斯倫貝謝公司 (SLB) 2004 Q3 法說會逐字稿

Good morning, good afternoon, or good evening, and welcome to the Schlumberger earnings conference call.

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Well, with that being said, let's get right to this quarter's agenda.

Here with our opening remarks is Schlumberger's Vice President of Communications and Investor Relations, Mr. Doug Pferdehirt.

Please go ahead, sir.

Thank you, Brian.

And welcome to today's third quarter 2004 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 discuss are contained in today's press release or will otherwise be posted on our investor relations website, which can be found at www.slb.com.

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

And now, today's agenda.

Andrew Gould, Chairman and Chief Executive Officer, will begin by providing an overview of the second quarter.

Then Jean-Marc Perraud, our Chief Financial Officer, will add additional commentary on the financial results.

Finally, we'll take questions from the audience.

As the entire conference call will be limited to approximately 45 minutes in length, please direct your questions accordingly.

And now, Andrew Gould.

Thank you, Doug.

Good morning, everybody.

It's been another quarter of solid progress in almost all areas, as the industry reacts to the need to add more capacity in response to strong demand and very strong commodity prices.

Within North America, U.S. land and Canada was strong both sequentially and year-on-year, as demand for new technology continued to grow, and as capacity limitations drove pricing improvements, particularly in well services where pricing showed a double-digit increase over the same period last year.

Strong natural gas demand is driving activity in non-conventional gas reservoirs, for which Schlumberger's technology portfolio is particularly well adapted.

In Latin America growth was strong in the south, with Brazil showing record revenues.

IPM saw increased activity in Ecuador, with contracts on a number of wells for a number of clients.

The IPM well construction solution is, in fact, gaining more and more acceptance as a standard practice in the country.

However, within North and South America, 4 events negatively impacted our performance.

First, the very long hurricane season in the Gulf of Mexico disrupted operations for a total of about 10 days during the quarter.

This and general wet weather conditions cost us about 2 cents pretax.

Second, some self-inflicted damage on 2 IPM well construction projects in the Gulf of Mexico and in Mexico cost us 3 cents pretax.

We have already looked at what happened on these 2 projects, and the root cause in both cases was a failure to observe well-established procedures.

IPM has drove more than 23.8 million feet of hole, over 7,000 wells since 1995, so these were not beginners errors.

We have taken the appropriate actions, and I'm confident that the same errors are unlikely to be repeated.

Thirdly, reduced level of drilling activity at Pemex slowed revenue in Mexico at the end of the quarter.

And fourthly, we are still experiencing delays on contract renegotiations in Venezuela, and during the quarter 3 of our lake barges were stopped for 2 months.

In Europe, CIS, and Africa, year-on-year revenue increases were driven by Russia in excess of 50 percent, the Caspian, West Africa and Nigeria, who are all above or around 20 percent.

Sequentially, Russia, Nigeria, and continental Europe were all strong.

Margins suffered due to the industrial action in Norway, and the cost of redeployment of equipment from new customers to other customers at the very end of the quarter.

Our rapidly expanding customer base in Russia has enabled speedy reassignment of most of the to other operations.

Middle East and Asia reported excellent results.

The slight sequential decline in revenue was accompanied by an improvement in margins, due to more favorable revenue mix of products and services.

Activity remains high to enable the key oil producers to maintain their current high levels of production.

Technology fuel growth was seen across the segments and around the world.

The commercial introduction of the Pressure Express well line tool in North America is the first of a series of new well line technology deployments that we'll be seeing in the market over the next few quarters.

This tool builds on the accuracy and reliability of previous formation pressure testing tools, and on the high efficiency of the Platform Express Triple Combo Well Line suite.

The result is a fast, easy to deploy tool that acquires pressure data much more rapidly than conventional well line pressure testing tools.

It's particularly suited to mature fields and to reservoirs with low mobility hydrocarbons, where pressure measures have always been a challenge in the past.

Industry acceptance has been excellent, and pricing is much higher than traditional well line formation pressure tools.

As the industry prepares to meet the challenge of adding new production capacity, as well as sustaining production from existing reservoirs, our end customers are increasingly facing shortages of qualified resources to execute all their work programs.

As a result, we are seeing increasing levels of interest in using IPM for both well construction and production enhancement projects, with all types of customers in all areas of the world.

WesternGeco had an excellent quarter. 18 months ago we set them the goal of reaching a return on sales of 12 percent.

We said it would be tough, but their third quarter results fell only just short, and I'm confident that even this figure will soon be exceeded.

All business lines showed improvement, with the exception of land, as contracts came to an end in Malaysia and the Middle East.

Market acceptance of Q-Technologies continued to accelerate with revenue more than doubling sequentially, and almost tripling year-on-year.

