斯倫貝謝公司 (SLB) 2005 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by, and welcome to the Schlumberger First Quarter Earnings Conference Call.

[Operator Instructions]

At this time, I'd like to turn the conference over to Doug Pferdehirt.

Please go ahead, sir.

Thank you, Ken.

Welcome to today's first quarter 2005 Schlumberger 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 web site at www.slb.com/ir.

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

Today's agenda;

Jean-Marc Perraud, 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 first 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 Perraud.

Thank you, Doug.

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

First quarter earnings from continuing operations before charges and credits were$0.65 per share, up $0.06 cents sequentially, a 10% increase and $0.21 above same quarter last year, a 48% increase.

Earnings from continuing operations after the net credit of $0.22 cents, mostly related to the sale of our facility in Montrouge, France, were $0.87 cents compared to $0.59 last quarter and $0.19 in the first quarter last year.

Oilfield Services generated a record $559 million margin pretax operating income, an increase of 16% over the previous quarter.

Pretax margin of Oilfield Services for the first quarter was a record 20.1% sequentially up from 17.7% or 240 basis points improvement.

By area, the highlights were as follows.

North America pretax margin was up 480 basis points to a record 23.4% contributing to about 60% of the overall Oilfield Services margin improvement.

Latin America pretax margin was 13.7%, up from 10.7% last quarter, mostly due to a better revenue mix and despite the revenue decline.

All GeoMarkets contributed to the margin improvements.

For ECA, our Europe, Africa, CIS unit, the pretax margin improved 130 basis points to 16.5% in Q1 due to Russia and all the African GeoMarkets;

West Africa, Nigeria and North Africa.

Middle East Asia margin dropped slightly from a record 27.4% last quarter to 26.1% this quarter due to cost related to the startup of new projects.

WesternGeco pretax margin improved from 12.9% in the first quarter to 16.8% in Q1 with a continuation of strong Multiclient Services sales in the US and an improved line of profitability.

For Schlumberger as a whole, the effective tax rate before charges and credits was 25.4% inline with our previous guidance, reflecting mainly the high profitability North America both for Oilfield Services and WesternGeco.

The return on capital employed by Schlumberger reached 21.2% in Q1 versus 19.6% in Q4 and 12.7% in Q1 last year.

At the end of March, our net debt dropped to $1.3 billion, a decrease of $159 million, reflecting mainly the $230 million proceeds from the sale of Montrouge partially offset by the continuation of our share repurchase program.

We bought during the quarter 1 million shares for $73 million, and so far, as part of our 15 million share buyback program, we acquired 6.2 million shares for a total amount of $393 million.

And now let me provide you with some guidance for the year 2005.

First, we expect the effective tax rate to remain in the mid-20s.

Second, the CapEx, including Multiclient Service, will increase by $170 million over our previous guidance of $1.5 billion.

This incremental CapEx for Oilfield Services will be allocated to new project outside of North America, the new technology introduction and expansion in emerging markets.

WesternGeco CapEx will remain unchanged.

Depreciation and amortization will remain at approximately $1.3 billion for the year.

Thank you.

And now, I would like to turn the conference over to Andrew.

Thank you, Jean-Marc.

Good morning, ladies and gentlemen.

Our first quarter results showed strong year-on-year and sequential growth.

Both activity and pricing contributed to the excellent progression of the pretax operating margins of Schlumberger Oilfield Services and WesternGeco.

The industry response to the current lack of spare production capacity has begun, but it is still at a fairly early stage.

Growing levels of activity and preparations for new projects in the eastern hemisphere will ensure that the growth trend continues in the coming quarters.

Pricing is firm considerably in North America and signs are there that we have increasing pricing power overseas.

Customers are showing concern over the availability of equipment, crews and technology.

Sequential revenue increases were highest in the Canadian, North Sea, Nigerian, West African, Middle East Gulf GeoMarkets, and technology demand were strongest for drilling and measurements and well services.

Year-on-year increases were strongest in Canada, US Land, Russia, Nigeria, the Middle East Gulf and India GeoMarkets with all service technology segments recording double-digit revenue increases.

WesternGeco Marine utilization increased and our Multiclient revenue grew.

All geographic areas contributed to the progress of pretax operating margins.

The very strong margin improvement in North America was due to several factors.

Equipment and personnel loading reached capacity in Canada with increased pricing levels and stronger demand for higher technology services.

Pricing gains were almost universal across North America, while Wireline and Well Services technologies were in strong demand and crews were at near capacity.

In the Gulf of Mexico in the quarter, the absence of turnkey drilling revenues dampened the sequential growth rate that led to a significant improvement in margins due to the absence of revenue from managed third-party products and services and project losses.

In Latin America the sequential decline in revenue was largely due to much lower levels of revenue from managed third-party products and services on the larger IPM project in Mexico and lower activity in Venezuela.

