斯倫貝謝公司 (SLB) 2004 Q4 法說會逐字稿

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

[Operator Instructions].

As a reminder today's conference is being recorded for replay purposes and we ask that you stay on the line at the conclusion of our earnings report to receive that replay information.

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, Ken and good morning.

Welcome to today's fourth 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 Investors 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.

And now today's agenda.

Jean-Marc Perraud, our Chief Financial Officer, will begin with commentary on the financial results.

Then Andrew Gould, our Chairman and Chief Executive Officer will provide an overview of the fourth quarter activity and outlook.

Finally, we'll take questions from the audience.

As the entire conference call will be limited to 60 minutes in length, please direct your questions accordingly.

And now is Jean-Marc.

Thank you, Doug.

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

First quarter earnings from continuing operations were $0.59 per share, up $0.09 sequentially and $0.28 above same quarter last year.

Before charges in the third quarter and last year, the increases were $0.07 sequentially and $0.18 year-on-year.

Pretax margin of Oilfield Services for the fourth quarter were 17.7%.

Sequentially, up from 16.9% in Q3.

By area, the highlights were as follows.

North America pretax margin was up 3.6 percentage points to a very solid 18.6% with a strong performance in Canada and the Gulf Coast and price increases taking effect particularly in Canada and US Land.

Latin America pretax margin was 10.7%, up from 10.3% last quarter.

In Venezuela, activity and profitability improved.

In Mexico, pretax margin in dollar terms increased significantly but modestly percentage wise as a high proportion of the additional revenue came from third party managed products and services associated with some IPM projects.

The rebilling of this managed third party services and product, necessary as part of the project execution generates lower margin, but mobilized less financial resources.

For ECA, the Europe, Africa, CIS unit, the pretax margin declined slightly from 15.9% in Q3 to 15.2% in Q4.

Russia, due to the movement of assets from Yuganskneftegas accounted for the decline.

Middle East Asia, margin continued strong from 26.9% last quarter to 27.4% this quarter with a favorable country mix expected to continue.

WesternGeco pretax margin continued to improve from 11% in the third quarter to 13% in Q4 with strong multiplying surveys sale but lower line profitability due to several vessels being in transit.

WesternGeco went from a pretax loss before minority interest of 20 million for 2003 to a pretax profit of 124 million for 2004.

For Schlumberger as a whole, the effective tax rate before charge was 20.2% in line with our previous guidance.

A good country mix at Oilfield Services mitigated a higher effective tax rate at WesternGeco.

The return on capital employed by Schlumberger reached 19.1% in Q4 versus 17.1% in Q3 and 11% in Q4 last year.

A loss of $21.6 million or $0.04 per share was booked for discontinued operation during the quarter as the last divestitures, three small business units, are taking place and we booked the expected loss and sale.

With business operating income, we're break even - each unit business operating income were break-even in Q4 and lost in aggregate 2.5 million in Q3.

At the end of December, our net debt dropped to $1.46 billion reflecting a strong cash flow from operation during the quarter.

Year-on-year the net debt dropped $2.7 million.

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

During the first quarter, we bought 1.3 million shares at an average price of $62.80 for a total amount of 84 million and this brings the total of shares repurchased at year-end to 5.1 million or about one-third of the program.

Now, some guidance for 2005.

Well, the CapEx including multi-client surveys will reach $1.5 billion as compared to 1.3 billion in 2004 and again, this is including multi-client surveys..

Depreciation and amortization should remain at $1.3 billion.

We expect our effective tax rate to be in the mid 20's or slightly below.

Our net debt will decline slightly to between $1.4 billion to $1.3 billion.

The liquidity generated by operation will increase but this increase will be partly used for our stock buyback program, also by the dividend increase and by discontinuing the use of the $230 million receivable securitization line.

Thank you very much.

And Andrew Gould now will comment on activities.

Andrew.

Thank you, Jean-Marc.

Good morning everybody.

In 2004, we established a new record in annual revenue and pretax operating income for Schlumberger including WesternGeco.

These results are a clear reflection of the increasing industry focus on building additional supply capacity in response to the record demand growth.

The growth is particularly strong in the Middle East leveraging the diversity and global footprint of Schlumberger.

Looking at the quarter, we delivered a very solid performance with activity up in all areas.

Sequentially, North America, the Middle East and Asia and Latin America all made strong progress.

Europe, CIS and Africa also made progress but their overall increase suffered from the halt of activity for Yuganskneftegas and the resulting redeployment of our assets to other customers.

Within North America, US Land and Canada results were strong sequentially due to both activity increases and strong pricing momentum.

Prices for both well services and wireline improved showing double-digit gains over full year 2003 averages.

Activity in the Gulf of Mexico returned to stronger levels following the slowdown caused by third quarter's hurricanes.

Additionally, we have exited the turnkey drilling business in the Gulf of Mexico.

