly being kind of flat for activity levels.

Is there anything out there specific to Schlumberger in the way of projects or contracts or your business or technology mix that would cause you to do better than the recount metrics in any or all of those markets?

Well, we have done extremely well in the North Sea so far this year.

There is no reason why that shouldn't continue for the rest of the summer.

I think we have several strong possibilities to do better than activity in the Far East.

I don't want to specify which.

And we have some still in the Middle East.

So I mean I'm not talking, you know, major increments but places where we can do better than the rig count, yes.

I think that more and more as the industry matures both in the North America and overseas, the drilling count as an indicator is becoming less and less accurate.

Okay.

And moving back to the seismic business we talked about multi-clients an awful lot and I think I'm clear on that.

I was wondering what the underlying demand situation looked like in some of the other businesses, the lands, the Marine and processing business and not multi-client?

Well, Marine is going into the third quarter with a very good backlog.

By the end of the third quarter I think all our 4 Q-boats will be 100% utilized.

And land has a reasonable portfolio of contracts, particularly in Latin America and the Middle East.

And processing, you know, follows behind us so there is no massive shift in processing but it's a good steady profitable business.

Okay, great.

Thank you.

And we'll go to the line of Pierre E. Corner III of Hibernia Southcoast Capital.

Please go ahead.

Good morning, everybody.

A follow up question on some of the pricing you talked about with Jim and Jeff about earlier.

North America, assuming sort of a flat activity levels, cost cutting is already been implemented as much as possible.

Could you talk about historical look in any way what market share has been like and then do you see that -- how sensitive is market share to pricing here or is it more new technology and again specifically more North America.

Well, North America in upturns and down-turns is extremely sensitive to both price and price is a trek direct driver of market share.

Now, I don't think that we have sufficient upside leverage in the rig count today for people to make enormous price increments.

I think we'll get some.

I think they may be regional.

Okay.

And I don't think that, you know, I very much hope we're not going to be in one of these situations where people favor price - favor market sharable price but, you know, I don't see any dramatic change in the landscape at this level of rig count.

And then in the last quarter, could you -- would you care to comment on any changes that you saw in market share specifically?

Is that appropriate?

No, we won't comment on market share.

Okay.

I'm sorry.

No, no.

I appreciate it.

I understand.

Very good and thank you for having the call.

Appreciate the information.

Thank you.

I would like to turn it back to you for any closing comments.

Thanks, John, for that.

But I think we can conclude proceedings here so thank you everyone for joining us on this half yearly call.

We look forward to talking to you again in the future.

Thank you.

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