During the quarter, an important milestone was reached in passing an agreement with PDVSA for moving forward to resolve issues related to the PRISA project.

The agreement included a payment of a significant amount of the outstanding receivables, a framework for future activity on the project from a resolution of some past issues, including negotiation of the outstanding receivables.

Latin America South showed solid progress in the quarter.

The strong sequential improvement in pretax margin across the area was due to an overall improved drilling environment and lower levels of revenue for third-party managed services in Mexico.

In Europe, CIS and West Africa, sequential results were driven by North Africa, Nigeria and West Africa with increases in well completions and productivity, wireline and drilling and measurements technologies leading the way.

Sequential pretax margins grew satisfactorily as a result of this.

However, the most significant progress was recorded in Russia.

By the end of the quarter, Yuganskneftegaz had returned to pre-September 2004 levels of activity.

The full - the return to full activity in Yuganskneftegaz was achieved together with a successful penetration of other new accounts which all goes well for the coming quarters.

Technology uptake remained strong and is key to the continued development of hydrocarbon resources in Russia.

Activity in the Middle East and Asia was essentially flat sequential, but showed the same year-on-year growth as other areas around the world.

Flat sequential revenues resulted from growth in the Thailand/Vietnam, East Africa, Eastern Mediterranean, Middle East Gulf GeoMarkets, being offset by reduced deepwater activity in Malaysia, Brunei, Philippines and Indonesia GeoMarkets.

Margins declined sequentially and this was primarily due to personnel and equipment costs associated with the startup of new projects in the quarter or in preparation for projects that will begin in the second quarter.

The importance of the Middle East response to the current lack of spare production capacity is reflected in the strong activity plans that are being implemented in the region.

During the course that we introduced a new-generation of MWD, LWD services that complement the PowerDrive rotary steerable family.

The new technology has been introduced under the Scope product brand.

We expect it to be a successful in bringing improved efficiency, reliability and speed to our drilling and measurements services, this platform express well in performing a similar breakthrough for wireline in the mid-1990s.

Some 166,000 cumulative feet have already been drilled with scope services and the number of achievements are detailed in this quarter's press release.

The acceleration in the way the new product introduction that I mentioned in the past is occurring.

Earlier this month in New Orleans, I clarified many details surrounding the nature and geographic distribution of IPM project revenues, as well as breaking these down into revenues derived from deployment of our own technology and project management skills, I explained the full effect of revenues from managed third-party products and services that are essential to the project, but which we do not provide ourselves.

In the first quarter, the contribution from this type of revenue was 31% of all IPM revenues, as opposed to the average of 41% that was experienced across the full year 2004.

This drop was due to the absence of third-party managed products and services from turnkey drilling in the Gulf of Mexico following our exiting the business in the previous quarter, and by addressing such revenues in Mexico, there is a large integrated project in the GeoMarket shifted through different phase of operations.

Total integrated project management revenues for the first quarter were $257 million.

WesternGeco had another excellent quarter underpinned by robust marine activity and strong Multiclient sales.

Conventional activity grew as expiration work returned and as line work increased in the Middle East.

We saw continuing demand for Q-Technology services, with vessel utilization remaining high and Q-Land activity growing in the Middle East.

Clients for conversion of a fifth Q vessel hand and it is expected to be ready for service by early summer.

As a result, the spec of company falling, Q-Technology uptake accelerating, pricing leverage is growing.

I would remind you all that the peak quarters for Multiclient sales are the fourth and the first, so while we can expect Multiclient sales to remain healthy, the second and third quarter will likely not see the same level as the first.

Schlumberger had a very solid quarter with good growth in operating margins due to activity increases, strong pricing momentum and technology.

As I mentioned earlier, the eastern hemisphere activity increases are still at a fairly early stage with the supply response only now translating into increased exploration, development, and production maintenance operations in key international areas such as Russia and the Middle East.

Absent any sharp drop in demand due to an economic recession, industry growth is set to continue.

The need for technology and the geographical extent of the supply response to today's lack of excess production capacity play to the strengths of Schlumberger.

I will now turn it back to Doug.

Thank you, Andrew.

Kent, we will now open the call for questions.

Very good.

Thank you.

[Operator Instructions]

And our first question comes from the line of Kurt Hallead with RBC Capital Markets.

Please go ahead.

Yes.

Good morning.

Good morning, Kurt.

Good morning.

Just a quick follow-up here on your outlook for North America and your fourth quarter review you mentioned some questions or concerns that you had about capacity specifically, in the pressure pumping area.

Those comments were noticeably absent in this quarter commentary.

Can we assume, by that that demand is still far outstripping supply and you still have some continued gains in pricing in North America and especially in the US market?

Well Kurt, I thought that some of my colleagues are commenting on it, so extensively I didn't need to.