We assessed the risks associated with this type of activity, determined that the technology component of turnkey service revenue proved insufficient to outweigh the risks associated with this type of activity.

Increased activity coupled with improved pricing resulted in record operating margins in Canada and strong improvement in U.S. Land.

In Latin America, growth was strongest in Mexico due to two factors.

First, the PEMEX drilling activity returned to levels similar to those experienced earlier in the year and secondly, IPM activity increased on the Burgos and Chicontepec projects.

In Venezuela, growth was the result of stronger drilling activity and market share gains due to the penetration of drilling and measurements and wireline technologies.

Dollar operating income for Latin America area grew sequentially by 17%.

The subsequent increase in operating margins was partially offset by high levels of third party products and services, billed to customers for IPM projects.

In Europe, CIS and West Africa, year-on-year revenue increases were driven by Russia, West Africa and the continental Europe GeoMarket.

Sequentially in ECA, Russia and the Caspian had lower revenues that were not completely offset by growth elsewhere.

Lower revenue in the Caspian was largely due to winter weather.

In Russia, we are not changing our positive outlook on the opportunity it represents in spite of the halt of activity for Yuganskneftegas in the fourth quarter.

Russia exceeded our growth expectations of 30% for the full year 2004 and further growth is expected in 2005.

Middle East and Asia reported excellent results.

These were driven by significant strength in Saudi Arabia as activity ramps up to grow production, in Qatar as gas projects gain momentum and in India as deep water activity expands.

Pretax margins reached 27.4%, an excellent result.

New technology services were strong across all segments and around the world.

The wireline pressure Xpress tool, introduced in North America, where it is uniquely successful in attaining pressure measurements in depleted reservoirs found application across the world with successes in China, Saudi Arabia, Dubai and Malaysia.

Well services continue expansion of the Viscoelastic diverting acid product range to other areas and applications as well as the introduction of a new member of the ClearFRAC family.

Well completions in productivity successfully introduced the Axia submersible pump service in California with very satisfactory operating results.

The phase test of well testing and monitoring package continues to grow with its particular efficiency in identifying production improvements in Oilfields.

Drilling and measurements deployed additional PowerDrive technologies for application in deep water and for advanced applications in through-tubing drilling.

WesternGeco had an excellent quarter despite lower marine activity.

Multi-client sales were particularly strong led by interest in the upcoming lease sale of the Gulf of Mexico.

Market acceptance of Q technologies continued to accelerate with revenue more than doubled in 2004 compared to 2003 and a similar growth rate expected in 2005.

The sequential decline in marine activity was the combination of a number of separate events, notably poor weather in Latin America and unusually high number of vessels intransit in December.

Marine activity will increase in the coming quarters.

As I said in the press release, the upstream industry is now clearly focused on the need to build additional supply capacity for both oil and gas.

The signs are almost everywhere.

And, encouragingly, there is a healthy mix of both short and long-term activity.

An increasing number of deep-water development projects and major LNG developments are underway or have been sanctioned for development.

The Middle East OPEC countries are responding to the challenge of increasing production capacity.

Seismic spending has returned to its historical correlation with expiration and production spending, and increasing exploration budgets have resulted in strong increases in both marine and land activity.

At the same time, an unprecedented effort is underway to maintain or increased production of oil and gas in mature areas.

This is as true of gas drilling in North America as it is of oil production enhancements in the fields of Western Siberia.

At our analysts' event in Ridgefield in June, I said that I thought that this was the most favorable business climate the upstream oil and gas service industry has seen since the early 1970's and that absent an economic recession and a consequent drop in demand it is difficult to see how the current up-cycle could be cut short.

What we have seen since June has only served to confirm this point of view.

The strong fundamentals, geographic dispersion, the call on technology and the need for a global diversified workforce all play to Schlumberger's strengths.

Finally, as you have seen, the board of directors has approved the 12% increase in the dividend, resulting in an annual dividend of $0.84.

This is consistent with our cash management strategy that we announced in Ridgefield last June to retain only the cash necessary to manage the business and fuel expected growth.

I will now hand it back to Doug.

Thank you, Andrew.

Kent, we can now open the call for questions.

Very good Doug.

[Operator Instructions].

And our first question comes from the line of Terry Darling with Goldman Sachs.

Please go ahead.

Thanks and quick congratulations gentelmen on a nice recovery here.

Andrew, I was wondering if you could talk about the pricing outlook in a little bit more detail.

I sense a much more optimistic tone here than what we were hearing on the third quarter call and I guess I'm wondering two things.

One, can you talk a little bit more in detail, quantify, perhaps, the increases you're seeing in the Eastern Hemisphere that you mentioned in the press release and, secondly, can you talk about any specific management changes that you've made either in North America or elsewhere and I don't mean changing people.

I mean any specific actions that you took following the third quarter to try to focus on harvesting more of the cyclical pricing power?

