斯倫貝謝公司 (SLB) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Schlumberger conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Doug Pferdehirt, Vice President of Investor Relations and Communications.

Welcome to today's year-end conference call.

Before we begin today's call, I'd like to review the logistics and agenda.

Some of the information in today's call may include non-GAAP financial measures.

A reconciliation of any non-GAAP measures we present is contained in today's press release or will otherwise be posted on our Investor Relations Web site located at wwwlSLB.com\IR.

A detailed disclaimer and other important information is included in the FAQ document available on our Web site or upon request.

Now, today's agenda -- Jean-Marc Perraud, our Chief Financial Officer, will begin by highlighting the financial details for the fourth quarter and full year.

Following, Andrew Gould, our Chairman and Chief Executive Officer, will provide additional detail on the performance and activity.

Finally, we will take questions from the audience.

Now, Jean-Marc Perraud will discuss the financials.

Ladies and gentlemen, good morning and thank you for participating in this conference call.

I would like first to specify that all of the figures I will mention are in line with our new reporting structure.

This means three changes.

The Oilfield Services figures now include the (indiscernible) IT business previously reported under SchlumbergerSema.

Second change, the SchlumbergerSema figures represent only those activities being sold to Atos.

Finally, the figures in the segment "Other" now include the businesses of SchlumbergerSema that are being separately divested.

The fourth-quarter earnings from continuing operations and before charges were 50 cents per share, up 9 cents from last quarter and 24 cents above same quarter last year.

Year-on-year, Oilfield Services accounted for 16 cents of the 24 cent improvement.

Sequentially, the improvement came mainly from WesternGeco that accounted for 5 cents out of the 9 cent improvement.

The pretax margin of Oilfield Services for the fourth quarter was 18.1 percent versus 17.7 percent in the last quarter and 13.6 percent in the fourth quarter last year.

All areas contributed to the sequential improvement with the exception of ECA, which experienced a slight drop from 18.5 percent to 17.2 percent.

This was partly due to the seasonal decline in the North Sea and the impact of the strengthening of some local currencies.

The WesternGeco turnaround from a pretax loss of 36 million in the third quarter to a pretax gain of 32 million in the fourth quarter was essentially the result of strong multiclient service sales.

These sales reached $111 million in the fourth quarter, versus 45 million in the third quarter, and were coupled with lower amortization costs following the impairment of the portfolio in the third quarter.

The return on capital employed, ROC, continued to improve and reached 12.8 percent in Q4, well in excess of our cost of capital.

This figure of 12.8 percent compares to 10.3 in the third quarter and 6.4 in the same quarter last year, 2002.

For the entire year 2003, our return on capital employed reached 10.1 percent.

The charge of 10 cents per share taken in the quarter was a net result of two events that had their roots in the tale of our gas compression business to Hanover Compressor in 2001.

The first one was an $81 million impairment charge on the restricted Hanover Compressor stock that we're holding, partially offset (inaudible) the second event by a 20 million gain on the sale of the Notes for $177 million.

Schlumberger net debt was slightly below $4.2 billion at year-end, a 691 million improvement during the quarter.

This was a result of, first, the strong cash flow from operations; second, good collection on receivables; and third, the above-mentioned sale of the Hanover Notes for $177 million.

It was achieved in spite of a 154 million adverse currency effect due to the strengthening of the euro and the Sterling and also in spite of a delayed closing on the sale of the electricity metering business.

Now, a word on the various divestitures in progress.

The closing on the sale of SchlumbergerSema will take place next week.

The transaction was approved by the shareholders of Atos at yesterday's meeting.

Upon closing next week, we will receive EUR400 million -- about $500 million at the current rate -- in cash, 19.3 million shares currently trading and EUR53, representing 28.9 percent of the Company, some reimbursement for the cash left in SchlumbergerSema and some favorable working capital adjustments.

At this stage, although we still have a few days of trading to go through, the transaction should result in a net gain.

Other businesses related to SchlumbergerSema that do not form part of the transaction with Atos are being actively sold and should generate approximately $500 million in proceeds between the first and the second quarter of 2004.

This figure includes the electricity metering business being sold to Itron.

In addition, we are proceeding with the preparation of IPO of our Smart Card business, which should take place during the second quarter.

Now, to conclude, let me give you some technical guidance for 2004.

First, in line with our divestiture program, we will continue to adjust down our support structure.

