斯倫貝謝公司 (SLB) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger first quarter earnings conference.

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

Later we will conduct a question-and-answer session and the instructions will be given at that time.

If you should require assistance during today's call, please press star then zero on your touch-tone phone.

As a reminder, today's call is being recorded.

I will now turn the conference over to Vice President of Communications and Investor Relations, Doug Pferdehirt.

Please go ahead, sir.

Good morning.

Welcome to today's first quarter 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 otherwise be posted on our Investor Relations website at www.slb.com.

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

Today's agenda, Jean-Marc Perraud our Chief Financial Officer will begin by highlighting the financial details for the quarter.

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

Finally, we'll take questions from the audience as the entire conference call will be limited to 45 minutes in length, please direct your questions accordingly.

And now Jean-Marc.

Thank you, Doug.

Good morning and thank you for participating in this conference call.

The first quarter earnings from continuing operations and before charges was 47 cents per share, up 2 cents from last quarter and 21 cents above same quarter last year.

All previous quarters being restated for discontinued operations.

Year-on-year Oilfield Services accounted for 13 cents of the 21 cents increase, WesternGeco and lower interest expenses were 3 cents each.

Sequentially the small improvement came mainly from lower interest expenses and corporate charges.

Pre-tax margin of Oilfield Services for the first quarter was 17.9% versus 18.2% in the fourth quarter last year and 15.7% in the first quarter last year.

Sequentially a higher margin in North America with strong performance in Canada was offset by a drop in ECA partly as a result of local currencies reevaluations and a drop also in Latin America due to lower activity in Venezuela.

WesternGeco reported a 10.7% pre-tax margin versus 10.5% in Q4 last year.

Multiclient service sales in the first quarter reached $135 million versus $112 million in Q4 and ended in $108 million in Q1 last year.

The strong sales were driven by the Central Gulf of Mexico lease sale which took place in March.

Net income after minority interest from WesternGeco was $9 million.

The return on capital employed by Schlumberger continued to improve and reached 13.3% in Q1 versus 12% in Q4, well in excess of our cost of capital.

As disclosed in our press release dated April 12, various exceptional charges for total of $152 million or 25 cents per shares were recorded during the quarter reflecting mostly the cost of some refinancing transactions.

As our divesture program are underway, we are applying the cash proceeds to reimburse the financing no longer required.

During the first quarter we sold SchlumbergerSema to Atos, Infodata, our business in Sweden to Ratos and Telecom Billing Software activity to General Atlantic Partners.

All these units were treated as discontinued operations with a net gain for the quarter of $93 million or 15 cents per share.

Also in April, therefore, not included in this quarter results, our Business Continuity units were sold to IBM in a cash transaction.

The cash proceeds of this sale including the sale of some Atos shares during the quarter and, again excluding Business Continuity, amounted to $1.3 billion.

Part of this cash was applied to reimburse $330 [ph] million of sterling bonds which were due 2032 and $38 million of [inaudible] bonds for a total cost of $77 million.

In the U.S. we paid also $500 million of commercial paper and as a result $500 million of interest rate swap associated to it became an ineffective edge and a $46 million charge was recognized.

I should add that in April the swaps were actually bought back.

At the end of March our net-debt dropped below $3 billion in line with our mid-year target.

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

First, capital expenditures including Multiclient service will be around $1.2 billion.

Second, after a $20 million pre-tax charge in Q1 to adjust our support structure, the efforts will continue in Q2 and Q3 with a further $20 million pre-tax charge for the two quarters.

Third, our effective tax rate for continuing operations and before charge will be in the mid-20s or slightly lower.

Our net-debt should be below $2 billion by year end, the main assumption being a successful IPO for Axalto, our smart card business.

As a result, our interest expenses, net of interest income should amount to $160 to $170 million for the year.

Finally, as mentioned last quarter, you can expect by the second half of this year most of the businesses in the segment "other" will be treated as discontinued operations.

This includes Axalto, Electricity Metering, and, of course, Business Continuity.

Thank you and now, Andrew, if you want to come on.

Thank you, Jean-Marc.

Good morning, everybody.

Our results demonstrated a solid quarter of activity reaffirming our belief that E&P spending remains robust in the face of increased demand from China and the United States.