I don't want to quantify overseas because it is extremely variable around the world.

I would say that, you know, pricing power in the Eastern Hemisphere markets is still gaining momentum, you know, and I think that that momentum will certainly be maintained through the first -- probably the whole of 2005.

In terms of management changes, we have modified the personal objectives to some extent or reflect the effect of fall-through in the results that people realized.

So that's a 2005 thing.

I would say that the people in the field, once they got the message from about June onwards, we've had no trouble passing the message to the field that they need to profit from the cyclical opportunity and, also, to beware of the inflation, which I still think is going to come to the industry.

That's terrific.

And so those efforts at this point essentially are behind you?

We're not looking at additional transition here, or is it going to take longer here?

What do you mean transition?

Just in terms of the modification of the objectives and seeing those changes reflected in the profitability of the company.

Is that a multi-quarter process or do you feel like that --

No, I think we've made the management changes necessary.

Now, how successful we are going to be well the time will tell.

Okay.

Let me quickly follow up on Latin America before handing it over and just try to calibrate our expectations.

Should we assume, I guess previously you know, my expectation was that there was still the opportunity or potential even with the increased IPM activity in Mexico to see your margins get back into the range they were you know latter part of last year, 16%, 17% range.

Should we be tempering those expectations, given the -- you know the IPM dynamic in Mexico that we have talked about here this quarter?

In Mexico, I think you should be tempering a little bit just for the influence of the -- or the volume of third party products and services that we have to rebill to our customers.

That doesn't mean the underlying margins for the Schlumberger product lines within Mexico have changed, Terry.

Okay, thanks very much.

Thank you.

And we do have a question then from the line of Mike Urban with Deutsche Bank.

Please go ahead.

Thanks, good morning.

I wanted to explore the margin issue a little bit and was wondering if you could give us a sense for if not specifically in Latin America, you know, where you are in terms of IPM revenue and if you can even roughly give a sense of how much is pass-through so that we could have a kind of a --

No, I mean we not at this stage, Michael.

We are working on that, and the best way to do it but I can't do it right now.

You want to try something else?

I'll go down a different route then.

Yeah.

We'll hit you up on that one later.

On the dividend increase, you know, you clearly have a bullish outlook here and it seems pretty clear what you're saying but just want to be clear that you know in increasin gthe dividend that you see a -- and you have greater visibility on a sustained up cycle here and that is consistent with what you said back in June, that you do see a higher consistent, you know, maybe...?

Yeah, I mean we haven't changed philosophy, Michael.

We always said that increasing the dividend depended on our visibility, future increases in earnings and that you know that's still our philosophy.

Okay.

And last question is we've now seen several Gulf of Mexico lease sales with a, you know, pretty high degree of interest there and then we started to see the activity pick up there.

What's kind of the outlook on the time it takes to follow through on that in terms of activity and to benefit to Schlumberger and the industry?

Are you talking specifically for deep water?

The Gulf as a whole but I am assuming that the deep water is where the outlook has been.

No.

I think we think that, you know, deep water will have a better year in '05 and the only thing that will limit it is the availability of rigs.

We're not very optimistic there will be a substantial increase in activity on the shelf in '05.

Great, that's all for me.

Thank you.

Thank you.

And we do have a question then from Michael LaMotte with JP Morgan.

Please go ahead.

Thank you.

I'd like to offer my congratulations as well.

Thank you Michael.

Andrew, you mentioned in your comments the halt on Yuganskneftegas in the fourth quarter.

Are you back working and I guess more importantly are you getting paid for work done?

We have been paid certain amounts on account of the past receivable and we are being paid for assets that we are in fact remobilizing to Yuganskneftegas in January.

So you're moving back in.

Yes.

Okay.

In terms of the contractual terms on moving back in are they similar to what they were before you moved them out or?

Yes.

Okay.

Great.

If I could get you to expand on Middle East/Asia revenues and I guess maybe speak in general terms just when we -- we look at I think very often there is a perception out there that the revenues are driven by the rig count and clearly revenue -- rig counts are not accurately measured in the Eastern Hemisphere and even more importantly, there's a lot of businesses that are not rig count sensitive.

Can you talk about things like brown field and production of reservoir management, C.T. drilling and some of the others you mentioned specifically in terms of sort of gauging our expectation for that part of the world, perhaps relative to rig count?

Michael, when I look at 2005, in fact I'm going to go back a little bit on what I said.

I think the brown field activity in the Middle East will be - which has increased substantially in 2004 -- will be stable or slightly up in 2005.

I think what is going to happen in 2005 is you will see significant increases, again, particularly in the land drilling rig count.

Okay.

So I think that the revenue coming through in '05 is more likely to be directly related to drilling, the increases are, than to the brown field activity.

Okay.

And then lastly on the new technology introductions, can you expand perhaps on the portfolio bid, anything that could be as impactful in terms of market penetration and margin as, say, Platform Express was a decade ago?