Consequently, we are expecting to incur about $30 million of restructuring charges spread over the first three quarters of 2004.

Second, as you know, starting in the third quarter last year, we expense new stock option grants and impact of the employee stock purchase plan.

In 2003, this resulted in a 2 cent per share charge.

In 2004, with four quarters and some new grants, the result will be a charge of 4 cents for the total year.

Our effective tax rate from continuing operations and before charges was 25 percent in 2003.

We are expecting it to remain around this level for 2004, though it may be slightly higher for the first quarter.

We could say mid to high 20s.

Capital expenditures, including Multiclient Services, will be around 1.3 billion in 2004.

Our net debt should be reduced to $3 billion by midyear.

Due to the current structure of our financing and the level of interest rates, you can expect, at this stage, that our pretax interest expense, net of interest income, will be around $180 million in 2004, 100 million lower than the level reached in 2003.

Finally, although the precise timing is difficult to assess, expect by the second half of this year that most of the businesses in the segment "Other" will be discontinued operations.

Thank you.

Now, I would like Andrew to continue.

Thank you, Jean-Marc.

Good morning, ladies and gentlemen.

I would like to add some context to the results that Jean-Marc has just discussed.

Firstly, let me say that they were very encouraging, with net income from continuing operations before credit and charges up 95 percent versus the same quarter last year.

We've seen activity gains from quarter to quarter during the year, and the fourth was no exception.

Within Oilfield Services, solid growth was reflected in all regions, which together, with continued attention to costs and good pricing on new technology, spurred the annual 20 percent increase in pretax income on a revenue gain of 8 percent.

Mexico, Indonesia, India U.S. land and the Caspian GeoMarkets posted the highest growth year-on-year and most technology segments recorded double-digit increases, with record levels being achieved in drilling and measurements from the introduction of new directional and LWD technologies.

Data and consulting services drew the award of several contracts for reservoir modeling, field development planning and production optimization.

Schlumberger Information Solutions experienced strong demand, particularly in Europe, Asia and the Middle East.

Integrated project management significantly expanded its backlog over the year, despite high activity levels.

Sequentially, Wireline Drilling and Measurements grew while well services and well completions and productivity were flat.

Highlights in the quarter included the acquisition of our minority stake in Petro Alliance, Russia's largest independent Oilfield Services company.

Petro Alliance, formed in 1995, provides a broad range of exploration and development services to international standards.

The size and scope of activity in Russia is huge, and this type of an investment will benefit Schlumberger and the Russian industry, as that industry seeks to access technology to be applied to its own particular needs in order to continue its production growth.

I would like to make a few remarks on our progress in seismic.

Q-Market penetration has continued, as demonstrated by the doubling of Q-Revenue year-on-year.

New contracts have been signed and pull-through into data processing revenue is occurring.

Multiclient revenue has returned to more normal levels.

Our decision to shoot only significantly prefunded surveys with the option to add Q-Multiclient to the library in the future, we believe that the Multiclient product line is in much healthier condition.

Looking forward, we see increases in land activity for seismic, stability and data processing, seasonal affects in marine but with a promising summer season shaping up and further encouraging signs in Multiclient.

The introduction of Q-Land will further underpin our position.

One word of caution -- there is still overcapacity in the market, and the pricing of conventional surveys remains soft.

Before reviewing prospects for 2004, I would like to mention the restructuring efforts that are being made at the corporate level.

It is clear that our new focus on Oilfield Services will require less corporate coordination than did our previous multiple business segments.

Therefore, we will be implementing cost reductions at the level of the holding company and that will benefit our margins, resulting in an annual savings of approximately 3 cents a share after-tax on annualized basis from 2005 onwards.

I've always said that renewed economic activity and the consequent renewal of growth in demand for oil and gas would be the signal that oilfield activity would need to increase.

The world's aging production base needs substantial investment if we're going to combat accelerating decline and meet increasing demand.

If recent evidence of demand growth, particularly in the U.S. and China, is sustained, I think we will see a substantial increase in the NP (ph) spending worldwide.

I would like to add that this is very probably the last quarter in which we will report to you on SchlumbergerSema.

I do not want to revisit the past but do I want to say that the combination of Atos and Sema will create a major force in the European IT services market and we have a considerable interest in their success.

I would like to thank the men and women of SchlumbergerSema for the incredibly hard work they've put in to get this transaction completed.