But my position is, when I think that you'd all agree now that there is considerable, additional pressure pumping capacity being built, not just by the major players but by a lot of other players, and that will likely come to market in Q3 and Q4.

And I can only hope, because I don't really have a strong opinion, that my peers are correct in saying there'll be plenty of activity committed.

And then my follow-up relates to the seismic business.

Your comments have a sized increased exploration activity.

The increase levels of demand in the seismic business provide you with a degree of confidence in the outlook for 2006?

You mean, worldwide?

Yes.

Worldwide and as it relates -- not just only to size increase as it relates many of the other --

You mean size increase and not the drilling.

Yes.

Exactly.

Yes.

So there are lot of problems here where that is true, yes.

I mean, if I take an obvious example it would be the Middle East, Canada, Eastern Canada, would be another one.

There is -- there are definite signs that seismic is being done in advance of drilling.

And there's no sign of let up whatsoever in the seismic related businesses?

Not at this point in time, no.

Okay.

Andrew, thank you very much.

Thanks.

And we do have a question and from the line of Ole Slorer with Morgan Stanley.

Please go ahead.

Thank you very much.

This one -- whether they can you touch on that the tax rate first on mark, I mean you -- it was 20% in the fourth quarter or -- and up to by 25%.

It was in broadly in line with what you had indicated, slightly higher than what we had expected.

I just wonder, whether you could go through again what's -- was it driven this increase in the tax rate.

Is it the increased possibility of WesternGeco?

Where does it come from?

Its coming and -- as I mentioned, it's coming most from Oilfield Services and WesternGeco very high probability in North America and the US specifically.

So that's the prime factor.

The other factor is that as you know what's beginning of the year embedded in the each year, there's a resolution for the year or we expected resolution after certain number accidental value of sorts.

Whether it's a resolution of audits, adjustment and timings and sales force and as the years move on, than either they are prior expectation or we do better than expectation.

I think last year on some expenses, we do better than expectations, hence the lower rate on Q3 and Q4 as well.

So as the momentum increasingly shifts away from North America and more international, the tax rate should -- if anything come down rather than go up a touch?

The mix would be more favorable, yes.

Okay.

And Andrew just one comment, on the, if I may, on the Integrated Project Management, the $257 million in the first quarter seems a little bit below the recent run rate.

Could you just comment on to what extent that's a function of lower bookings of historic part of revenue?

Well, it's the drop in bookings and third-party revenue and also the fact that the Gulf of Mexico turnkey business was an extremely high as turnkey revenue business that we've not stopped.

So it probably, disguises in fact an increase in the Schlumberger participation in IPM in the global figure.

Okay.

So this is still a -- as far as the Schlumberger content is concerned a strong growth, Andrew?

Yes.

Okay.

Thank you, very much.

Thanks.

And we do have a question now from the line of Michael LaMotte with JP Morgan.

Please go ahead.

Good morning.

Good morning, Michael.

Andrew I want to follow-up with your comments on critically the Middle East Asia markets.

And in the press release, you may comment that there were increased costs, personnel costs, in anticipation of contract growth.

Could you give us a sense as to what the impact there was and maybe percentage of headcount increase or --?

Well Michael, all I would say is that -- is certainly -- the drop in the margin, could be largely accounted for, for the additional sort of costs we're incurring as we get ready for stuff that's going to start in Q2 and Q3.

And the nature of the cost is yes, very much logistics in other words moving a bunch of equipment from where it would be.

It's also very -- we have a very stronger recruiting effort going on.

It's all of sort of things but it's not speculative.

It's all in advance of known projects.

That was actually going to be my follow-up, which is can you give us a sense as to what the dollar volume of these contracts might look like?

No.

I'm not going to do that.

Not even in percentage terms?

Let's say that they -- you all know that there's a substantial number of rigs pretty mobilizing to the Middle East.

They are going to turn in -- those are going to turn into revenue generating opportunity of contracts over the next -- I don't think, it's going to be one big jump in one quarter, it will be gradual over the next three or four quarters.

Okay.

And is there a high percentage of IPM in errors that's straight Schlumberger?

There is a reasonable percentage of IPM, not as high as Latin America, but higher than it's been traditional.

Yes.

Okay.

Quickly on North America, record margins.

At what point do you start to consider to add capital to North America and particularly in unconventional areas?

Well, I think we would do that selectively, but we're still taking very much the attitude that we do that in front of known projects, not just a blanket capital.

Very high margins, yes, it's much more attractive than it used to be.

But you know as well as I do it's the market where everyone can invest very quickly.

Okay.

Thank you.

Thanks.

And we do have a question now from the line of Jim Crandell with Lehman Brothers.

Please go ahead.

Good morning.

Good morning, Jim.

A question on Russia, specific amount of general question.