During the quarter, several tests of the Q-Land system in the Middle East yielded very promising results.

Driven by these successes, particularly in marine, we announced plans to equip a fifth vessel with Q-Technology.

Our activity outlook for the coming quarters remains very positive, as the fundamentals of supply and demand mean that commodity prices remain strongly biased towards the upside.

Thank you, and I will now turn it over to Jean-Marc.

Thank you.

Our third quarter earnings from continuing operations and before charges were 52 cents per share, up 4 cents sequentially, and 16 cents above the same quarter last year.

Sequentially, WesternGeco and lower interest expenses contributed 2 cents each.

Year-on-year, WesternGeco accounted for 6 cents, oil field services for 3 cents, and the rest, seven-tenths, came from lower interest expenses.

Pretax margin of oil field services for the third quarter was 16.9 percent, sequentially down from 17.9 percent, and year-on-year from 17.7 percent.

Sequentially and by segments, the highlights were as follows -- For North America, pretax margin was 15 percent, down from 16.1 percent due to the poor weather conditions in September, which had a negative impact of about 1.2 percentage points on the margin, to a loss on the IPM well construction project in the Gulf of Mexico, mentioned earlier by Andrew, and these events were partially offset a strong performance in Canada.

Latin America experienced a sharp decline in pretax margin from 14.7 percent in the second quarter, to 10.3 percent this quarter, mainly due to Mexico, with lower than anticipated activity for Pemex and some issue with an IPM contract, mentioned also by Andrew, and which has since been renegotiated.

This year the Europe-Africa CIS unit pretax margin declined slightly from 16.6 percent in Q2, to 15.9 percent in Q3.

UCOS slowdown, especially in September, and the strike in Norway, accounted for approximately a 1 percentage point negative impact on the margin.

This was partially offset by strong performance in Nigeria.

Middle East-Asia pretax margin improved from 25.3 percent, to a solid 26.9 percent with a favorable revenue mix expected to continue.

Overall for oil field services, we estimate that the pretax margin this quarter was adversely affected by more than 1 percentage point, due to various issues mentioned.

WesternGeco pretax margin improved sharply from 5 percent in the second quarter to 11percent, with strong vessel utilizations during the quarter and higher Q revenue.

Return on sale for WesternGeco was 9.5 percent with a low effective tax rate due to a favorable country mix.

Net income after capital charge was positive as return exceeded the cost of capital for WesternGeco.

The effective tax rate before charge for Schlumberger as a whole was 19.4 percent, below our previous guidance of mid to low 20s.

WesternGeco accounted for approximately a 2 percentage point sequential improvement.

The return on capital employed by Schlumberger continued to improve and reached 17.1 percent in Q3. 2 exceptional charges for a total of 13 million, or 2 cents per share were recorded during the third quarter, one for patent infringement settlement and the other one for termination costs in Europe .

A gain of 21 million, or 3 cents per share, was booked for discontinued operations, mostly as a result of the sale of our residual holdings in Acsaldo (ph).

At the end of September, our net debt dropped to $1.67 billion, reflecting first a free cash flow from operations of $269 million.

Second, $349 million of proceeds from divestitures, offset by a $249 million accelerated funding to our U.S. pension plan, and 237 million stock buyback.

As you may recall last July, the board of directors announced the share buyback program of up to 15 million shares to be acquired in the open market before the year end 2006.

During the third quarter, we bought 3.8 million shares, 25 percent of the total program, at an average price of $61.96.

Now to finish on guidance for the rest of the year, first we expect the effective tax rate to remain in the low 20s.

Second, our CapEx, including multi-client service for the year will reach $1.3 billion.

Thank you, and I will now turn the call to Doug.

Thank you, Jean-Marc.

Brent, if you could open the lines for questions, please.

Indeed, I would be happy to. (OPERATOR INSTRUCTIONS) Terry Darling, Goldman Sachs.

Wanted to follow up on the summary of the impact of the various items, Andrew.

Yeah.

About a percent impact.

If you could step through your expectation for the timing and the resolution of some of these items.

First off and second off, I think if you could just speak to how you're looking at the profitability expectations for the IPM business overall going forward.

Is there nothing in here that we ought to interpret as source of scepticism on your IPM strategy from a profitability standpoint going forward?

Okay.

So in terms of the end result items going forward, I would deal with 3.

Okay.

Firstly, Pemex, slowdown in activity.

I don't anticipate any change in that before the end of the year.

I think it will remain slower.

And I don't have any visibility today on what Pemex is going do with their spending in 2005.

So slower activity in Q4, really no good visibility on 2005 yet.

Secondly, Venezuela.

We are in the middle of a contract renegotiation, which is very delicate and very long.

We will do our best to get it resolved by the end of the year.