I would like to conclude by saying that the continuing businesses of Schlumberger, with their unique breadth and technical strength across a wide spectrum of exploration and production technologies in over 100 countries in an environment where new efforts are going to be needed to maintain energy supplies at a reasonable cost gives me great confidence in our future.

I'm impressed by the effect the refocusing of the Company has had on our people in terms of both their morale and competitiveness.

Thank you.

We will now be happy to take questions.

(OPERATOR INSTRUCTIONS).

Jim Crandell from Lehman Brothers.

Good morning, Andrew.

I'd just like to focus first on your comment about current size of (indiscernible) that the customer base is beginning to respond to the need to increase exploration and production expenditures.

Which regions and what customers are you seeing that now?

I think that it's the Middle East, Caspian, Russia and parts of Asia and that the customer base that is essentially looking closely at how much it is actually going to spend, in my mind, is essentially the major resource holders, Jim, at the moment.

I can't say I have a very different view of what you published in your survey for the mega majors (ph) or the independents yet.

Okay, one follow-up question -- what products and services, Andrew, in the oilfield do you think you gained market share in 2004.

Specifically, where do you think you stand now worldwide in the whole rotary steerable business?

Are you saying 2004 or 2003?

2003, my mistake, 2003.

I think that we have unique family of rotary steerables at this point in time, both in push technology and point divet (ph) technology.

I think that in push technology, our range of sizes is such that it allowed us to make significant market share progress in 2003.

I also think that the issue in rotary steerable is more and more reliability and I think, at this point in time, we are fairly well placed.

So I think that that was a significant progress for Schlumberger in 2003.

Do you think you're now the leader globally in that business?

Then where else do you think you might have gained market share in '03?

Well, I always hesitate to say who is the leader and who's not the leader in a business where there are three players and I'm sure everyone will make claims and counterclaims.

Did we gain satisfactory market share?

Yes.

Did we gain large contracts?

Yes.

Are we the leader by 0.1 percent, or 3 percent or 10 percent?

I don't know, Jim.

Michael LaMotte.

Good morning, Andrew.

Where to pick my question?

Quickly, on Russia, have you seen any fallout from the Kortikosky (ph) issues that surfaced last fall?

Obviously, the results of the fourth quarter wouldn't reflect that but as you look at '04, is growth still something that we can expect to see in that part of the world?

You're quite right to say that we have not seen any fall-out so far.

My feeling is that some of the oil analysts' projections of Russian growth in 2004 are high.

I suspect that the issue is not going to be the direct effect of the position that -- or, if you like, the litigation between the Russian government and Ucos over taxes and everything else; it is going to be the capacity of the Russian oil companies to access Western capital markets.

I suspect that that capacity is not going to dry up, but I also suspect it's going to be slightly less lenient, perhaps, than it was in 2003, and that may eventually affect the rate at which the Russian companies invest.

I think the other issue, which is not yet solved in Russia and which will eventually affect capacity, is the transport system.

You know, we know that the limit is close to being reached and that in addition to the limit -- to expand the actual pipelines beyond this limit is going to require considerable investment for some period of time.

So, I don't think that Russia is going to stop growing by any manner or means in 2004;

I think it will moderate a bit, Michael.

As a follow-up, China is obviously a huge market that has been largely closed from a services standpoint.

As their need for energy internally grows, do you see that market breaking open over the next few years in terms of actually putting services crews on the ground and making China something other than just a market to sell product into?

To be quite clear, we don't sell any product into China that is used in the service business.

So, I think that the difference between China and Russia, if you like, is that China has never experienced a collapse of their industry the way that Russia did.

Therefore, to their own standards, there is a very viable Chinese servicing industry within China.

Therefore, the only thing that's going to break it open is, as you point out, their need to grow their energy supply faster and perhaps to recover more.

As they try to find more gas, they want to access more technology.

So I think it will open but I think it will not open as fast or perhaps (indiscernible) ever to the same extent as the Russian industry had to open because it went through a period of collapse.

Is SIS something that will lead (ph) that in your mind?

SIS is very well-established in China already.

Mike Irving (ph) from Deutsche Bank.

Good morning.

I wanted to follow-up on the Russian question a little bit. (inaudible) kind of various competing proposals and maybe rumors is a better word on what might happen tax-wise.

I was wondering if you had a view on that or if any of your customers had a view on that, what the impact (inaudible)?

I can't honestly claim to have studied the question but I haven't heard any panic or alarming calls from our own people in Russia, so I do think it's probably an open question.