First of all, to what extent is the anticipated strength in Russia or the strength you are seeing now due to Yuganskneftegas coming back into the market and applied for them, do you see continued strength in Russia?

And secondly, my understanding in Russia was that you'd put all the crews that had been working for you get back to with other companies.

So now that Yuganskneftegas get back to former levels of activity or those crews returning to work for you guys not to the companies that they have worked for?

No, that's why I made the remark, Jim, in my comments about penetration with other customers being maintained.

We did not strict new customers of their equipment unless it came pretty naturally to repopulate Yuganskneftegas, we moved the equipment in.

So, that's why I think that provided everything else being equal, the next few quarters in Russia look good because we've got -- we're back on Yuganskneftegas that we also have a lot of -- quite a few new accounts that we will be able to retain.

And does it matter if Gazprom and Rosneft owns Yuganskneftegas going-forward?

Well, I know Yuganskneftegas field, as long as they pay the bills, I don't really mind they owned it, Jim.

Okay.

And Andrew just one related follow-up, most of the super majors as you know we are budgeting minimal gains in CapEx and E&P.

If this is the cycle you think it is.

Do you think that will change and you start to see more significant gains and spending among the majors?

And if so, when?

Well, I think that for the majors, a large access they have in their portfolio is deepwater.

I think that to crank out deepwater projects takes a year to 15 months engineering and then you have to find contract all the assets you need to do it.

So if this cycle unwinds the way, I think it will then the increase in the majors will be around 2006 rather than 2005.

Okay.

Thank you.

Thanks.

So we have a question now from the line of Bill Herbert with Simmons & Company.

Please go ahead.

Hi.

Good morning.

Good morning.

Andrew, back to Russia for a second.

Yes.

Last quarter we were commenting on the fact that the resumption for work with YUKOS or on the YUKOS fields is going to be relatively slow, I mean, we are going to be back to hopefully, peak margins second half of 2005.

Given the fact that it sounds like improvement in Russia has gone more quickly than anticipated, accelerated your timetable with respect to returning back to peak levels of profits?

I think compared to what we said in January, Bill, everything has been accelerated by two months.

Okay.

Good.

And then the second question is also in relation back to the sort of fourth quarter, I guess, pronouncements.

We -- the comment was made that we expected that pricing in North America was going to continue to improve because we had a decent amount of older vintage contracts rolling off onto newer vintage, better price contracts.

Where are we in the evolution of those contracts rolling off from more poor -- from lower levels of pricing onto higher level of pricing?

Do we still have a decent amount of contracts to roll off or has that rolled off?

I think we are probably about halfway through it, Bill.

Thank you very much.

Hold on, probably over halfway through it by now.

Okay.

Thanks.

So we do have a question in from the line of Terry Darling with Goldman Sachs.

Please go ahead.

Good morning.

Thanks.

Doug, I was wondering if you could help us with where the IPM revenues were in the fourth quarter of last year and first quarter of last year for comparative purposes?

I'm sorry Terry.

I don't have that in my head.

I mean you know last years total was $1.1 billion.

I really don't have it in my head because we're talking about all the shifts.

I think because we felt that most of the IPM activity in North America, geographically, we have a higher percentage now in Latin America of IPM revenue in Q1.

So if you -- I know you can probably take 70, 80% in Latin America.

Terry, without giving you an exact number, when I counted you that Q1 last year there was virtually no Gulf of Mexico turnkey.

Q4 of last year there was a huge amount in North America -- of Gulf of Mexico turnkey.

And so the overall shift is probably -- as I said it's probably flat in Q1 compared to Q4, but it's better quality revenue and as much, as the less for the Gulf of Mexico turnkey and Mexico third party compensated by much higher relevance of Schlumberger revenue.

And you are out of the Gulf of Mexico turnkey business but we all expect that third party piece in Latin America and other areas to bounce around from quarter-to-quarter?

It will bounce around from quarter-to-quarter that why we give you the percentage, Terry.

That's helpful.

And then on sort of pricing globally, the impact on your margins, on your margin improvements specifically can you estimate that number for us?

Are you seeing 100 basis points sequentially, 200 basis point any swag for us on that?

The reason I made this remark in my statements about customers are showing concern over the availability of crews, equipment, and technology is that there is no one rule for pricing today overseas.

In fact, general tendency is that pricing is improving quite considerably, but within that it depends what sort of technology.

For example Drilling & Measurements pricing is strong.

Wireline pricing is strong in most part of the world.

But then you find one or two GeoMarkets were there is still lot of capacity and pricing in fact is not increasing in all.

So it's extremely difficult to give you a general rule.

That there is absolutely no doubt that as our customers began to worry about the availability of key services or new contracts, there is considerable pricing leverage.

And is the stronger dollar helping the margins as well?

I think, I let Jean-Marc, answer that.