Geographically the strongest sequential growth was seen in Canada, India, West Africa and on land in the U.S. and these gains offset lower activity in Venezuela, the Gulf Coast and the Caspian.

Improving pricing in U.S. land and Canada drove our performance in North America and overall.

In U.S. land the expansion of nonconventional gas markets led to higher demand for Wireline and Well Services while high rig counts spurred market share gains and pricing increases in Canada.

In Latin America year-on-year growth in revenue and pre-tax operating income was fueled by continued demand for large integrated projects.

This was offset sequentially by reduced activity in Venezuela.

We expect the situation in Venezuela to continue to deteriorate in the near term.

Sequential declines in revenue and pre-tax income in Europe, CIS and West Africa region were due to lower activity in the Caspian after exceptional fourth quarter sales of electrical submersible pumps and delayed stimulation activity in Russia.

Weaker market conditions were also experienced in the U.K..

In addition, the appreciation of several local currencies against the U.S. dollar impacted results.

India led significant growth in the Middle East and Asia with a steep ramp up in deep water activity for ONGC, and exploration work for Alliance Industries.

From a technology standpoint, drilling and measurements gained market share in Middle East during the quarter.

Technology highlights this quarter included the introduction of two new members of the power drive rotary steerable family of which one that addresses hostile high temperature markets and the other which is designed for hard rock formations.

Demand grew for Q-Borehole service using the versatile seismic imager to improve hydraulic fracturing monitoring.

Also, for phase watcher multiphase flow meters, particularly in the Middle East where some of the largest orders to date were received.

Also, SenTREE subsea trees in a number of frontier and deep water areas around the world were successful at the back level of deep water completion projects build.

The strength in our completions capabilities, we announced the opening of the second phase in the expansion of a reservoir completion center in Rosharon, Texas.

This site is now home to the industry's most advanced perforating research laboratory and integrated completions testing facility and a custom engineering capacity.

The benefits of this center lie in the rapid design, engineering and manufacturing and deployment of fit-for-purpose completion solutions.

WesternGeco continued to make good progress, and for the second consecutive quarter posted impressive results.

As of the last quarter of 2003, Multiclient sales were a driver resulted from the Gulf of Mexico leasing round together with a second part of a major customer sale that was announced last quarter.

Marine activity was seasonably low; however, we were awarded two Q-Technology contracts in the Norwegian sector of the North Sea for North Kydro [ph] and further work for Statoil on the Norwegian Continental Shelf.

On land five new contracts were awarded for work to begin in the second quarter.

Total revenue for Q in Q1 2004 was double that of Q1 2003.

Looking ahead to the rest of the year.

There is no change in our view that ENP Fundamentals remain strong, driven by continued increases in demand particularly in China and the U.S.A.

However, the usual seasonal effects are by no means absent, and local conditions in a number of markets Venezuela, Nigeria and the UK North Sea to sight some, are likely to restrict investment in some parts of the world.

I will now hand over to Doug.

Okay, Jenny, if you would open the call up for some questions, please.

Thank you.

Ladies and gentlemen, if you would like to ask a question at this time, please press star then one on your touch-tone phone.

You will hear a tone indicating that you've been placed in queue, and you may remove yourself from that queue at any time by pressing the pound key.

Again, if you would like to ask a question, press star then one.

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

Please go ahead.

Good morning, guys.

Good morning, Michael.

A couple of quick ones if I may.

Andrew, if you could go into more detail on what's going on in Venezuela?

Well, obviously, given the political situation there are is some reluctance on the behalf of the foreign operators to commit to investment at this stage, but that's really not, in my mind, the chief issue.

The chief issue is, as you know, they heavily restructured PDVSA last year and the result is very poor drilling efficiency.

It's made administrative things extremely difficult to get achieved at the same time.

I just feel cautious about the capacity of the country to increase activity in the near term.

When you talk about contractual issues, are you having difficulty getting paid?

Is that part of the problem?

We're not not being paid, we're not getting paid at the same rate as we were in previous regimes, Michael.

Okay.

In terms of the restructuring charges, is downsizing that operation part of that?

No.

I think most of that has been done previously.

The restructuring charges we're talking about this quarter is --.