Thirdly, UCOS.

We made a conscious decision to remove equipment from UCOS because we were worried they would not be able to sustain activity, and therefore we were anxious to move the equipment to other customers before the Russian winter set in.

So, that's why it all happened at the end of September.

We have had no issues replacing those frac fleets with other customers.

Is that-- those are three ones that are ongoing if you like.

The Norway strike as well, I think?

Oh, the Norway strike.

I'm afraid that's going to last until mid-November at least.

The trouble is this is a frac strike on the floaters at the moment.

It doesn't -- so it affects activities like wire line drilling and measurements, you know?

The problem is, it doesn't affect Norway's production enough for the government to get involved, so unless the strike spreads to the fixed platforms, it's likely to go on, I think, until sort of mid-November, or something.

Okay, and the -- your view on Russia is that that is profitability ought to be recovered in the fourth quarter?

Pretty much.

Yes.

And in terms of the IPM profitability overall?

Overall, IPM profitabilities, the guideline is very clearly that we do not do project work, that dilutes the overall Schlumberger financial metrics, and that's excluding the segment profitability.

I'm talking the profitability on the IPM project, itself.

Geoff Kieburtz, Smith Barney.

Couple of questions, maybe for Jean-Marc.

The tax rate, just to be clear here, you're talking about low 20 percent for the fourth quarter.

It was a little ambiguous in the FAQ, whether that was a full year guidance.

No.

It's for the fourth quarter.

Okay.

On the, the CapEx.

Again, a clarification.

The FAQ talks about 1 billion 60, and 150 million for WesternGeco.

I thought you said 1 billion 3 consolidated there.

Consolidated, I think it comes to 1.270 if I remember well.

So it's a rounding.

Okay.

That is an increase.

You know, we saw evidence of that in the third quarter CapEx.

Can you give us a little bit more understanding about what's driving the CapEx increase, where is it going, and why the change?

Yeah, let me try to answer that, Jeff.

A lot of the CapEx increase you're seeing now is for programs for 2005.

And, you know, we're starting to have visibility on quite a few programs where we are going to be short of equipment.

One of the reasons that we're accelerating it a bit is, supplier lead times for a lot of basic products are getting very long.

So we don't want to get caught without equipment for projects in the second quarter of next year.

Can you be any more specific about -- maybe by product line, you know, where that's particularly being seen?

Drilling and measurements in wire line.

Okay.

Okay, and then the depreciation and amortization.

Is the run rate that we-- is the third quarter a run rate that you expect to sort of persist?

Well, Jeff, there is nothing exceptional in Q3.

So I would think, yes, that should persist.

Obviously as CapEx increase, it has marginal impact as it's settled in, but by and large that, should be same running rate.

Okay, and the pension payment, can you elaborate a little bit on that?

Well, pension payment is basically, was a little bit above what we are scheduled, we're scheduled a payment of around $150 million.

We did a bit more.

Frankly, one of the consideration was to avoid payments to the PBGC of $4 million.

And I considered that if we could improve the funding of the pension, and avoid these insurance payments, which was around $4 million, it was probably the right thing to do.

Okay, and my last question is on the Middle East-Asia, you talk in the release about the initiation of some favorable projects in the Gulf.

Can we, you know, conclude from that, that you expect the very strong margins in that area to increase further as we go over the next several quarters?

I don't know.

It's-- the trouble is that margin at that level is very dependent on the service mix, Jeff.

Yeah.

So I wouldn't be surprised if it fluctuates up and down, but around that level.

James Stone, UBS.

First of all, can -- Andrew, you talked about domestic well servicing pricing being very strong in the quarter, up double-digits.

Then you also mentioned the impact that, you know, product and supply costs are starting to have.

Yep.

Can you kind of balance that out for us as you look forward.

Do you think that you still expect pricing momentum to be strong enough to outweigh those impacts, and see further improvement in margin?

Or are we starting to see incremental margins come down to a much lower level?

No, I don't think that costs-- still pricing momentum.

I think we just wanted to put people a little bit on notice, that there is starting to be considerable cost inflation in the system.

I don't think it's-- if you are saying would-- are we running out of momentum next quarter?

No.

Is it going to be much tougher next year in North America?

Yes.

Okay, and then I guess I want to come back to, I know there were obviously a number of issues that affected margins in the quarter, which you summed up as 1percent.

But I guess if I just go back over the last couple quarters, the general trend, you know, since really the fourth quarter of last year has been, you know, kind of declining OFS margins in an environment where I think we all would have expected margins to be better.

And I'm just trying to square how you see, you know, the profitability of the business, the margins of the business going forward, in an environment where you are posting pretty good revenue gains, but don't seem to be bringing as much to the bottom line as maybe we would all expect at this point in the cycle.