No, it's pretty neutral because we -- since, middle of last year we're basically hedging more than 80% of our costs.

So we are pretty much neutral at this bench.

Okay.

Last question.

Trying to get a sense for how much we should expect to see the seismic business down sequentially in Q2.

I think you had something like a $100 million of zero book value sales this quarter, something like $50 million in 3Q.

You can obviously, you can drive a truck through that range.

But can you help us with any thoughts that obviously the Central Gulf sale was helpful?

I wish I knew.

Okay.

It will be done unless we signed a couple of big deals or something.

But I really -- the answer is I don't know.

Okay.

Thank you very much.

Thank you.

We have a question coming from the line of Ken Sill with CSFB.

Please go ahead.

Good morning, gentlemen.

Good morning.

Good Morning.

Good Morning

I wanted to follow on the pricing from a different tack.

I mean, you made the comment that North America, you are pretty far along in getting the mind set in place of driving margin, and this is the cycle to drive profitability.

How far behind North America is the international market in terms of doing that kind of driving pricing and margin?

And how long do think it takes for the international side to kind of catch up toward the US as ...?

Are you talking internally or externally?

Both.

I mean one of things you made a big statement that last year as you're trying to drive a culture of improving margins.

I think the culture is there overseas.

But I just said in answer to Terry Darling's question there are patches of weakness.

So, it's difficult to have a global role overseas.

I think that for you know, I think that pricing overseas will continue to strengthen through the rest of the year.

I don't have any issue with Schlumberger people driving profitability.

They understand, I mean particularly, you know, as all of them can see markets which are short of equipment and people, and therefore do have pricing leverage.

They have learned how to react.

Internationally you have a lot more, I guess, longer-term contracts.

A little tougher to roll it over so I guess...?

Yes, Ken.

It's two to -- somewhere between the two and three year cycle.

So if we start six months ago by the end of this year we will be halfway through it.

Okay.

Thank you.

Thank you.

We do have a question now from the line of Brad Handler -- pardon me with Wachovia Securities.

Please go ahead.

Thanks.

Good morning.

Good morning, Brad.

Let me come back to IPM again, please, I guess, you mentioned that the Eastern Hemisphere contract include a good portion of IPM work.

Are they also consistent with comment that you have made in the past that they are more production optimization oriented is it that?

No, that would not be the case in this quarter.

I would say that because of the ramp up in drilling that is taking place, there are more Well Construction, not necessarily -- in fact, not turnkey.

They are just -- actually they are Well Construction rather than production.

Okay.

So that may prop-up the third-party portion higher than you might have?

No, because I said they're not turnkey we could probably get the customers to pay the third-party part correctly.

Okay.

You see what I mean?

In other words, if he wants us to use a rig, he pays for the rig directly.

We don't have to pass it through our IPM counters we have no -- contractual responsibility for that, for rig itself.

Okay.

That makes sense.

I guess that actually leads to a follow-up, I've been a little confused as you have included the Gulf of Mexico turnkey work in your IPM numbers only because, I think at one point you were trying to split amount somewhat intentionally.

Are there other spots of work where there's more of the turnkey -- is there more turnkey then just IPM?

No, we only have turnkey market is IPM today, large one in Mexico.

So we -- I mean, I'm not quite sure how we gave the impression that we wanted to split out Gulf of Mexico turnkey other than it was a significant items for investors to understand.

But it is all part of the IPM business.

Yes.

Fair enough.

Okay.

Let me turn to one other question, please, as a follow-up.

Are you seeing any speculative moves of equipment into any other markets beside the US may be its North Sea may be its Russia at this point?

All I think there is some speculative movement of equipment into Russia, not huge amounts because people are very busy elsewhere.

But generally, no, we are not seeing -- I'm seeing, I'm not hearing any anecdotal evidence of large shifts of equipment into some of the emerging markets.

I mean, that doesn't mean there is not any, but I have you know, I was in the Middle East last week for example and no one mentioned that to me as a concern.

Okay.

That's helpful.

Thanks very much.

Thank you.

And we have a question now from the line Mike Urban with Deutsche Bank.

Please go ahead.

Thanks.

Good morning.

Good morning.

You guys have for a little while talked about investing in West Africa and that just being a drag on the margins and that part of business.

You had a nice pick up there in the quarter.

Is that the beginning of what you told us to be up on the lookout for, and what do you expect going forward?

No, I think that the pickup in West Africa in margins was probably very heavily dependent on the improvement in Nigeria and this quarter.

And that some of the project investments that we made in Western South Africa are still to come.

And what kind of timeframe are we looking for on that or it that?

The second half of this year.

Okay.

And is that dependent on some of the deepwater projects getting started?

Yes, it is.

Okay.

Thanks a lot.

That's all from me.

Thank you.

And we have a question from line of James Stone with UBS.

Please go ahead.

Good morning everybody.