Well, I don't really want to anticipate what's going to happen.

I would say that there are, in at least two segments, very significant offerings coming through, which I'm not sure they'll have the same impact as Platform Express.

They certainly have the potential to do so.

DNM and wireline?

Yes.

Okay.

Thank you.

Thank you.

Our next question comes from Brad Handler with Wachovia Securities.

Good morning.

Could you please comment, maybe you can offer us some guidance on your thoughts on the Latin America outlook overall '05 versus '04 just in terms of revenue growth and then maybe turn it into a sort of multi-part question, I could ask you to expand a little bit on your Mexico outlook overall and then your Venezuela outlook overall.

Venezuela, particularly, in the context of some of what we're hearing about in terms of Pedevesa, I guess call it muscle flexing.

Well, I think if I take the south first Argentina-Brazil, we see sustained activity at the levels of 2004.

We don't see huge increases.

And in Brazil that's I think to a large extent rig availability.

We will have a good year in seismic in Latin America South particularly with some of the key contracts we have offshore Brazil.

If you take the North, so Peru, Colombia or Ecuador I think we'll see modest increases in activity.

Venezuela, I don't want to make any comment on the difficulties that some people are having, but overall, I think you will see another activity increase for the country of Venezuela particularly from Pedevesa.

And Mexico, I think you will, it's going to sort of stabilize around the level where it is today.

In fact, our feeling is there will be probably some reduction in expiration but that the development in production budgets will remain untouched.

So, you know, Mexico stable with '04 from the Q4 level, from the Q4 level of '04.

Is that -?

That is very helpful.

Thank you.

Maybe I can squeeze in one follow-up.

Yes.

The contract negotiations you've had with Pedevesa seem to have gone on for the better part of '04 now.

Yes.

Can you offer us a little more color on kind of when you might expect resolution and does resolution -- you know, at what level of activity does resolution imply versus today?

Well, firstly -- I think all I can say on the negotiations is that they are ongoing and there is an active dialogue in place.

You know, a satisfactory resolution would obviously open up further business opportunities for Schlumberger.

I don't think I can comment on our specific contractual situation beyond that.

Okay.

Thank you very much.

Thank you.

We have a question then from James Wicklund with Banc of America Securities.

Good morning gentlemen.

In the third quarter conference call, you had, Andrew, talked about how there was pricing momentum in U.S.

Land through 2004 but it might be more difficult in 2005 and now we see pricing accelerating in the fourth quarter, so do you think it's going to be easier, less difficult, I'm not sure of the right term, but are you more encouraged about pressure pumping and overall pricing in North America in 2005 than you were three months ago?

I certainly feel that the environment will remain strong through the first half of 2005.

As we get to the back end of the year, I am getting concerned about the reports I hear of the amount of capacity that is being constructed in pressure pumping.

Okay.

That's...

As you know, it's eight, nine months' delivery time, so we're talking the back end of 2005.

Okay.

Second question, a clarification if I could, in your press release in the Q&A you note that D&A is expected to be 850 for the full year of 2005 and it was 339 in the first quarter.

Am I not, Jean-Marc, I guess this is a question to you, should I including -- am I missing something or I'm not including Western or--

I'm not including WesternGeco in the Q&A and the figures I gave for Schlumberger, the $1.3 billion I mentioned for 2005, is including everything.

Got you.

In the amortization of the multi-client service.

Andrew, in terms of you guys adding capacity, whether it's North America and if you could a little bit by region, where do you expect to be adding capacity through '05 to your capital equipment base?

Well, I don't want to talk about that in detail for competitive reasons.

But we will be -- overseas the capacity will be largely in front of -- we'll be adding will be largely in front of where we have known activity.

And in North America, we know exactly how much capacity we intend to add.

And most of that, in fact, is probably new technology.

Actual base capacity, we're not going to add a lot.

Okay.

Last question.

In general, I realize in your revenue breakdown for Europe, C.I.S. and West Africa about $700 million, approximately how much of that is I.P.M. business in Russia?

It's a much less significant than Latin America and I don't know the number off the top of my head, Jim.

But it's not a significant number in the $700 million.

Okay.

Gentlemen thank you very much.

Thank you.

We have a question from the line of Ole Slorer with Morgan Stanley.

Please go ahead.

Thank you very much.

I wonder whether you could help us a little bit with the sort of gauging the outlook for WesternGeco.

If you look at a year ago, you had a very large sale, a multi-client, to a North American customer and I wasn't quite sure how that was booked predominantly in the first quarter or whether it was a fourth quarter, first quarter event.

And then talk about the repositioning costs you had in the quarter on the stream -- is that North Sea ships migrating south and in that case shouldn't that also be a little bit in the first quarter just to kind of help us better be able to handle this sort of rather substantial momentum in the seismic business now and how it's going to affect Schlumberger?