I think that in the last-- I'm not worried about Middle East and Asia one little bit.

In ECA, we are largely through the worst of the dollar devaluation, which was quite expensive over the last 4 quarters.

In ECA, we are starting to see activity pick up in some markets where, you know, the low activity hurt quite a lot.

I'm talking particularly about UK, Norway, and Nigeria.

So we've seen Nigeria pick up.

I think we'll see UK get better.

Norway, if you couple the strike with the fact there's not any real incentive for people to do much, particularly in the traditional provinces, I'm not sure we will see a pickup.

So in ECA, I think that next year will be a much easier year for ECA than this year's been.

And in North America.

North America, I think things are getting a lot better.

In Latin America between the Pemex drilling slow down and resolving our problems in Venezuela, there is no doubt that the coming quarters will be better.

Will they be as good as they should be?

I don't know yet.

And my last question just goes back to this issue with Mexico.

Can you just give us a little bit more insight into why activity has slowed down in Mexico as we've come in here to the end of the third quarter and into the fourth quarter, and where is it -- is it your Burgos, is it offshore?

I'm just trying to understand where this slow down is coming from.

Certainly, it's largely in the north.

Certainly, I don't think it's Burgos for one minute.

Some of the cuts are not in our IPM activity at all there in the traditional Pemex rigs.

I think they are reevaluating the value of some of the incremental production they are trying to achieve, and, you know, they are taking a breather.

Michael LaMotte, J.P. Morgan.

Andrew, could you go into a little bit of detail on the actions that were taken to avoid or reduce the risk of IPM losses in the future?

You sort of --

Well, let's be clear, let's try to be clear.

We're talking about 1 IPM contract in in Mexico that was not with Pemex.

In that case, it is quite clear that our people did not go through the normal procedure of evaluating the drilling risk properly, and signed a contract in which they took more risks than Schlumberger would normally take.

So we have firstly been able to persuade the customer that it was not a good idea to be in a lose-lose situation, and therefore renegotiate the contract.

We've-- and we have absolutely reinforced, in no uncertain terms to every geo market in the world, that signing an IPM drilling contract without -- or production contract for that matter -- without a proper technical and operation risk evaluation is totally a life-threatening activity.

And secondly, in the Gulf of Mexico, it was a straight failure to observe very classic drilling procedure.

So-- and that, you know, is to some extent, being sure that the right people from IPM are in charge, the right people are on the ground.

And I think the message has gone home and we have made some changes, which make me comfortable that going forward, we won't have the same problems.

I would just stress one more time, Michael, we're talking about 2 wells out of the 7,000 they have drilled in the last 7 years.

Yeah, I guess what I was getting at was how complex the issues were, and they sound very simple.

They are.

No, no, no, this is not rocket science.

This is observing basic procedures.

Okay.

I sort of asked the question within the context of, you know, your comment about challenging the business model.

Oh, yeah.

It's not --

No, no.

Certainly not the issue?

No.

Okay.

It seemed like in the third quarter underabsorption of the asset base was an issue with a lot of movement and dislocations.

As you look into the fourth quarter, Andrew, some of it's obviously going to, you know, has carried out.

I mean the Gulf of Mexico, for example, there's a little bit of spillover into October as activity slowly ramps back up.

You mentioned Norway's still an issue.

Yeah.

Russia's still really -- Where are we going to see the greatest change in terms of seeing an improvement in absorption and utilization of your fixed assets in Q4 versus Q3, do you think?

I think you will see-- it's very difficult to say for Russia, because we're going into winter and there is always a natural slowdown.

It's not necessarily less equipment working, but because of weather conditions, equipment gets used a lot less efficiently than it does in the summer months.

So Russia, I can't be very accurate.

In the case of Norway, I mean, to be-- you know, it's such a long strike.

We're moving assets away from Norway at the moment.

In the case of Mexico, you will see a much better quarter in Q4, because we've already gone through, at the end of this quarter, a lot of the actions we needed to do to readjust our cost base to a new level of Pemex activity.

So, you know, the Pemex activity, you know, Mexico will not be as good in Q4 as it's been in previous quarters.

But in terms of profitability, it will be a lot better.

Okay.

So then, you know, the only place that I can't really give you a very accurate prediction today, though our overall activity is improving very significantly, is what the outcome of the renegotiations in Venezuela is.

Okay.

One last question, sort of along the same lines.

As you look at North Africa, (inaudible) and Libya obviously are going to be big in '05, how much sort of anticipation has been done-- you mentioned CapEx.

But in terms of moving people and equipment, is-- could we expect as the rig count goes up, that you're, you know, that the incremental margin will be there as well, that movement costs and people costs are not, are not going to be coincidental with that kind of--

I think that a lot of--so in Libya, I think there are 2 things.