Good morning.

Good morning.

Good morning.

Could you talk a little bit about, maybe elaborate a little bit about the settlement that you reached on the PRISA contract, and how that may affect the Latin American business going forward?

And particularly Andrew, if you could update us on your views on Venezuela in light of some of the sort of more contentious statements coming out of the government again?

James we have an ongoing negotiation.

Try another question.

Okay.

I'm not going to answer any questions on Venezuela beyond what's in the press release.

So why don't you try another one if you like.

Okay.

Jean-Marc just on the CapEx side, should we read into -- where their new contracts that were signed in the first quarter that led you to increase the CapEx for specific projects, or is it a growing confidence in the revenue growth outlook sort of for the end of this year and into 2006 that led to the -- sort of 14% increase?

James let me take that.

So it is a combination of unexpected projects, growing confidence in the markets, and very large success particularly of drilling and measurements in the overseas market.

So I would say that most of it is not in any way speculative, it is towards known projects that we probably, we didn't have quite such high confidence of winning in Q4 but we now have one and the success of drilling and measurements new technology.

So that's expanding or accelerating the penetration?

It's accelerating the introduction of the some of the very successful services in drilling and measurements.

Are there any key to your markets for scope that had not yet been -- we haven't really put the tools?

Yes.

There are lots.

I mean we haven't.

We -- this is very targeted introduction.

We put it where we knew it would do the most good in the short term.

And therefore yes, there's still a large number of GeoMarkets that don't have scope services.

So what were the targeted, the key targeted markets?

Well, obviously the ones with complex drilling or complex pressure regimes.

So anything to do with deepwater or offshore Indonesia for example, which has very complex special regimes.

And it will generally move out from deepwater towards the more best type (ph) in markets as more tools become available.

That's terrific.

Thanks very much.

Welcome.

Thanks.

We have a question now from Robert MacKenzie with FBR.

Please go ahead.

Thanks.

Andrew, I wanted to get some more color on WesternGeco, which I think hasn't done much attention here so far.

Yes.

You seen some good news here in the quarter, you had Kuwait Q-Land, you got the Maersk, the Gulf of Mexico Q-on-Q.

It seems like Q seems to be really accelerating here.

I was wondering if you could clear up if that is correct and if so, what's the ultimate potential for Q in the next year or 18 months?

Well, so there is a very logical acceleration of the adoption of Q particularly Q-Marine.

And this is very simply because when you have a totally new technology, particularly in an application like seismic or well logging, you don't really know all the applications is going to have when you initially introduce it.

But as you build a portfolio of examples and as your geophysicists think about ways it can be used.

They introduce more and more relevance into the use of Q.

And that has really, really accelerated in the last six months.

So today, we're much more confident about what Q can really do, as are our customers.

And therefore selling Q is -- Q is no longer a difficult thing to sell.

And please remember that one of the reasons it was difficult to sell in the beginning because we refuse to compromise on price.

And now we can demonstrate the value, it's much easier to sell.

The second thing is that we're converting a fifth vessel.

I have a deal with Dalton that when he can see the work in front of him, we will convert a sixth vessel.

And I don't think he is quite ready yet but I wouldn't be surprised if he gets there fairly quickly.

But beyond six vessels in WesternGeco, as it is that's probably we would maintain six Q vessels, five or six conventional vessels.

And that would be our fleet because there is still going to be always a market for conventional fleet seismic.

Great.

As a follow-up, are those Q vessels the four active ones now shooting sole Q-Marine?

Yes.

There are only shoot Marine, yes.

There are only Q-Marine, yes.

They cant shoot conventional.

They can or can't?

Sorry.

Cannot is the answer.

And then the Gulf of Mexico, Q-on-Q.

I was wondering if you could provide some color on that?

Has it been analyzed yet, has it been deemed success by the customer?

No.

But the customer I think probably adopted Q-on-Q because they've seen the results of Q-on-Q elsewhere.

You had a particular application, a particular field where you thought it was applicable.

So I don't have any -- I have no lack of confidence in the quality the results are going to produce.

Can you give us a feel for how many fields that kind of announces might be applicable for in the Gulfs and globally?

I believe the correct answer is I don't know.

But it's basically, any field where you have a good baseline, and does not have a big gas cap because it really works best on oil.

But I'm sure that we could provide you a number if we ask Dalton.

Thank you.

Thanks.

We have a question now from line of Tom Moore with State Street Global.

Please go ahead.

Hi Andrew.

Hi.

Just a question about the capacity and how you're handling that.

You mentioned a little bit about clients getting or customers concerned about availability of tools and such.

How about accrues and have you expanded your training capacity and your training program to talk about or to help you this summer coming up?

Yes.

So basically, we have two major trading centers under way.

The first one has started.

The second one will start shortly.

The first one is in Tiananmen in Russia.