Michael, it's only headquarter and support structures, we're not including any restructuring at field level.

Okay, great.

Last question I have is just looking at the pull on working capital here in the first quarter.

First quarter the last couple of years is generally -- this is in the ballpark in terms of draw on working capital and we've seen acceleration in sequential revenue growth as a consequence of it.

Is there a lot of working capital being consumed here in the first quarter to gear up for IPM projects?

No, truly, in most as you pointed out, it's a bit of a cyclical pull and the first quarter is not very good for working capital for various reasons.

One of them is being all the funding of the various trusts for [inaudible] benefits and profit sharing for the employees which accounts for about $100 million and the rest is account for traditional deteriorations of DSO in the Q1.

Most of the use working capital, the use of funds for working capital were coming from these two items.

Okay, great.

Thanks, Jean-Marc.

Thanks, guys.

Our next question comes from the line of John Dowd with Sanford Bernstein.

Please go ahead.

Good morning.

Good morning, John.

I was wondering if you could discuss your view of supply and demand for the rotary steerable tools market in the North Sea and in the Gulf of Mexico, and specifically, did the reduction in supply by some of your competitors influence the markets at all?

I don't think so.

I certainly don't think in the last quarter there's been major shifts in contractual emphasis, and therefore, we have the tools to supply our contracts and I can't say that I've noticed any reduction in capacity has affected our overall level of activity.

Is pricing still under pressure in those markets?

Well, in the lower end, obviously.

In the high end, deep water all the rest of it, as we've said several times, it is not a price-sensitive market.

It is a reliability- and technology-sensitive market.

So if you wanted me to say, in bidding new contracts in the North Sea is service pricing under pressure at the moment in the U.K. sector?

I would say yes.

In the deep water Gulf of Mexico, no.

And on the U.S. land market you mentioned price increases, can you give us a sense of the magnitude and what product lines are most influences by that?

Well, the most influence is obviously pressure pumping and wireline.

No, I don't think I can really give you a magnitude.

All I can say is the momentum is much, much stronger than it was in Q4.

Excellent.

And, lastly, what portion of your Oilfield's revenues are derived from Venezuela?

Oh, off the top of my head, well, maybe we could look that up, Jean-Marc.

I would say it's about 3%.

Yeah, 3% overall.

3%, 4%.

Okay.

Thank you very much.

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

Please go ahead.

Andrew, could you talk a little bit about how the rest of the seismic business is performing from a profit and loss perspective, if you exclude what's been two really good quarters of Multiclient with very high kind of flow through on the Multiclient sales, and where you are in turning around the rest of that business?

So I would say that, marine lost a little bit of money in Q1 which is not uncommon.

As you know, it's the low season; however, I'm confident that marine will make money for the rest of the year, certainly through the second and third quarters.

Land will sort of break-even and will make money with these new contracts I mentioned.

And DP is break-even and will probably make money certainly in Q2 and Q3.

I think you are quite right to ask the question, Jamie, because it's unlikely -- we're certainly not going to get a repeat of the effect of the lease sale, and therefore, Multiclient going forward, certainly in Q2 and Q3 is likely to be lesser of an influence on WesternGeco's results than it's been in Q4 and Q1.

And do you have a stance, I mean, can you give us a sense of sort of post lease sale, is there a run rate?

Sort of look at what Multiclient was running at, if you kind of start looking at it excluding the lease sale now?

Not really.

Make it a percent of where it was?

Not really, Jamie.

Okay.

Not really.

And then just going back to the issue on rotary steerable.

Yeah.

Can you give us a sense of what your change in reliability has been say over the last year?

If you give us a sense of how that market is changing with the new products.

I think, I'm reluctant to give you a percentage because there are really two ways that you measure reliability.

One is obviously your time between failure for customers, and there I think what I would say is that we make continuous progress.

I can't say we make a big jump, but we make continuing process, because it's not just the tools it's also the systems you put in place and IDNM has been putting in place a massive amount of new preventive maintenance and follow-up systems.

The other element in reliability is how many tool sets you take to the well site.

In other words, what is the confidence your customer has in your service not failing, and therefore, you're not having to take to the well site two or three sets of tools to do one job, ignoring the size problem.