Like all tax questions concerning the oil and gas question, it's a delicate balance between what the state requires and what you need to leave to the industry to invest.

I'm sure Russia will go through that process but I have not heard any immediate problems.

Another kind of growth area for you is Mexico; it seems to the a division of opinion there in terms of which way that market is going and (inaudible) talking about a lot of additional need for services and projects and also, some people say -- (technical difficulty) -- (inaudible) having a difficult time managing and there might be at least a plateau-ing kind of near-term in terms of their need for (inaudible) services (inaudible) what your view was there and what you are seeing?

Well, my view is that they went through an absolutely massive expansion in 2003 -- I mean really massive -- and that there will be some expansion in 2004 but not on the scale of 2003.

That's not because they don't have the projects; it's precisely -- because as you say -- there's a limit to the number of projects they can manage at the same time and they have to draw priorities.

So I would say, 2004, yes, there will be new demand but not at the same level there was increased demand in 2003.

Geoff Kieburtz from Smith Barney.

Good morning, Andrew.

I'd like to come back to the subject of your commentary in the release.

From a slightly different angle, really, the contrast with what you said three months ago -- I guess what I'm asking is, what can you point to concretely that has changed over the course of the last three months that has changed your view from expecting a flattening of activity in coming quarters three months ago to the comments you made today?

I don't think I was wrong on the flattening of activity in the U.S., Geoff.

The thing that has changed in my mind -- and I still consider this to be perspective rather than concrete -- is the startling, upward revisions in demand that have taken place.

These are not just upward revisions prospective; some of them (indiscernible) upward revisions of reported demand in 2003.

You know, we're at a stage now where I don't think there is a vast amount of excess production capacity out there.

I mean, three months ago, it was not as well quite clear -- even though I had my own view -- as to with what speed Iraq's production could go above its prewar levels.

It's becoming clearer and clearer that that's less likely.

I think there is still considerable doubt over some other OPEC countries as to what their actual excess production capacity is.

Therefore, if the demand increases are confirmed, which to me was not clear -- I mean, maybe I'm too conservative but it was not clear three months ago -- then I think that we will need -- the world will need more activity.

I guess I totally understand that explanation.

It was really the part about signs that the customer base is beginning to respond to this need.

Maybe I am being too literal here, but it sounds like you have become aware of certain interest or willingness on the part of particular customers that was not apparent three months ago.

I'm wondering, am I over-interpreting your comment?

No, you are not over-interpreting.

I mean, it is true that -- I think that certain parts of the customer base (inaudible) aren't necessarily having made public statements.

Again, as I said in answer to Jim Crandell's question, I am talking more in terms of national oil companies rather than the mega-majors are reconsidering their investment plans.

A separate question, just briefly -- can you just elaborate a little bit -- WesternGeco performance in the quarter -- sharp improvement.

Can you just elaborate a little bit on whether you believe this is a new, sustainable level of profitability, or any commentary you can give on that?

Firstly, I think the seismic business will continue to be cyclical, even within an upturn.

In other words, you know there is always this mini multiclient boom at the end of the year.

We didn't have it in '02; it came back in '03.

Will it be there in '04?

I don't know.

Marine will remain cyclical because of weather.

When I talk about improvements in Marine, I'm talking about a good summer season, which as you know is sort of the middle of the second quarter through the middle of the third quarter.

Land activity -- yes, we are seeing a fairly sustained increase in the number of inquiries.

So you know, I wouldn't -- I would be, I think -- given everything we know about the seismic business -- foolish to pretend that we are off to the races or that I can guarantee that level of profitability through each quarter.

Can we get to that level of profitability on a yearly basis?

I'm a lot more hopeful than I was six months ago, Geoff.

Your target is 12 percent pretax margins, right?

Ten, roughly, in Q4.

I know it was 10 in Q4 but your target is still 12 percent?

Yes.

That's on a single-quarter level? (multiple speakers).

No -- (Multiple Speakers) -- sustained profitability.

Is that possible in '04?

I'm not going to go there, Geoff.

I don't know.

Jean-Marc would like to add something.

Just structurally, as you know, we reduced the number of vessels this year and that was (indiscernible) in 2004.

We reduced the number of land crew.

We reviewed and impaired part of the portfolio, and that will have an impact on '04.

The last element, as you know, is that we have an increased penetration of the Q-Technology and an increased share of revenue next year.