One is that, you know, we-- seismic is starting.

We have won a couple of seismic jobs recently in Libya.

Serious increase in drilling activity, I don't think is until the second half of next year.

If-- even that may be a bit early, Michael.

Okay.

What has happened this year, of course, is that we were previously operating under a technology embargo because of the-- but now that that embargo has been lifted, we are modernizing our technology in Libya at a fairly rapid rate.

So Libya does have a fairly high CapEx at this point in time.

John Dowd, Sanford C Bernstein.

I assume that you track information about your pricing fairly precisely.

I was wondering if you could share with us how much your average pricing is improving in North America and in the international regions respectively.

Well, as we said in the-- I just said in my comments, well services pricing, compared to the equivalent period a year ago, has increased in double-digits.

I don't think that, for basic services in the other segments in the United States, we have really good pricing traction at the moment, because there's still plenty of capacity.

So I would say it is slightly up, but nothing significant.

If you look at the overseas market, I would say at this point in time that pricing is neutral to up for standard technology, and strongly up for new technology.

And I do think we are beginning to get traction on '05 contracts that we're bidding now, but I can't say I think that it's been significant up until now.

Except perhaps in certain parts of, in certain countries where big projects are being undertaken.

You also mentioned cost inflation and it sounded like from what you said, that the cost inflation you're seeing is really centered in the U.S. so far.

I was wondering why the U.S. is more subject to cost inflation than the international markets.

Because it's closer to capacity on the one hand, but the cost inflation I am talking about is also a lot to do with our raw materials.

I mean, you know, the cost of steel has, you know, increased somewhere between 50 and 100 percent in the last year.

And while we do have long-term supply contracts for steel for a lot of the things we do, when they get renewed, they are going get renewed at much higher prices.

And this is not something unique to the oil industry.

It's generally true.

No, no, I understand cost inflation is occurring in the services.

What I was trying to understand was why the U.S., why you were seeing more cost inflation in Schlumberger's costs in the U.S. business than in the international business.

Is it more-- is steel a larger component of your costs or are the raw materials--

No, the well services in the United States buys a lot of product, and that product has been a lot tighter in the U.S. than it is overseas.

And lastly, you mentioned several items that, in aggregate, reduce operating margins by about 1 percentage point.

Without these items, therefore margins would have increased about 10 to 20 basis points in a year--

That's correct, yes.

Excluding the reversal of these items, what kind of margin increases do you expect going forward?

Well, I'm sorry.

Going forward, what do you mean, in Q4 or next year, or what?

Over the next 12 months.

I mean if we exclude the reversal of Norway, and the moving assets around from UCOS, and the hurricanes, and Venezuela and Mexico, kind of look through that, it looks like margins were up about 15 to 20 basis points on a year-on-year basis.

Yes.

Is that a run rate that we should expect going forward or should we expect--

I think that as I said in response to an earlier question, I think that the Middle East and Asia will, depending on the product and service mix that they have in any one quarter, fluctuate around the level that they are.

I think that Europe, Africa, CIS overall will do better than that, better than the 15 to 20 basis points you're talking about in '05.

And in North America, I think there will be-- it will be more difficult to increase margins next year, unless there is a sort of strong resurgence of activity offshore.

Jim Wicklund, Banc of America Securities.

Some clarification on the IPM business.

You were talking about how you won't sacrifice the overall margins for IPM work.

Right.

In Ecuador you're doing project management, well engineering, well site supervision, all related construction.

It would seem to me that since you're doing everything including the people, it would be harder to get the same margin on people, as like pressure pumping.

So just to clarify, because, you know, a lot's been made of your revenue increase due to IPM, will the overall IPM margins be as high as like the historical, like geographic margins for the particular regions?

Well--

And will your work in Ecuador, your IPM project in Ecuador, will it generate as good a margin as you have traditionally generated --

From the segments in Ecuador?

Just on a geo market basis--

Yes, yes, yes.

Okay.

I mean don't-- you know, there is no-- this is not--

I know we're being general here.

No, you can't generalize.

I mean if people asked us to supply-- if they want to rent drilling engineers or rent well engineers or whatever, and we have to do it, we'll do it.

We much prefer to do the project ourselves.

So you see all variations in this model.

The point I tried to make earlier is that we are not bidding project work that will dilute the overall metrics.

Either at the geo market level, or at the Schlumberger level.

And that-- and I exclude from that the segments, because the segment profitability is something we have anyway, right?

Okay.

That's very helpful.

I appreciate it.

In WesternGeco, you talk about the Gulf of Mexico data sales and the cost associated with it, which gives you an operating, or a gross margin of about 31 million.

Yeah.

And you reported 32 million for the segment.