And I would say that in some new markets where they have a high degree of confidence in our reliability, we made pretty astounding steps there.

But it's not generalized yet.

On the Multiclient, your question, I think the running rates -- no?

Would be wrong.

Basically in line with last year.

Okay.

Okay?

Yep, that's very helpful.

Thank you.

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

Please go ahead.

Thanks, good morning.

Good morning, Terry.

Andrew, I wanted to follow up on seismic given the strong first quarter, given the backlog build and some of these other successes on Q. Have your expectations for the profitability of that division for full year not improved versus where you were at the end of the fourth quarter?

I would say that my expectations, yes, they have slightly improved, Terry.

But I am, to be quite honest with you, waiting for the results of two or three Q contract negotiations that are currently underway.

I like to have the customer's LOI signed and in my office before I shout victory.

So I would say that if you asked me that question at the end of Q2, I would probably be much more confident in answering it.

But on the prospects we see today, yes, they have slightly improved.

Okay, fair enough.

I was wondering if you could update us with your thinking on your balance sheet.

Obviously, you're in a position to play some offense now versus a couple of years of playing defense.

Right.

I'm wondering if you could just share with us your thoughts there?

Well, I would rather wait until June the 15th.

Okay.

But we will June the 15th give you a fairly comprehensive view of how we see that, Terry.

Okay.

Maybe that qualifies, then, to be able to ask another question.

Could you give us an update on your outlook for Russia for the full year, obviously, the first quarter was down a bit.

Has that changed your full-year outlook for Russia?

No, my full-year outlook for Russia hasn't changed.

As you well know, there are a number of uncertainties in Russia at the moment.

They don't seem to be affecting activity.

I don't think they will because of the need for them to sustain and increase production.

So, no, I haven't changed the outlook.

And just to confirm, that outlook would be flat to modest growth?

Modest growth.

Thanks very much.

Our next question comes from the line of Jim Crandell of Lehman brothers.

Please go ahead.

Good morning.

Good morning, Jim.

Good morning.

Andrew, I think in your press release you made the comment about lower margins in Nigeria, the Norwegian North Sea and Southeast Asia, presumably lower activity is causing that in Nigeria, but what's causing the lower margins in those three regions?

We didn't say lower margins in Southeast Asia.

Okay.

My mistake then.

Most of the lower margin issues we discussed were either a function of Venezuela, which was basically drilling inefficiency.

And the second group were in Europe CIS and Africa, where it really is the rate, the devaluation of the dollar, not just against the euro, but also against the Russian rouble, the Algerian dinar, all sorts of currencies.

And that we think unless the dollar revalues will be an ongoing effect through the year.

Okay.

Secondly, Andrew, I know in past cycles that Schlumberger has often said that the only place we'll really get pricing improvement is for new technology and will use yesterday's technology to be more price competitive against some of our competition.

Is that sort of strategy changing at all?

No.

No, Jim.

No, I think that we feel very strongly that the pricing leverage is still in new technology, Jim.

Okay.

Last question, Andrew, the president of Baker Atlas just recently told me that in open hole wireline that for 15 of their top 20 customers they gained market share last year.

Do you see yourself losing market share with a number of your biggest customers for '03?

There are two -- I can think of two notable successes they've had, but otherwise I don't see us having lost significant market share.

And certainly not with the 15 top customers.

Okay.

Last question, with most majors and larger independents shifting money out of the U.S. internationally, what do you attribute the strength in U.S. revenue to?

Nonconventional gas, coalbed methane, tight gas and some good technology in hydraulic fracturing.

We're being quite aggressive with wireline case total [ph] new technology.

I can't really tie it down to any one thing.

And pricing, Jim, as I said in the beginning.

Okay.

Thank you very much.

Thank you.

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

Please go ahead.

Thanks, good morning.

Andrew, I'm trying to understood Venezuela a little bit more.

Because I think, if I understood you correctly, you said the main culprit, if you will, for the uncertainty that has arisen and sort of the lack of profitability has been the erosion in drilling efficiencies as a result of all the technical talent by the Statoil Company.

What I'm trying to understand is the rate of change Q4 versus Q1, because that certainly was the case in Q4 as well.