So all these elements work toward (indiscernible) better profitability.

Terry Darling from Goldman Sachs.

Congratulations on a very strong quarter, Andrew.

I wanted to, I guess, follow-up on seismic from the standpoint of your strategic comments back at the analyst meeting sometime ago and perhaps give us an update as to whether you feel like the business is making enough progress to where it remains in the center of your strategic thinking for the Company long-term, or whether we are still in the "let's see how it progresses" mode?

So, I think I have to, at this point, say that the people in WesternGeco did an absolutely amazing job in '03 of taking costs out of their structure and adapting WesternGeco to a size that basically is applicable to the market and the technologies they want to apply.

I mean, they took out, in a year period, 33 percent of the headcount, which is never a pleasant thing to do.

What are the other key indicators that I have to look at in terms of judging whether or not this improvement is likely to lead to us either confirming seismic as a core part of Schlumberger, or reviewing whether or not it has a future?

That is the progress of Q.

So Q-Marine made spectacular progress in 2003, but not enough for me to say that we've won a battle.

Therefore, the progress that Q-Marine makes in 2004 -- and the signs are encouraging -- is extremely important to the ultimate determination that we make over WesternGeco, but I think we're going to get there.

I also think that some of the results of Q are so spectacular that our customers are not going to be able to ignore them.

I have to say we have done all of that without compromising -- at all -- on Q pricing, which means that our marching margins on Q surveys are way in excess of the 12 percent that I just was discussing with Jeff.

So, my opinion is that we're going to get there but for me to say today we are there I think would be wrong.

That's very helpful.

The second question I had was on the profitability of your oilfield business, Andrew, outside North America.

If we back out the impact of putting the oilfield IT business into the various regions, it does look like you had very strong revenue growth sequentially but that margins were down about 50 basis points sequentially.

I think the area that looks like where you had the biggest impact was in the Europe/West Africa/CIS region where, based on your commentary, it looks like Africa and Europe were down and so perhaps Russia increased as a percentage of the mix there and that's the region for the margin deterioration.

Could you speak to how you are thinking about the oilfield profitability outside North America here this quarter and going forward and perhaps speak to that specific region?

Well, I think that any problems in ECA are essentially limited to the North Sea and the appreciation of the euro and certain other currencies against the U.S. dollar.

While we have a reasonable balance -- natural currency hedge -- on the euro in the North Sea, it's not total, obviously.

You know, the North Sea is disappointing, not only in the UK sector but also my feeling is that until the Norwegian oil industry adapts its tax legislation to a production phase, there's going to be underinvestment in the Norwegian sector.

I think that we are currently looking closely at our cost structure across the whole of the North Sea because we don't see that improving any time soon.

I don't think that we had activity issues in any other part of ECA; on the contrary.

That's helpful.

Jean-Marc, I'm wondering, just as a follow-up there, if you have a currency impact, perhaps either on a sequential or year-over-year basis for the oilfield business in total.

Have you looked at that in that level of detail?

No, we didn't look at it in very much detail.

I think we are roughly in balance.

We have a little bit of an exporter, I think, on the euro but it's really marginal.

Actually, one of the issues on the currency for ECA was revaluations of the Algerian currency, not the euro.

That created, I think, $1 million re-evaluations, which affected a bit the margin.

George Gaspar from Robert W. Baird & Company.

Good morning to all of you, Andrew.

I would like to pursue this WesternGeco just a little bit more.

Could you possibly break down your geographical revenue stream, western/Eastern Hemisphere?

In terms of this momentum, which was very impressive in the quarter, could you highlight how much of that pick-up may have been from offshore as opposed to onshore activity?

Then, maybe how might this mix change, going forward in '04?

I can't do the detailed breakdown of the numbers in the conference call.

What I can tell you is that you have to remember that the land activity drop in Q4 of '03 reflects the fact that we shut down the U.S. land seismic activity in the fourth quarter of '02.

So I mean, there is a drop, which is due to the fact that we consciously shut down an activity.

My feeling is that the recovery in Q4 was very largely Multiclient and as you know, the Multiclient business is very largely a Gulf of Mexico/U.S. land type of business.

Compared to year-on-year, Marine did better in Q4 than it did the year before.

Land dropped dramatically because of the shut down of activity; it was a conscious decision on our part.

Processing was about flat.

Now, going forward, I think that there will be an improvement in seismic activity on land very much largely, as far as we're concerned, outside the U.S.