How much of Western's profitability in the quarter were the data sales?

I mean should we assume that it was basically all?

No, no, not at all.

Actually you have to be careful with the cost of sales.

Right.

That's why I needed the clarification.

-- missing R&D, missing G&A, and actually the cost of the profit from this, from the multi-client sales, was bottom line with the last quarter.

So it's actually not the major part of the profit of WesternGeco this quarter.

Major part came from marine.

Okay, and I understand that the marine's getting tighter as the fifth boat that you're outfitting with the Q system, will that be one that's going to Canada?

No.

I don't think it's specifically-- I mean the way we did this, Jim, was to say to Dalton, when you can line up a string of contracts that justify a fifth boat, we might consider building one.

So now he's back to us with a string of Q contracts.

We're going to do the conversion.

Okay, and you talk about how 56 percent of the data sales had no net present value.

At what point do you reevaluate how many times you depreciate a data set, because one would think in this post-Enron accounting days, that the accountants would kind of over time, try and narrow the data sales such that you, it's harder to have 56 percent fully depreciated data sales in a quarter.

I don't think that-- doesn't have to do with Enron, as you know.

I think we discussed many times the accounting for the multi-client, that we believe we are in the fairly conservative side on it.

I think, as you know, basically we-- if multi-client survey is not sold over 4 years, it's still end up being fully depreciated.

So there is no-- the other factor is obviously, that since last year we, by and large got out of the multi-client sales business unless it's extremely well prefunded.

So we don't have that much coming into the portfolio.

So it's kind of natural that right now the sales are, sales of survey is being by and large, fully depreciated.

Because we don't renew the portfolio very fast at this stage.

Mike Urban, Deutsche Bank.

Wanted to follow up on your comment about the growing visibility that you're getting for next year, and hence the ramp-up in your own investment.

Was wondering where either regionally or in the types of projects and types of product and services, where that -- where you see that growth.

Well, at the moment, big, new projects, are projects on which the whole industry would have this visibility, because they are to a large extent identified.

The interesting thing, I think is that if you look at activity today, basically I think you have an awful lot of production, maintenance, and enhancement going on all over the world, just to sustain the volumes that people are trying to produce today.

There is in fact, not a lot of new development work that has really started yet.

So I think that that new development work is going to start coming probably towards the middle of next year.

You know, in the case of the very large customers, they can't switch it on overnight because you're essentially talking to a great extent about very large offshore projects that require a huge amount of engineering and tendering before they actually put them online.

And in a lot of the countries where we work, these things just don't happen overnight.

But I suspect that you know, towards the middle of next year, you will start to see an international markets -- a ramp-up of new development type activity, as opposed to the current ramp-up, which is very much a ramp-up around, in a lot of places, the maintenance of an existing production base.

And it's not, you know, I think as I said in reply to an earlier question, the interesting thing is that these sort of oil prices, you are seeing markets that have been very dormant, like the UK North Sea, and even I suspect next year places like, you know, if they can solve the security problems, the delta in Nigeria, are going to start to come back.

Because work on existing oil fields at these oil prices is almost irresistible.

And I'm going go ahead and ask one more on everybody's favorite issue today, IPM.

As it's becoming more important to you, I mean you mentioned people, you know, getting the right people in the right places.

Is that a challenge for you?

I mean are you struggling to get the people who know how to execute on these things, and evaluate the risks and the rewards appropriately and get them in the right places, and in a position to do that.

And is there anything that you can do to alleviate that to the extent that those are concerned?

I mean we do-- we are, like everybody else, hiring experienced people.

The issue, if you're trying to relate that issue to the incidents we had, that is not the problem.

The problem is when people who don't have the expert knowledge try and do it without the experts, and that's what we put right.

And, you know, we are in the very fortunate position, there's more demand than supply in IPM, so we can, we can pick to go after work where we really have the necessary expertise to do it.

Robin Shoemaker, Bear Stearns.

Andrew, just-- you mentioned just now that of course the oil price environment is higher, and working in the existing oil fields is attractive proposition.

I was just also thinking about the goals that had you for Schlumberger, which you talked about in June, which was at a somewhat lower oil price environment.

And just wondered if you, what you think about those goals.

The ones that I recall were the 15 percent after tax return on sales, including WesternGeco.

The target ROCE in the upper teens, which is where we are now, not retaining cash in the Company, and not raising the dividend.

So on the last 2, there is no change as far as I'm concerned, you know, there's no change.

What we said about how we will distribute cash to shareholders, from what we said last June, and what the board decided in July.

The return on capital employed I think is, you know, we just-- I don't want to make a revision at this stage.

I think if I had to answer your question, there was one goal I didn't set in last June, which had I been more perceptive that oil prices were actually going to go to 50, I would have said, and that is that there will be a resurgence to some extent of expiration.