So what has changed fourth quarter to first quarter?

Because on the fourth quarter call I think we were cautiously optimistic about Venezuela, now the tone has darkened.

So walk me through that evolution quarter to quarter.

Well, because I think, probably at the end of the fourth quarter I was still optimistic that despite the lack of technical talents and despite some of the administrative problems that I mentioned earlier, that they would, in fact, gradually improve their efficiency over the first quarter and that has been true in some parts Venezuela but not in others.

And the overall result is still a little negative, and I just worry if they haven't got it together after two quarters, how long is it going to take?

Okay.

Secondly, with respect to Russia, modest growth, first quarter Russian revenues versus first quarter of last year, were we flat, up or down?

Hold on one second.

Let me check.

And then also sort of with Russia in mind, can you give us a sense as to where revenues are running right now on an annualized basis?

Annualized Russia is going to run somewhere over 400 million.

Okay.

And Q1 was in fact up compared to Q4.

Okay.

Versus Q1 of last year?

Oh, yeah.

Significantly up.

Good.

And then lastly, with respect to seismic we continue to sort of take the disciplined approach that we're not going to shoot any Multiclient surveys without any significant levels of prefunding.

Give us a sense of what clients are conveying to you from a prefunding standpoint and a willingness to prefund, I assume the prefunding levels to date have been relatively subdued.

What's the expectation going forward?

Bill, I'm very happy to tell you that I don't know how to answer that.

Okay.

And the reason I don't know how to answer it is because all our boats are occupied on third party through the summer.

Okay.

No, wait a minute.

We do, in fact, think we will do a little Q-Multiclient toward the end of the year and Dalton told me yesterday that he assumes that that will be over 100% prefunded.

Wow.

Okay.

Very good.

Thank you.

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

Please go ahead.

Hey, good morning.

With respect to the seismic situation, you really had a very good quarter on the Multiclient sales, but then again, you mentioned you sold a whole bunch of fully amortized surveys.

Can you shed a little bit of light on whether this was in any form or shape helped by the substantial write-down in the third quarter?

No, actually, that's a good question.

The impact of the write-down last year on actual sales is a single digit.

Okay.

Thanks for that.

I also wonder whether you can help us understand a little bit what's going on in Nigeria in addition to Venezuela, Nigeria seems to be one of the other wild-cards.

And you mentioned West Africa had improved, was it any signs of things improving in Nigeria or was it other parts?

And if not, what are you seeing going forward in Nigeria?

Firstly, what we call western southern Africa, which is the Gulf of Guinea down to Namibia, excluding Nigeria is doing really well, that's what we are referring to in West Africa.

And I think in Nigeria, as you saw, our MPC reduced our cash contribution again last week or the week before, all I can tell you, Ole, is that every time an MPC reduces their cash contribution it does not have a good effect on activity.

Yeah.

So how that is going to shake out, I don't know, but it's certainly not a positive sign for the rest of the year.

So if you look at the overall margins in the Europe, CIS West Africa they came through a little bit below what we had expected for the quarter.

Yeah.

Quite a lot of lumpy items.

You mentioned The North Sea hit an all-time low in the rig count in this quarter.

Right.

At least in my living memory.

But talking to Statler [ph], they appear very, very upbeat about what they're going to do in the Bering Sea going into the summer and the second half of the year, that should be, I thought very high margin stuff, and there seems to be something odd going on the Caspian.

I wonder whether you can kind of --?

No, the Caspian is very simple.

In Q4 we had a huge sale of electrical submersible pumps so it was a product sale that just didn't repeat in Q1.

Okay.

So when you're looking sequentially for the Europe, West Africa, Russia segment going from first quarter to second quarter.

We see a modest improvement of activity for the whole thing.

What about margins?

Obviously, if we have an improvement in activity it will have some affect on margins.

What I don't want you to ignore, because you haven't mentioned it, Ole, is the affect of the devaluation of the dollar against the Russian rouble, the Algerian dinar and the euro, because that is quite a substantial problem and we can't recover that without some change in the currency parity.

It's about 1 percentage point of margin impact.

And you come to regain that gradually by pricing improvements?

Yeah, of course, we do.

I'm saying we can't do it overnight.

Okay.