And that will train everyone for Russia plus the Russian-speaking people from the former Russian republics, so Kazakhstan et cetera, et cetera.

And the second one is we will breakdown shortly on a major training center in Abu Dhabi, for the middle east, middle and the far east.

So for the next six months or so, we're basically surviving on the training facilities that we have, which are adequate, and then we will be bringing in the near ones.

In terms of our training staff, recruiting staff, we have -- we increase that considerably in the second half of last year to get ready for this.

So the number of training base we're doing is accelerating very fast.

Yes

Thank you.

Thank you.

And we do have a question then, from the line of Mark Urness with Merrill Lynch.

Please go ahead.

Good morning.

Good morning.

Good quarter.

Most of my questions have been answered, Andrew but I just wanted to ask again on the improvement, sequential improvement in operating profit, you mentioned that was record quarter it's just over 20%.

Was that really entirely pricing driven, or do you think there was a mix contribution to the margin improvement?

No, they - they I think, so its very difficult for me to give you hard numbers because I can't demonstrate it.

So I think there, in addition to pricing, there are two effects.

One in North America is the absence of turnkey drilling in the Gulf.

And the second, overseas or generally, is that we're moving back into a drilling cycle, where as up until now we've been very much in a main production and maintenance cycle.

And as we move into a drilling cycle, it does our expiration development cycle, it does bring back into play the higher value-added services, both in drilling and measurements and in wireline and to certain extend in well services.

So I can't demonstrate to you by a formula that there was a mix effect in Q1, but there is certainly is a better mix of revenue overall.

Okay.

Then I wanted to ask, it seems that your operating margins in the late '70s were up in the sort of 25% to 30% range.

I'm wondering, if you think that you going continue to see steady continued improvement in the operating margins from both the pricing perspective and from a mix perspective?

Well, in the late 70's is that, subscribers on many occasions there were two things which are absent so far to-date.

One is the whole industry was absolutely completely under -- there was a lack of capacity everywhere which led us to control demand through pricing, that's one.

And the second thing was that in the late 70's, we were actually a very large extent a pure wireline company.

And therefore, I think it is unlikely -- I mean I form -- I don't -- I do not have any reason to say "yes" or "no" to your question.

But those are quite big hurdles to get over in terms of returning to the margin to the late 70's.

Okay.

Then my follow-up relates to the uptake of the new scope product.

Yes.

Could you compare that to our Platform Express was it introduced in the 1990's, in terms of the speed and acceptance?

Well, I mean it's basically in the Platform Express introduction has been the scope introduction, there are three things that you try to do.

Firstly, the tool has been designed with specific improvements in mind.

So it's designed to improve the speed of operations, the reliability of operation, and the quality of operation.

And therefore you try to sell it into markets, where it was most valuable, which is why you go to the deepwater for example, as being a very high-cost market, or to markets where you know that scope is going to be able to sell certain specific problems.

The other thing about that we -- we took from Platform Express introduction is, make sure this thing is reliable before we introduce it.

And always don't have - don't have your cheating problems from back of your customers.

And the third thing is, that you build a sufficient quantity of tools to be able to make a fairly rapid market impact for the poster dribbling them into market one-by-one as they come off the production line.

And so when it have -- there are characteristics to the introduction that will be the same.

I would point out that scope is a very, very different type of service from Platform Express in those markets, it is designed for high-end market and not just to go and populate the traditional triple-combo market, which is got the Platform Express we designed to do.

Thank you.

Thanks.

We have a question then from the line of Jim Wicklund with Banc of America Securities.

Good morning, guys, good quarter.

Good morning, Jim.

Andrew, the WesternGeco joint venture, is it the end of this year that you can put to back or use to buy the balance and they get the opportunity on a prorated basis to match it, they want to?

Does that get to happen this year?

At the end effectively was stuns to runs out of the end of this year.

It is -- the person who wants to change something he has to make the first moves.

Okay.

That's very happy, as a 70% owner.

Okay.

The IPM business 257, a couple or a, I guess a year-and-a-half ago you had said that you expected that to be a very large percentage of your business.

Can you remind us what percentage that was and do you think you're still on track to get there?

I would like to put this to bed forever.

I don't blame you.

This is very last question at the end of a very long day for investors in Richfield and I say that I thought by the end of the decade it might be 50% of our business.

And to be quite frank, the answer was not a scientifically -- maybe, I shouldn't have said that.

Do I think -- do will it be 50%?

I've no idea.

Do I think it will continue to be a significant part of our business?

Particularly, as our capacity to managed production goes, yes, I do.

Perfect, then I agree.

Thank you very much, guys.

Thanks.

We do have a question from the line of Geoff Kieburtz with Smith Barney.

Please go ahead.

Good morning.

Good morning, Geoff.

Just want to clarify, first terminology in Jean-Marcs comment about the increase in capital expenditures.