And we, you know, we have not seen a resurgence of expirations, I don't think, at the level we might see it, and I'm not confirming this yet.

We might see it, since the mid 1980s.

Okay, and I take it that is a business that would impact your overall margin expectations to the upside, I guess.

Well, certainly it's good for WesternGeco.

And, yes, yeah, I think that expiration is generally a no risk-- people do not take technical risks in expiration.

They try to get the best data set they can, and therefore, yes, it's generally good for, to Schlumberger's (indiscernible).

Ken Sill, Credit Suisse First Boston.

I think I'll ask the last question on IPM, and that is, you know--.

I wouldn't bet on it, Ken.

No, you know, what I've been hearing from some of the other people in this business is that you had hired some folks and gotten more aggressive doing some more challenging stuff in the Gulf of Mexico.

I mean a 3 cent loss, that's a big number for a company your size.

Has there been a change in the type of projects in the U.S. gulf that you've been taking on in the last 12 to 18 months?

Yes, we have a group down there who wanted to try their luck in the turn key market, and this loss comes from a turn key well.

So in fact, we have a process in place at the moment to review whether or not using Schlumberger technology can make a significant difference to the performance of well drilling in the turn key market, and at the same time realize a return that is suitable to Schlumberger.

This is a project.

It's under evaluation.

We have a deadline.

And when we reach that deadline, we will review it and make a decision as to whether or not we stay in that market, because we think we can make a financial and technical success of it, or we don't.

Okay, and that was the question.

So you distinguish between turn key and integrated project management.

Absolutely.

Let me, let me just develop that for a second.

IPM does not like drilling single wells.

When we do drill single wells in IPM, as we did recently for a Russian company in Algeria, we normally charge fixed costs and exclude the big drilling risks.

Because there is no way you can amortize the big drilling risks over 1 well.

What IPM likes, is repetitive business.

When, you know-- if we drill 350 wells in the Burgos Basin, you can plan to lose, you know, 10 of them.

You guys will never even see it in the results, because over the whole project, it won't even appear.

But when you do it on a well-by-well basis, you are exposed to a much higher level of individual risk.

I like that answer because that's my view of the turn key business personally, as well.

One follow-on question kind of from a higher level.

If you sit here and look at Schlumberger, historically you guys have great people, great technology, kind of get average returns.

And I'm sitting here looking at the first 3 quarters.

You've got really nice revenue growth year-over-year, revenue growth sequentially, and yet your incremental margins have been single-digits.

Is there something, I guess institutional within Schlumberger, that there is a focus on market share and revenue gain at the expense of returns, or is this just kind of a string of bad luck here?

Well, no, I think it's a little bit of both, to be absolutely honest.

I think there has been a string of bad luck, particularly in Q3.

I mean, you know, it's been bad news every day for the last, last 15 days.

And it is true that after 15 years, particularly in the overseas market where, you know, Schlumberger has a very dominant position, which is very frequently attacked, that the traditional way of managing the business has been to win the contract, and make the margin on new technology.

Now, we're now moving into a market where, even overseas, eventually it's going to become resource constrained.

So yes, a lot of our effort at the moment goes into persuading people who have never known the luxury situation of not having enough resources to meet demand, that, you know, a very important part of their mission is to increase prices.

So this is just taking time to move the ship.

Well it, takes time and then don't forget that overseas contracts don't roll over every month or every 6 weeks, as they do in the U.S. land.

They roll over every 2 or 3 years.

Our contract portfolio overseas takes 3 years to renew.

Okay.

That's good to know.

And then, one final question.

Did you guys quantify the impact of the moving the assets from UCOS to other customers?

And does this change your fairly aggressive revenue growth expectations in the former Soviet Union?

No, it-- Q4, that's why I-- in answer to an earlier question I said, be careful of Q4 in the Soviet Union.

Because just the winter slows down the efficiency with which you can use equipment.

So Q4 will have a lower growth rate than the previous quarter.

On a year-to-year basis, no, this doesn't change our view that the Russian market will still sustain very high growth rates.

Dan Pickering, Pickering Energy.

I wanted to ask about Venezuela.

You sounded like the barges worked for 2 months in the quarter.

It's a switch, it's a change from last quarter.

It sounds like we worked a little bit and then stopped again, or are we back--

No, no, you've got -- Dan, let me be clear.

They did not work for 1 month in Q2, they did not work for 2 months in Q3.

They went back to work towards end of the quarter.

Okay.

So we are back working now?

Yes.

And does that imply that -- what's the difference between the barges working and the contract negotiations that you have ongoing?

The contracts-- the barges are under the contract.

Okay, but you said we hope to wrap this up by the end of the year.