So in the very large contract at the end of 2003, beginning of 2004 that you mentioned for one customer was in fact spread across Q4 and Q1.

There is no contract, any one multi-client sale that even approaches a similar size in the Q4 numbers for 2004.

In terms of the stream of fleet or the boat fleet, it is some--in my mind somewhat unusual to have so much capacity steaming in December.

Normally, you have capacity steaming in April or October.

And the reason is just the take-up of the new contract portfolio, which so happens that we're repositioning the vessels at this point in time.

But as all the vessels are going to non-contracts, you know, it's really a one-time event for the month of December.

And we did have very adverse weather in both Mexico and Brazil that affected marine revenues in both, a little bit in November but also in December.

Well, to be clear about the very large sale that you had a year ago was it predominantly in the fourth quarter or predominantly in the first quarter?

I honestly don't know, Ole.

I think it was predominantly -- I'm not sure.

We can check for you.

I'm not sure.

And with respect to the -- talking to some of your WesternGeco colleagues a little while back they mentioned that at that point in time in September or October they had a rather substantial backlog of activity in the North Sea.

Can you talk a little bit about what -- how contract pricing has evolved in the seismic market, sort of from the low point in the summer until now?

There has been, you know, a substantial increase in conventional 3-D pricing in the marine market, which I think started before last summer.

I know some of the seismic competitors don't agree.

But I think we would say that that pricing moment -- we would say that that pricing momentum started before last summer's season and certainly continued through to the end of the year.

So, you didn't book up a large part of your oil fleets for work in 2005 on, say, well below current market pricing or something like that?

No, no, no.

I mean, we have a bigger marine backlog than we've had for a long, long time and it was certainly not booked on pricing that was settled before pricing started to expand.

Okay.

Just one last question on the seismic.

How is the very sharp pickup in pricing of conventional high definition 3-D affecting your ability to either push pricing or gain acceptance for Q.?

We haven't noticed any effect of high definition treaty.

So have you been able to raise pricing on the q or has it been more or less...

The delta of the q pricing follows the delta on conventional --- So we haven't reduced the delta as conventional hass moved up.

So you've been able to keep the spread?

Yes.

Interesting.

Thank you very much for that.

Thank you.

And we have a question from Geoff Kieburtz with Smith Barney.

Thanks very much.

Jean-Marc, just to go back on a question asked earlier to make sure I understand the CapEx and D&A. comments you made versus what was in the FAQ, the entire difference there is WesternGeco CapEx and WesternGeco D&A.?

It's WesternGeco CapEx.

It's WesternGeco multi-clients served being capitalized and the same thing for the D&A., yes.

Okay.

And the $434 million of D&A in the first quarter was again a combination of those two?

Yes.

All right.

So your fourth quarter run rate is not going to be sustained through 2005 in aggregate, correct?

Yes, correct.

Okay.

The variation is the difference.

Okay.

Andrew, you mentioned in passing your continued expectation that we're going to begin seeing some cost inflation.

Can you give us a status report as to where it is right now?

Are you seeing none of that yet?

We're not.

I mean, you know, we're seeing it in steel costs that we've been seeing it for five or six months.

So I mean, you take a business like perforating which you know the steel element in perforating is very high, then you know the price, the steel cost in perforating comes, come through.

And, you know, whether those, you know, I think the other commodities, they are going to -- we haven't yet seen it and we will see it.

Okay.

Would you venture a guess as to what your, kind of, annual cost inflation rate is as you exit the first quarter?

No.

I'm sorry.

I wouldn't.

I'm not in the guessing business.

I mean, we have to track this product by product or commodity by commodity be it sand, steel, whatever, and so it would be very, I think, very rash of me to try and push dimension and average.

Okay.

Do you think it's single digits though?

Yes.

Okay.

Do you expect it to accelerate?

I think it depends entirely how much activity accelerates, Geoff.

Okay.

Have you seen any wage inflation within that overall cost trend?

Sporadic, limited to certain very specialized types of people.

Do you think that's going to change?

Yes.

Okay.

Shifting gears, you mentioned that you're concerned particularly about the U.S. market in the second half in regards to pressure pumping capacity being, perhaps, added at too fast a rate.

Let's say you're right.

What is your response?

Well, I mean, I don't, you know, I'm not sure I really want to talk about it.

I'm sure you don't.

That's why I asked.

If you mean, are we going to go back to a market share war?

Not on the basis of the capacity that's being built today, but there is a point at which, you know, one has to -- can't let one's market share be completely deteriorated.

I don't think we're there yet.

I'm just worried that the industry will lose pricing momentum because the delta capacity will remove it.

Okay.

So you see it more as a risk that the upward trajectory -- slows or stops rather than you go into a nosedive.

Yes.

It is I think very much a U.S.

Land and Canada issue.

Okay.

So everywhere else in the world you're comfortable.