He mentioned emerging market.

And then elsewhere we talked about the increase in investment in the Middle East.

Could you just clarify for us what emerging markets refers to?

Well, I think what Jean-Marc was referring to is a little bit what I referred to in terms of going back to Yuganskneftegaz and not robbing our new customers of the equipment that we have them when we took it away from Yuganskneftegaz in September.

So, emerging markets means Russia.

Right.

Okay.

In terms of the new projects in the Middle East that incurred the experts for the startup costs, is there any particular concentration there or is it in all over the Middle East?

Well, there is obviously to a huge upcoming increase in activity in Saudi.

But outside Saudi I would say it's pretty general here.

And specifically the Saudi, you mentioned in the press release the order for 47 permanent quartz gauges

Right.

Could you elaborate a little bit on why you concluded that to be significant enough to mention in the release?

Because we -- I mean, I think we mentioned three-phase meters, they are not just cost gauges, right?

Well, this particular paragraph..

Let me just find it.

I think I'm going to take up too much time here Geoff.

Can I shortly get back to you on that?

Sure, that's fine.

Okay.

One question on IPM.

You mentioned that in the quarter only about 31% of the IPM revenue was call a passed through, for lack of a better term

Right.

And that compared with 41% average in '04.

If we would have take out the -- I don't know if you can do this, but if you would have take out the Gulf of Mexico turnkey from the '04, what's kind of the baseline a pass through, which we exclude that effect from the '04 mix?

Well, I don't know what the top of my head.

It would be significantly back toward the 31% for '04.

Because, you know, if you take out the Gulf of Mexico turnkey drilling business, the only other really significant pass through area is Mexico.

Right.

But the 31% in the quarter, I thought was also lower because of Mexico third party.

No, it should but then Mexico removes to a new phase, don't forget last quarter we were in a big startup phase.

And therefore it's going to also lay it in a function of where you are in the project.

Okay.

The level.

And, as you think about your plans, whatever those are for the expansion of IPM as you know that earlier but is that kind of roughly a third being passed through, you expect to be kind of a sustainable mix?

I think so.

Okay.

And then finally, when you talked before about IPM being comparably profitable to the average of your oilfield business, was that inclusive of that third party passed through?

No, that's why we're distinguishing again because on the pass through we know we can't charge in margin beyond the risk margin on a rig that we contract to do a project.

Okay.

So it's -- the 70% that you're getting comparable margins on and then it's brought down by the third party.

Okay.

That is right.

Okay.

Great.

Thanks very much.

Thank you.

We have a question then from the line of Dan Pickering with Pickering Energy Partners.

Please go ahead.

Good morning.

Good morning.

Andrew, you talked in the press release about North America, the Revenue growth there from fourth quarter to first being primarily driven by Canada.

I'm wondering as we look out into the second quarter, obviously, a seasonal break up in Canada, do you think that US pricing improvements and recount activity in the US can offset the Canadian break up, or do think that segment will be slightly lower in the second quarter?

I honestly do not know Dan.

You know it really does depend on how long or whether or not Canada goes back to work early.

I don't have a good view at this point.

Okay.

Little too early, sounds like.

And then just want to clarify looking at the Latin America margins to in I think you've explained the issues associated with the IPM work in Mexico there.

Just wanted to -- does that mean that given where we are in the Mexico Project that this as a sustainable level of margin as we look at Latin America going forward?

Yes.

I think it's probably a sustainable level of margin.

Yes, absolutely.

Okay.

And there were no onetime issues surrounding the Venezuela issue that popped up in the first quarter, either positive or negative?

No.

Okay.

Fantastic.

Thank you.

Thank you.

Okay.

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

Great.

Thank you.

And that question comes from the line of Kevin Simpson with Miller Tabak.

Please go ahead.

Good morning.

Good morning, Kevin.

I have another quick short term oriented question.

I just wanted a clarification on the, if possible, in terms of the outlook for WesternGeco for sequentially to Q2 versus 1.

I just wanted to get a sense on whether you were -- can do like you're talking lower sequentially, but I was just wondering if that's specifically on Multiclient or would that be more than likely for the operations as a whole?

No, it was -- there is no issue with marine land or processing.

It is purely, what is the level of Multiclient sales going to be in Q2 as opposed to Q1 which was very strong.

So it's a tossup.

It would be operate -- contract operations strong and uncertainty on the level of probable decline from...

Exactly.

Okay.

No.

Operationally, I think it's -- we're very confident in what we think will be the topline.

Its just we don't -- I just wanted to point out Kevin, as you know, the multi-client drops and we're not sure how much its going to drop.

Okay.

Great.

Thank you.

Okay.

Thank you all very much for participating on today's call and Ken will provide closing remarks.

Great.

Thank you very much.

[Operator Instructions]