How long of time do you think it will take before you get back to a reasonable margin in that GeoMarket?

Well, I think the margin is not bad as it is, but I think it depends on where the dollar goes, it depends where activity goes.

But if activity comes as we think, if the dollar does not devalue any further, then by the end of the year we should be back to something perfectly respectable.

Okay.

Thank you very much.

The next question from the line of Robin Shoemaker with Bear Stearns.

Please go ahead.

Thank you.

My question had to do going back to Latin America where year-over-year you showed the best percentage gain in revenues and you commented extensively about Venezuela which appears to be on the 3% number something like $70 million out of the roughly $400 million in revenue.

Could you comment on the gain year on year in revenues as was it mostly Mexico and/or Brazil?

And specifically give us some color on the Mexico and Brazil markets.

No, I think that's certainly by far, way and away the largest element of the improvement year on year is going to be Mexico, because in the period of the second quarter through the balance of the year, we ramped up a lot of the integrated service contracts that we had in that area.

If you look at Brazil, then year on year, yes, we had a very nice pickup, but we also won, I think we actually announced it, Robin, a fairly substantial integrated services project in Argentina towards the end of last year, which is probably now in full swing.

And if you look at the other parts of that, Peru, Columbia, Ecuador has a fairly nice uplift as well.

Basically, the only issue as far as we are concerned is, sequentially, is Venezuela.

Even if you look year on year, Venezuela did extremely well.

Because if you remember this time last year Venezuela was virtually shut down.

Okay.

So it sounds like you're up and running at a much higher level in these other countries apart from Venezuela.

Is there still more to come either in Argentina or Mexico where you're still ramping up?

Yeah, I think there's more to come.

It's going to come at a slower rate than the comparison between Q1 this year and Q1 last year would imply.

Okay.

Thank you.

Our next question comes from the line of Mike Urban of Deutsche Banc.

Please go ahead.

Thanks.

Good morning.

Good morning, Mike.

I wanted to take a different approach on the strength you've seen in Multiclient.

Is there any ability to infer, do you have any hope that the interest that you've seen in the Gulf of Mexico library [ph] sales gives you any hope for the outlook in Gulf of Mexico drilling activity?

I would like, that would be logical.

It's been logical for a while.

Been logical for a long time.

But, we don't see a great deal of sign of it today and also another issue that worries me is there are a lot of rigs particularly jack-ups leaving the Gulf of Mexico.

I'm a little bit frightened that when the business does turn around and people start looking for jack-up rigs, it's going to be a little bit of a constraint because lot of them have shuffled off to Mexico or Qatar.

And in India, obviously, that's another place they went, it helped your quarter but has that reached kind of level of stability right now or is that going to continue to improve?

No, certainly through Q2 it will continue to improve.

Great.

Thank you.

That's all for me.

Our next question comes from the line of Ken Sill with Credit Suisse First Boston.

Please go ahead.

Good morning, guys.

Good morning.

Talking about some seasonality, obviously North America did very well this quarter, nice bump in profits.

How much of a decline do you guys expect sequentially out of Canada?

I'm trying to get a feel for how big Canada is relative to the U.S. because the U.S. looks like it's still getting better.

For us Canada is about 1/3 of U.S. land I should imagine.

Something like that, Ken.

And it's awfully difficult to tell until you bounce off bottom.

So today I don't really have a good -- you don't have a good feel until sort of the beginning of May or middle of May about whether or not the second quarter is going to be bigger or smaller than Q1.

So at this stage I don't know how to answer the question exactly.

You just assume that something would be typical.

I guess to try to dig a little deeper.

The pricing improvement that you guys are seeing, if you're looking at it being pretty strong in the unconventional gas, is that fair to say it's probably more U.S. weighted than Canada?

Yeah.

That would be fair.

Okay.

Wait a minute.

The U.S. pricing effect in unconventional gas is a correct statement.

During the first quarter in Canada we had really good pricing because of high activity levels.

Okay.

So it's just hard to parse those two out.

Yeah.

Yeah.

And then looking at the second half, the deep water, we still think that's something that's going to grow.

You should see a lot of stuff actually getting completed as you move into the second half of this year and into '05.

Are the margins on the completion business for you significantly different than from some of the early part of the well construction operations?