I suspect that is largely going to be Middle East/North Africa.

I think that Marine, again, will be -- there will be some improvement in North America, probably in western -- Eastern Canada as well, but the bulk of it will be, again, overseas.

One of the things that we know is lining up very nicely is a good summer season in the North Sea, which is very much based on reservoir seismic, or repeat seismic, as opposed to a conventional expiration-type seismic.

Very good.

Thanks on that.

Then a question on your rotary steerable drilling -- how many units actually do you have completed and operational at this time?

Can you give us a benchmark on how you've progressed maybe from, say, a year ago to where you are now and what your objective might be a year from now in terms of units deployed?

We have four or five sizes out there and the total number of units -- I'm not sure I can count that far.

There are a lot of tools out there.

I don't know the exact number, to be honest.

It's not relevant; what is relevant is the number of sizes we have and the contracts that they are employed on.

Then, as I say, you know, the key to this whole industry of rotary steerable and directional drilling as a whole is reliability because reliability is going to eventually allow you to reduce the number of toolsets you have to take to the rig site to guarantee the job.

Kurt Hallead from RBC.

Good morning.

A question I have for you -- I noticed incremental margins in North America in the fourth quarter were substantial.

I was wondering if you might be able to provide a little bit of color on what drove that.

Was it U.S., Canada?

Could you give us some color on that, please?

I think probably the biggest driver for improved margins in the U.S. in Q4 was the improvement in offshore Gulf of Mexico, compared to Q3, where, if you remember, we had a lot of interruptions from tropical storms.

When you have interruptions for tropical storms, you cannot reduce your cost base because you're talking about a matter of days.

Therefore, I suspect that what drove the increase in margins was very largely the offshore business.

When I look at the data over the last few years, I've noticed that there has been a substantial amount of capacity absorbed in the U.S. market.

Also, it looks, on the international market, we're running about 97 percent of the 1997 highs in terms of rig activity.

Andrew, in your view, are we getting very, very close to having some pricing power shift back to the service industry this year?

I think, in the United States, that will depend very much on what happens to the land rig count -- what the increment is this year.

I don't have a good feeling as to what that's likely to be at this point in time.

I don't believe it's as low as some of the surveys that we saw would imply but I really don't have a good feeling as to what that's going to be and I still think that we probably won't know until this winter is over.

As I walked through the office in New York this morning, it was minus 10 degrees Celsius, so I have to believe that there are some heavy draws coming.

Overseas -- yes, I think that we're getting close to the point.

I think that one of the interesting things which we need to track better as a service industry is how much of our work is becoming rigless.

In other words, how much of it is work-over, rehabilitation, production optimization -- which does not necessarily depend on the presence of a drilling rig and in some cases doesn't even depend on the presence of a work-over rig.

I don't think, as an industry, we track that particularly well.

But if we did track it better, we would have more ideas as to where our pricing power was.

In your commentary, you mentioned something about the well completion business and service business being kind of flat to down.

I was wondering if you might able to provide some color on what's going on in that business?

Do you see it improving as we get into 2004?

No.

I think that this was a particular Schlumberger phenomenon in that probably our largest customer on U.S. land -- (technical difficulty).

John Dowd from Sanford Bernstein.

Good morning.

I was hoping you could give us a little bit more color on your wireline business.

In which regions are your technologies enabling you to gain share?

Has demand been strong enough to increase pricing in any of these regions?

Well, I don't think a regional comment is really what's wireline pricing at the moment.

I think the most exciting in wireline today is what we call ABC, which is analysis behind casings, because we now have a suite of tools that allows to make a full petro-physical (ph) evaluation out of whether it's being able to take (indiscernible) and samples in cased wells.

As you know, in all cased wells, there is a lot of bypassed oil and the ability to run, in the casing and identify bypassed oil is a very, very cheap way for customers to be able to recover additional production from their existing assets.

The pricing for ABC is excellent and we are rolling it out in a fairly aggressive manner in most of the mature markets.

So, I can't speculate as to what effect that had on share.

It is a service that is going extremely well, in which the pricing is not an issue.

Is pricing for open-hole logging as stable?

I think yes.

On a worldwide basis, pricing is probably stable.

(technical difficulty) -- business mix of your Russian operations -- does that add or subtract your average margins in that ECA segment?

I think -- Jean-Marc is just checking -- but I'm pretty sure that the Russian margin is accretive to the whole (indiscernible) ECA pretax.