I'm just trying to understand if there is another piece to this negotiation.

No.

We have a contract, a 10 year contract, started in 1997 for 10 barges -- for 6 barges, I beg your pardon, and we are renegotiating the whole contract.

And I am not prepared to go into any more detail than that, because we are in the middle of contract negotiations, Dan.

Gotcha.

Okay, and if we look at Latin America in general, Andrew, I guess what I heard in your discussion was, we have cut costs in Mexico, so we should see some improvement.

But can you help us generally kind of quantify what your margin expectations are here, for either fourth quarter or as we look into '05?

You said better, but you didn't--

Well I mean in Q4 obviously, because most of the problems were in Q3, significantly better.

On '05, as I said earlier, I really don't have good visibility, Dan, for Mexico.

Okay, and I'm wondering if Jean-Marc can just quantify for us, you talked about 100 basis points of margin, which is $26 million.

The Gulf of Mexico weather issue was 12 million.

Can you help us with, was the Gulf of Mexico turn key well a million, or 5 million?

No, I told you, I told you in my comment that the Gulf of Mexico turn key well and the Mexico well was 3 cents pretax, Dan.

Okay.

And I will help you further actually, because the Gulf of Mexico was about 2 of the 3.

Okay.

Thank you.

And then Russia and the moving of the assets?

Well, we didn't give a number for that.

Okay.

Dan, because-- but, you know--

That's part of the 26 million though?

Is it?

Yes, it is.

Okay, and is Norway part of that 26 million?

Yes, it is as well.

Okay, and the Venezuela issues are part of the 26 million?

No, no.

Okay.

All right, and in general, Andrew, I will ask one more IPM question.

And that is, as you look at the numbers in third quarter for your worldwide IPM projects, were the margins on those projects higher or lower than the average you reported for the oil field in Q3?

I have to exclude -- will you allow me to exclude the Gulf of Mexico well, and the Mexico well, and Venezuela?

Yes.

Then the answer is yes.

So I can assume that the answer is no if we include them?

Yeah, absolutely.

We are having problems.

We sort of trying to explain that, Dan.

No, no.

Okay.

And final question, converting a boat to new Q Technology.

What's the rough cost estimates to do that?

No, I'm sorry, we're not going to tell you that.

Not going to go there.

No.

All right.

Thank you.

Brent, I believe we have time for one more question.

Indeed.

Thank you very much, sir.

Ladies and gentlemen, we appreciate your interest in the call today.

However, as you just heard, with time now for one more question, the next participant in queue is Kevin Simpson with Miller.

Please go ahead.

Two quick questions.

I guess the first one rhetorical, why would you want to be in turn key?

I mean what kind of--

The thesis was, as I tried to explain, that with us on technology, we could significantly improve the performance, compared to what had been going on in the market before, and therefore make a lot of money.

So significantly extra normal returns?

Yes.

Any timeframe on when you say, when you make your fill or kill here on this?

Well there, is but I'm not prepared to disclose it, Kevin.

Okay, and then you did raise an intriguing question with the, the kind of overflow issue with, you know, on IPM with more, you know, broad base of customers looking at the service.

So that implies big integrateds.

I mean are we seeing some of the people who had kind of been skeptical and rejected it, begin to look at it and maybe be a user in '05?

I-- all I can say, is that we have inquiries today ongoing from every class of customer.

So, you know, every class, and we class customers 3 ways - big integrateds, national oil companies, and independents.

For big integrateds, are there--

I'm not going to go there, Kevin.

I'm just wondering just without specific names, are there clients who had basically had the door shut on this service, now--

If you go back to 2001 in the last peak, okay?

When the big integrateds ran out of resources, and they needed to do some projects, they came to IPM in 2001.

And so they are now getting to the place where they still have projects to execute.

They are not quite sure that they will have all the resources, so they are looking at the different possibilities.

And one of the possibilities they viewed before, and they may well use again, is IPM.

No guarantees, but a much greater possibility?

Yes.

With that, Mr. Gould, and our host panel, I'll turn the call back to you.

Thank you all very much for participating in today's call and your intriguing questions.

With that, Brent will provide the closing details for the conference.

Indeed, I would be happy to.

Thank you very much, sir.

Ladies and gentlemen, as you just heard then, today's conference is available for digitized replay for 2 weeks.

It starts at 12:30 p.m. eastern daylight time, October the 22nd, all the way through 11:59 p.m. eastern standard time, November the 5th.

To access AT&T's Executive Replay service domestically in the North American continent, please dial toll-free 800-475-6701.

At the voice prompt, enter today's conference ID of 747719.

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And that does conclude our earnings conference for this third quarter.

Thank you very much for your participation, as well as for using AT&T's Executive teleconference service.

You may now disconnect.