Well, you never know the margin on a completion until you finish.

Potentially they should be at the same level, but, you know what it's like running a big completion, you have to wait until it's over before you claim victory.

Potentially, yes, they should be the same.

So that shouldn't see a change.

No.

And then finally, on the interest rate guidance, is that net interest excluding the $73 million for the --?

Yes, it is.

Okay.

Thank you.

Our next question comes from the line of Mark Ernest with Merrill Lynch.

Please go ahead.

Yes, good morning.

Good morning.

I wanted to ask about E&P spending, you, obviously have a pretty robust outlook and I think last quarter you talked about the national oil companies primarily driving that.

Do you see any change in the behavior of the majors that would indicate a second half pick up?

No.

No change?

No.

Okay.

And then with regard to integrated project management, I just wondered what the trend in the backlog looks like, you mentioned a new project in Russia.

Yeah.

You mentioned the one in Argentina last quarter, can you talk about what's going on in that?

We haven't won any mega projects this quarter, we've had lots of small ones.

And I don't think you'll see anything on the scale of Mexico probably until the second half of the year being added to the backlog.

There is a lot of smaller ones taking place.

When I say smaller, I'm saying that they're not in the hundreds of millions of dollars.

Thank you.

Our next question comes from the line of Kurt Hallead with RBC.

Please go ahead.

Yes, good morning.

The follow-up question I have for you was on the currency, you mentioned a 1% margin impact.

I wanted to clarify whether that was total corporate, or whether you were talking specifically the Europe, CIS, West Africa --?

I was talking specifically ECA [ph] Europe, CIS, West Africa.

Okay.

And were there any currency impact whatsoever in Latin America?

Nothing significant.

Nothing significant.

Okay.

Andrew, you went through Nigeria.

You also talked about Venezuela, can you give us some color on the prospects for the North Sea, is it a similar situation as the Gulf of Mexico or is there some ray of hope there?

I think of the Norwegian sector, Ole Slorer mentioned, yes, there's considerable hope that you're going to see the rig count increase through the summer.

Unfortunately I think the U.K. sector of the North Sea has still not made itself attractive enough for the independents to move in more than they have already.

Therefore, I suspect that we're not going to have a very exciting summer in the North Sea.

Okay.

I've just got one follow-up.

In terms of pricing, a question was asked a little bit earlier in terms of new technologies versus old technologies.

Has there been a cultural shift internally at the organization where the operating people are more driven now by EBITDA margin than maybe market share that may have been prevalent in the past, in terms of compensation-based bonuses, et cetera.

No.

It's a balance.

We haven't -- since we introduced the notion that a portion of the bonus be based on the use of capital last year, we haven't changed the scheme that much.

Market share against price is, as somebody described earlier, it's very old technology we are quite happy to use it to win market share, but we will absolutely not discount our new technology for the purposes of market share.

I understand.

Finally, I think on the last quarter you mentioned some sustainable level of interest in Multiclient seismic.

We've kind of gone over a lot of topics on that.

My general sense based on your conversation is that you still see some sustainable level of interest in seismic information for the year?

Yes, but what I wanted to sort of get across is, I don't know where it is compared to Q4 last year or Q1 of this year because of the exceptional items in those two quarters.

Understood.

Thank you.

Our next question comes from the line of Jim Wicklund of Banc of America.

Please go ahead.

Good morning, guys.

Good morning, Jim.

The Smith MI joint venture stand still agreement expires in July.

Is there anything we should expect to see from that or is that just a deadline that rolls over that nobody notices and how happy are you at the MI joint venture?

I'm not sure what you mean by the stand still, Jim.

But I don't see any change in the relationship upcoming.

And are we satisfied with the relationship?

Absolutely.

It's one of the few joint ventures I've been involved in where it's in the interest in my mind of both parties to continue because it's win-win.

Smith MI uses us for technology.

They also use us as a distribution channel, not just geographically but also for integrated product management.

And we get access to fluids and fluids engineering, which when you're drilling wells on incentive, as we very often are in IPM, is a very important part of the equation.

So, for me certainly it's a win-win situation.

Is it better to own a part of the joint venture or the whole thing?