Ken Sill from Credit Suisse First Boston.

Good morning, guys.

I have a little technical glitch there and dropped off, so I apologize if I ask something that has been asked.

Andrew, things are improving in the oil service business and WesternGeco seems to have turned a corner, but I am a little surprised at the big increase in capital spending.

On the numbers you gave us, oilfield is going to be up around 24 percent, Geco up 62 percent.

Could you discuss where you guys are spending money and where you're adding capacity?

I am not quite sure of your number, particularly for WesternGeco.

It's just what you guys had (indiscernible) asked questions in the back in terms of CapEx guidance.

Okay, but that includes Multiclient, right?

No, I think that's just the CapEx number you gave.

Anyway, so you have to remember that, in 2003, we put the oilfield on a heavy diet.

You know, you can do that for a certain period of time.

I'm pretty satisfied that, in 2003, they made a tremendous effort in terms of moving CapEx, sharing CapEx.

But then in 2004, given the technology introduction program, given some of the major, major projects that we know we're going to be on, that we're going to have to open the taps a little bit.

So, where is that CapEx destined?

I would say not a great deal of it is destined for North America.

Latin America would be fairly sizable.

The whole Russia/Caspian/Middle East would be fairly sizable in terms of where those increases are going to be.

Okay, that helps a little bit there.

Then, just as a kind of a follow-on, what are you guys seeing in Latin America in terms of activity or possible activity gains in Venezuela and basically in Brazil?

I think Brazil is fairly solid in terms of -- and Argentina by the way -- in terms of there being activity gains in '04 compared to '03.

I know there's a lot of work planned in Venezuela.

I think, in Venezuela, one needs to wait until it is actually realized before you say it's sure.

I think that we will, as I said -- discussed in an earlier question -- that while the gain of activity in (indiscernible) -- nowhere on the scale of '03 -- there will still be a solid gain in '04.

Then finally, backing interest income and the gain on sale out of the interest and other income implies that MI had a pretty good quarter, maybe almost doubling sequentially.

Can you guys comment on the contribution out of MI?

I don't think that would be appropriate.

We will find out next week.

Thank you.

Bill Herbert from Simmons & Company International.

I got dropped for two seconds.

If I ask a question that was asked, I apologize.

First question, following up on Venezuela just very quickly, is the profitability associated with your Venezuela endeavors commensurate with the rig count?

In other words, is the revenue per rig equation in Venezuela somewhat similar to what it was pre-strike?

I don't know, Bill.

I don't know the answer to that.

I think that our profitability in Venezuela is very much affected by two things.

One is the two very large IPM integrated project management contract (sic) we have with -- in the East, on the precer (ph).

The second is the six barges that we have on the lake, which again, are managed as projects rather than service contracts.

The balance, I really don't know, but I do think profitability as a whole is back to pre-strike levels.

Jean-Marc?

Yes, I was just checking in the meantime.

Our profitability is basically in line with Latin America profitability at this stage.

Great.

Second question -- any commentary on Iraq, Andrew?

I know that there's a lot of uncertainty there with respect to how things are going to unfold, going forward.

The security situation is still challenging, to say the least.

What is going on there. from your prospective?

What are your basic expectations there?

There are two avenues to Iraq.

One is through the National Oil Company; the other is through -- for us is subcontractor at some of the very large construction-type contracts, which have just been awarded and which we are a subcontractor to one.

You know, for me, the real question, Bill, is still whether or not it is safe enough to send crews into the oilfield.

I suspect that, initially, when we do operate, we will probably operate from Kuwait on a day-to-day basis, (indiscernible) morning and in the evening.

You know, I don't have a good feeling as to when it's going to be safe enough for the industry to resume the normal activity.

Ole Slorer from Morgan Stanley.

Thank you very much.

Andrew, I wonder whether you could help us out a little bit on ABC.

You talked favorably about it.

How big a percentage is ABC revenue now of your total wireline business?

What do you see (indiscernible) EMU?

I think you have to firstly divide the market into open coal and case coal.

Case coal, as you know, is probably the fastest-growing part of the wireline market.

Within that, ABC is a young service and therefore, any percentage I announce to you today is not going to impress you.

The point I'm trying to make is it's by far the fastest-growing product and a product with the most potential to obtain pricing leverage in the short-term.

So what do you sort of -- what do you think it could grow to on the (indiscernible) or two-year view?