Yeah.

And anywhere else you're concerned about capacity, any other product line or market area, over capacity.

I'm sorry.

No.

Not at this point in time.

Okay.

And last question, in terms of the WesternGeco backlog number that was quoted, is that all contract or is there multi-client --

No, no.

It's all contract, Geoff.

Okay.

Thanks very much.

Thank you.

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

Good morning.

Good quarter.

Thank you, Mark.

Andrew, I wonder if you could elaborate a little of bit on what you're seeing in terms of exploration trends, obviously marine seismic is in higher demand.

Could you talk about which parts of the world are seeing the biggest increase in exploration and how much that might incrementally benefit Schlumberger?

Well, I don't think it's a huge increment.

I think it's a very nice add-on if you like.

I think that you will see more exploration wells offshore West Africa, offshore Nigeria.

On the Atlantic margin in the North Sea, possibly, if the rigs are available I think you'll see an increase in the Gulf of Mexico, exploration wells.

And, you know, there are very large exploration campaigns underway in India and certain other parts of the Far East.

Okay.

And I also wanted to ask, in terms of the revenue growth we're expecting to see this year versus last year, could you quantify just on a percentage basis, how much you would expect to be activity driven versus pricing driven and how that might compare to the growth we saw in 2004?

I think that I don't want to give you exact numbers but if you accept that particularly the offshore rig count is going to be somewhat limited in what it can grow in 2005, because utilization is already fairly high and, you know, we've had a lot of repositioning of rigs and rig rates are moving up, so I think that probably on balance as much of it will be driven by pricing as by activity in 2005.

Okay.

And the last question relating to some of Ole's questions on WesternGeco's side would there be plans to convert any additional vessels to cumering (ph)?

Not beyond the one we announced at the end of Q3 at this stage.

We've taken the position at WesternGeco that we'll only convert when they have the backlog in hand and so we're fine with the vessel coming out of the end of Q1, beginning of Q2, we're fine with the five and, you know, when we have additional backlog we'll look at a sixth but not before.

Thank you.

Thank you.

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

Please go ahead.

Thank you.

Good morning.

Good morning.

I was wondering if you could provide, you talked about a lot of areas already this morning, one you haven't spent a lot of time talking about was the North Sea.

Given the increase in seismic activity, and B.P's budget, which came out I think last week, or a couple weeks ago, can you give us an update on what your prognosis is for activity in the North Sea and pricing as well?

No.

I think that, you know, last year I think that it was a very poor year in both the Norwegian and U.K. sectors.

It was particularly bad for Schlumberger in the U.K. sector because so much of our activity was with the very large customers who didn't spend much.

So we expect much better, never mind seismic, but drilling season in the North Sea in 2005.

We think the relative strength for us will probably be in the U.K. sector rather than the Norwegian sector.

Anything that correlates to pricing as well as activity -

I think we have a certain degree of pricing momentum already in the North Sea.

Okay.

And then as a follow-up question, in terms of your commentary about the ramp-up in the OPEC producing countries, as they address production, what is your best guess as to when we might see a meaningful change in capacity in whether it's Saudi Arabia or any other area in which you're active?

Is it three years out, is it five years out or two years out?

I would say it's a minimum of three.

Two to three.

It depends by what you mean by meaningful.

But, you know, for large increments to be brought on stream you're talking two to three years.

Let's say Saudi Arabia going from 10 million barrels a day to 12 million barrels a day.

Well I think you should ask Saudi Aramco.

I don't think I'm going to get an answer.

Finally, just, you've also mentioned back in your June conference about clearly Russia being the immediate growth opportunity but China being something to watch down the road.

Is there any acceleration in your growth opportunity in China whatsoever?

Yes.

But it's, relative to Russia, it's still fairly small.

We have considerable technology success in Russia, but -- in China, excuse me, but not service implantation on the same scale as we have in Russia.

And are Chinese oil service companies impacting your pricing momentum anywhere around the globe?

They have done in land seismic in the past.

I would say that that, in fact, has flattened off a bit recently.

Great.

Thank you very much.

Thank you.

And we do have a question then from Ken Sill with CSFB.

Please go ahead.

Good morning, Andrew.

Good Morning, Ken.

Wanted to follow up and make sure we don't get term expectations too high.

In Venezuela are you seeing any impact between the activity of Pedevesa or the private guys in the kind of delays on permitting activity?

We saw the harvest guys who said they're not going to drill but what are you seeing on the ground in the near term in Venezuela?

No change.

No change at all so far?

No.

And then the question, I know you're going to get hammered with this people going to say gee, you know, you guys talk about and you are worried about pressure pumping capacity yet in your CapEx budget is 37% higher than your depreciation O.F.S.

How come that's bad for other people but good for Schlumberger?

Well, it depends, you know, you talk about pressure pumping CapEx, if you talk to the pressure pumping CapEx guys in Schlumberger they will be very unhappy that we are limiting them so much on CapEx.