I don't think, I'm not going to comment on any idea what we might do anything, but I think we are happy with the joint venture as it is.

To switch topics to WesternGeco.

You had mentioned a while back that WesternGeco wasn't generating 12% or so full cycle returns, there might be rethinking WesternGeco.

Yeah.

Where do you stand on your return run rates today on Western?

As I think we mentioned, we're at 10% pre-tax this quarter. 20% operating income this quarter.

There were three elements to the thinking around WesternGeco.

One was getting the cost structure right.

We've done that.

We're not going to remove any more capacity.

We feel fine with the capacity we have.

The second was the state of the seismic industry which we really can't do much about unless the others decide they want to consolidate.

And the third was the success of Q. As I mentioned in my introduction, Q revenues in Q1 of this year were double what they were in Q1 of last year.

I think we're going to have a very strong Q season, particularly in Q3 but also in Q2.

And so if the results come through with that and we get close to the 12%, I'll be a lot less concerned than I was when I made those remarks which was in March 2003.

Good.

Good.

Okay.

And last, Andrew, on Mexico, you and some other companies were bidding for some offshore turnkey which I believe is somewhat new.

Yes.

Does the offshore have the potential that you've seen so far onshore?

Geologically, you mean?

In size of contract or what?

Size of contract.

Business wise for you guys.

I think they will start smaller than they did on the onshore.

Don't forget we're in year seven of Bergas [ph], it's huge.

And Chicontepek [ph] is a huge land field, so I doubt they would start with the same size of contract offshore as they did onshore, but it still be a good business.

We do, in fact, manage one or two already offshore.

As their individual rates go up, it doesn't get on the radar screen.

Okay, Jean-Marc, thank you.

Thank you, Andrew.

Jeanine, we have time for one more question.

Certainly, and that will be from the line of George Gaspar with Robert W. Baird.

Please go ahead.

Yes, good morning.

Good morning.

Wish you continued success in your redirection to the oilfield.

Thank you.

The first question I have here is on your interpretation or thought on possible growth measurement in terms of seismic data opportunity for the deep water offshore West Africa Nigerian market going forward beyond the mid-year period.

Growth measurement, George, you mean?

Yes.

Well, basically how do you see your opportunity?

In seismic?

Yes.

I don't think that West Africa, South, Angola that sort of thing, is going to be a huge opportunity for seismic in the short term.

And in Nigeria, I think it's going to be very much company by company.

There are some companies who are in fact looking at Q to try to get better definition of some of their deep water horizons.

We haven't necessarily come to an agreement with them yet.

I don't see why it would be stellar in this summer, George.

Okay.

And can you tune your thought on the Company's posture related to possible pricing improvement and the stimulation services area?

Yeah.

We think that the market is now in a situation where we can aggressively pursue price increases on individual renewals or call out work here.

We think the whole the climate for pressure pumping pricing in North America has improved considerably in the last quarter.

Okay.

And then lastly, this apparent break through you've had on seismic data acquisition system in the well bore and the subsalt interpretation in the Gulf, can you describe a little bit of the improvement that that system is giving to the interpretation site?

Well, I don't know how you heard about it, George, but I'm certainly not prepared to comment.

Unless you're talking about just the vertical.

Are you talking about the Q-Borehole?

Yes.

Oh, sorry.

Well, I think that that's more a question of the operators realizing that when they do massively offset vertical seismic profiling, they can image the salt wall, and therefore get a much better picture of the overall shape of the reservoir.

We did a couple of huge VSPs last year for a major customer in the Gulf, and I think you'll see us do several more this year.

If you like the shear size of the survey, coupled with the quality of the vertical seismic imaging tool and also, very importantly, coupled with the ability to process it rapidly enough for the client to be able to use it, that provides them with a much better estimate of where the salt wall actually is.

Okay.

Does this have a measurement of opportunity for improving the confidence factor for deep horizon drilling?

Q, not Q-Borehole, no.

Q-Marine, yes.

I think deep horizon drilling -- yes, it does.

You're quite right.

It does, in fact have some help in proving the degree of confidence.

You're quite right, yeah.

Okay.

Thank you very much.

Thank you all for attending today's call and your thoughtful questions.

Jeanine will now provide closing details.

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