I'm just asking for some kind of magnitude.

Ten percent of your total wireline business?

I mean, the overall analysis through casing market, yes, could certainly grow to that size.

Today, it's a bit sort of -- (Multiple Speakers)?

Don't push me because I don't know.

I deliberately don't know, that way I can't answer you. (LAUGHTER).

You wouldn't be impressed anyway.

What I can tell you is that the case (indiscernible) and the through casing MBT are extremely profitable services.

Okay.

That's a good enough indication also of what potential(indiscernible).

Just a follow-up question on Q-Seismic -- could you just help us a little bit to understand where the real potential lies?

Is it mostly in (indiscernible) service to do with production, or can it have some implication in, let's say, deep gas in the Gulf of Mexico trying to help the operators find out more about what's down there?

What is the real -- is it purely a development tool, or can it also be, in some cases, an exploration angle there?

You have to remember that Q-Seismic can be processed to the resolution that the customer requires.

In other words, you can shoot Q-Seismic and provide an exploration quality image on 12.5 meter grids.

If he sees a zone of interest, he can refine that down by processing to, you know, 6.125 or 3.675 grids, which obviously gives a much sharper image.

And in certain circumstances -- not all -- that allows Q identify reservoirs that probably would not have been seen on conventional 3-D seismic.

Now, in terms of repeat seismic, 4-D seismic, Q-on-Q, because of WesternGeco's unique positioning and steering technology, the quality of the differential between the original survey and the repeat survey is probably unmatched.

Nobody can do that.

Therefore, these are not huge surveys, which means that if you want to make money on them, you have to charge differential pricing.

I think, more and more, that (indiscernible) -- people are also realizing that the quality of the positioning is such is that where you don't need share, you don't have gas (sic).

On an oil reservoir, you can use (indiscernible) streamer (ph) to do repeat seismic, which obviously -- for the operators -- is an enormous cost savings.

You don't have to have any seabed kit.

So I don't think you can say that Q is one thing or the other; what you can say is that the application of Q in development and in reservoir management is, if you like, at a quality level for seismic that reservoir engineers have not had before.

That's kind of -- most of the press releases you sent out on Q have all been developments and my question was does it have exploration and in particular, in association with the deep gas in the Gulf of Mexico.

I don't want to comment on deep gas because I'm not going to pretend that Q is a solution for subsalt.

We have a lot of ongoing research in that area, as does everybody else, but to say -- I would be wrong to try to sell Q or to say that Q was a solution to subsalt.

Can you highlight a little bit of what you're working on with respect to subsalt, if there are other things you are working on than Q that could make a difference?

I really don't want to on the conference call.

Our last question comes from Kevin Simpson from Miller Tabak.

Andrew, I've got kind of a broad-based question.

Do you think that your large, integrated customers have the people or the capability to go back and kind of do more aggressive exploitation of their existing resource base?

If not, do you think they'll be more open to using ITM (ph) than they have been in the past?

My assumption is ITM is mostly driven by NOCs or in Russia.

I don't think that the major integrated companies today are doing enough to be short of the human resources that they need to manage the portfolio of projects they have.

In fact, in the last cycle -- up cycle -- they did use IPM, but they used it at the margin.

In other words, they used for the projects they were only doing because their activity was at a higher level than their human resources.

Obviously, it was the first thing that got cut back when the cut back on their activities.

So I don't think they are yet at the stage where they would start to need IPM, Kevin.

Second, I was a little intrigued by your North Sea comments, particularly with the idea of maybe a refocus on existing reservoirs.

Can you say -- or is it large integrateds who are driving that, or is it more the independents who -- (Multiple Speakers)?

I think that the North Sea is -- the UK sector is in transition between the major integrators and some independents who, as you've seen, have already had some quite-spectacular results.

This has not happened at all in the Norwegian sector, and it will not happen until the tax laws change.

Therefore, it's just not enough volume to make the North Sea grow at this point.

So no implications on, say, the UK sector -- it sounds like what you're saying is that it is more from the independents -- this stronger season you're looking for for seismic -- (Multiple Speakers).

No.

Don't forget, the major integrateds and particularly the Norwegian companies still have very large reservoirs that they are exploiting, so most of the reservoir seismic I was talking about is, in fact, probably with the major integrateds who have long-term fields that they are still producing in the North Sea.

So that's -- Doug?

Robert, would like to give the details?

Certainly.

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