The elements of our CapEx that are important, new technology overseas and that is very much in function of activity that we know is planned or is even in hand.

Okay.

So that just dovetails.

You said it's mostly new technology and now you're saying a lot of it is going to international markets I guess.

New technology is equal to the US and international markets but, you know we're not adding base capacity in the U.S. and certainly not to the extent of some, I mean I can't guarantee the accuracy of the numbers we're being told by some of the manufacturers but if they are accurate they're quite substantial increments.

Yeah.

And then on the CapEx at WesternGeco the $215 million, how is that going to be split between, you know, assets and multi-client?

Do you have a breakdown of that?

It's just assets actually.

That doesn't including anything on multi-client.

The multi-client is coming up to I think 112 million, actually.

And that 112 was significantly pre-funded that's in there.

Okay, that all assets.

Yes, that's the only thing.

Okay, great, one final question on Russia.

So, you are actually doing some work for the successors to Yukos, you know, that seemed to tail off quickly in late Q3 and Q4.

How fast do you see that revenue coming back into the fold over the next few quarters?

Sorry, we're working for Yuganskneftegas field.

You clear?

Yes.

I think if, you know, provided their financial plans are satisfactory it could come back pretty fast.

Okay.

Thanks a lot, guys.

Thank you.

And we have a question from Bill Herbert with Simmons and Company.

Please go ahead.

Good morning.

Good morning.

Sticking on Russia for a second, Andrew, you mentioned that revenues were up 30 plus %, 2004 versus 2003.

And your expectation is that revenues should be up again in 2005 and waxing actually relatively optimistic as it relates to Yukos.

Do we have sort of a working estimate as to what the expected revenue gain in '05 versus '04 would be on a sort of percentage basis?

In Russia.

No, we don't, I mean I don't -- So much depends on how the Yuganskneftegas story plays out.

Yes.

But we still are looking at substantial double-digit growth.

I don't want to speculate, you know, on what it might be.

No.

Well, that's exactly what I was looking for, so thank you.

And then secondly, switching hemispheres to Venezuela.

Are all of your Prisa barges back working now?

No.

There is one idle at the moment.

All right.

And how many worked in the first quarter?

About 80%.

And how many barges do we have down there?

You know, 4 1/2 to 5.

Okay.

Thank you, sir.

All right.

Bye-bye.

Bye.

Thank and our next question is from the line of James Crandell with Lehman Brothers.

Please go ahead.

My question has been answered thank you.

Thank you.

We have a question from Pierre Conner with Hibernia.

Good morning everybody.

Thank you.

A lot of my questions have been answered but I did have one, Andrew, on this directional drilling market, you've done a phenomenal job with growth in rotary steerable tools.

What do you see going forward in terms of that market doing any cannibalization of conventional steerables or is that actual growth in the overall directional drilling services market?

I think it's a little bit of both.

But I would put the weight on an actual, overall growth in the directional drilling market because of the efficiency and the capability of rotary steerables to take the drill stream where it was just not possible to go with conventional steering.

So even though we may have some nominal growth in offshore rigs where there is predominantly the directional work you could still see that rotary steerables going to increment the amount of footage drilled in directional holes?

Or on land.

I mean if you look at the role of slim rotary steerables in creating a side track market, it's huge.

Okay.

Fair enough.

That's helpful.

Then, just to,I'm sorry to go back to this again, but just to, sort of, recap Michael's comment on Russia, with the combination of the seasonable trends in Caspian as well as the restart of work, can you say that last quarter was the trough in revenues?

You know, I don't like -- I don't want to commit myself to saying last quarter was the trough.

Notionally if things go on the way they've been going in January you would be right and last quarter would be the trough but let's wait and see how it plays out.

Very good.

Okay.

I appreciate it.

Thank you.

Thank you.

And we do have a question then from the line of Rob MacKenzie with FBR.

Please go ahead.

Good morning, Andrew.

Good question.

Question for you building on the Russia question.

I wonder if you could give us a feel for about how high your utilization was of your assets during the first quarter and what kind of cost you may have incurred.to move those assets around.

I would say in Q4, if you took a similar asset base to Q3 we probably got about 55% to 60% utilization and, yes, we incurred considerable cost moving assets and people around.

I don't have an exact number but we incurred considerable costs.

The big effect was the loss of efficiency in having all the assets or having the whole asset base of Yuganskneftegas where it was extremely efficient being scattered around different customers.

Okay, would you expect --how much of that efficiency would you expect to regain given what you're seeing in January here?

I don't think we'll get back to the efficiency we had in the first half of last year, for example, I don't think until the end of the second quarter.

Okay.

Turning to technology, you guys have mentioned in numerous events the analysis behind casing logging technology.

Why don't you give us a feel for how much growth you've seen in that volume one quarter to the next and how that adoption is going forward.

I don't have an exact number for the growth.

What I can see very clearly through the internal reporting is that the geographic spread of it is going extremely well.

For example, we had a string of ABC running for a very large Russian company through the first quarter, which is something they've never seen or used before.

Similar stories in China in the Far East, you know, so I can't give you an exact percentage growth but the uptake is still great.

Okay and another new technology you have talked about it in the past, to the FAT Frac fluid.

Anecdotally, I heard you made great market share gains with that in the U.S. in certain areas.

How is that progressing?

You didn't mention it here.

Is that taking a breather or is it?

I'm going to let Doug answer that, as he is the well services specialist.

No, I wouldn't say it's taking a breather.

It continues to increase actually quite nicely.

Okay.

Great.

Thanks.

I'll turn it back.

Thank you and we have a question then from the line of Kevin Simpson with Miller Tabak.

Please go ahead.

Thanks and good morning.

Good morning.

Kevin.

I guess the first question, Andrew, pretty simple.

Is there any remaining turnkey liability?

Or is it all done with what you took in the fourth quarter?

In the Gulf of Mexico, the answer is no.

There is no remaining liability.

We have one well to drill under the non-Pemex turnkey contract we have in Mexico, which should be finished by mid-February.

And so is that under the old arrangement -

No it's under an improved contract but it's not ideal.

And then subsequently you'll still have an IPM arrangement with I guess Repsol but not on a turnkey basis then?

I can't comment on that and beyond the turnkey well, no, we don't have a contractual arrangement.

Okay.

And then Jean-Marc, could you talk about currency impact on the results in the quarter?

Yes.

From the impact between Q3 and Q4 we estimate around $10 million.

And that's obviously due to the strengthening of some of the currency against the dollars.

We are looking forward.

We are taking measures to hedge a lot of this exposure, so we figure that at this stage we have hedged probably about 80% of the exposure.

So looking forward from the current rate we should be much less exposed to any fluctuation

Okay.

Thank you very much.

That's it for me.

Okay, Kevin.

Thank you.

Kent, we have time for one more question.

Thank you.

That question comes from the line of Dan Pickering with Pickering Energy.

Please go ahead.

Good morning, guys.

Good morning.

I want to circle back to Latin America again.

Last quarter you talked about having a turnkey issue in Mexico that was about $7 or $8 million pretax impact.

When we looked from Q3 to Q4. it looks like we got most of that back but didn't see any profitability gains from the incremental revenue.

I understand the pass-through impact you've talked about.

I'm just trying to understand if Mexico continues to be a, if that turnkey issue continues to linger, if there are other areas that saw a downtick in Q3 and Q4.

No.

The turnkey issue did not linger in Mexico in Q4.

And the, you know, the impact was more start-up costs on the new Burgos project and otherwise, the quality of revenue.

I don't see, I am not quite sure what you're asking.

Okay.

But let me just try to -- in terms of the additional revenue in Latin America between Q3 and Q4, we did generate a margin which was higher than in Q3.

So the increased revenue generated a margin above the average margin including Mexico actually.

Okay.

Let me rephrase my question.

We're up $8 million sequentially in profitability from Q3 to Q4.

Mexico, you said, was better profits, dollars.

Venezuela were better profit dollars.

Mexico turnkey, if it just went away, would have given you the profit increase so that, to me, says that somewhere in the other countries something is down.

That's what I'm trying to understand.

Or did I misinterpret that Venezuela profit dollars were higher and Mexico profit dollars were higher?

No.

I think you are absolutely right.

They were higher in both of this country and in P.C. we had basically an increase in revenue without increased margin.

Okay.

And as we look at Russia, I just want to understand, we did have revenues from Yuganskneftegas in the fourth quarter?

Zero.

Zero revenues.

So that did indeed make up most of the revenue delta from Q3 to Q4?

Right.

Okay.

And would it be safe to say that it made up the -- most of the profit delta from Q3 to Q4?

Plus the cost of redeploying equipment.

Okay.

So even more so.

Yes.

Okay.

And Andrew, in the U.S., just want to make sure I understand sort of the net impact of improving pricing in general, and potential cost inflation.

When I add back the $10 million in turnkey exit costs, your margins there were quite strong, almost 20%, and I guess I'm trying to understand, is there any reason to think as we look forward into 2005 that we have any seasonal issues or product line issues that would result in margins ticking down from the current levels?

I think the only seasonal issue we might have is the weather.

Canada in Q2, you know, weather has not been great in January but I don't think it's enough to impact the overall quarter.

Okay.

All right.

So it looks like we've got continued margin opportunity in the U.S. aggregate from -

As I said in an earlier answer the first half of the year the answer to that question is yes.

Clearly yes.

Okay.

Great.

Thank you very much.

Thank you all very much for your interest and active participation in today's call.

Kent will provide some closing details.

Great.

Thank you very much.

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