斯倫貝謝公司 (SLB) 2005 Q2 法說會逐字稿

Good morning, good afternoon or good evening and welcome to the Schlumberger earnings conference call. At this time all phone lines are muted, or in a listen-only mode. However, later during the earnings conference, there will be opportunities for questions and those instructions will be given at that time.

[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. 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, Kent. Welcome to today's second quarter 2005 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 nonGAAP financial measures. A reconciliation of any nonGAAP measures we discuss are contained in today's press release, or will otherwise be posted on our Investor Relations website, which can be found at www.SLB.com.

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

And now today's agenda. 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 second 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 Jean-Marc will discuss the financials.

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

Second quarter earnings from continuing operations before charges and credits were $0.78 per shares, up $0.13 sequentially a 20% increase, and $0.29 above same quarter last year a 59% increase. Oilfield services generated 674 million in pretax operating income, an increase of 21% over the previous quarter. Pretax margin of oilfield services for the second quarter was a record 22.1%, sequentially a 200-basis point improvement, and a 440 basis point improvement since the beginning of the year.

By area, the highlights were as follows. North America pretax margin was up 240 basis points to 25.8% contributing about 27% of the overall oilfield services margin improvement. U.S. land and Gulf Coast strong performance, offset the seasonal Canadian decline. Latin America pretax margin was 15.1%, up from 13.7% last quarter, mostly due to improved IPM results in Mexico.

In Venezuela, an interim agreement was reached with PDVSA on the contractual terms for the six PRISA barges. For ECA our Europe/Africa CIS units the pretax margin improved 210 basis points to 18.6% in Q2, contributing 26% of the overall oilfield services margin improvement. Improvement came from the North Sea region, Russia, and the Caspian. Middle East/Asia, pretax margin improved 220 basis points to 28.3%, contributing 28% of the overall oilfield services margin improvement. Saudi Arabia, Thailand, Malaysia, China led the performance. Western GECO pretax margin declined 180 basis points to 15% as improved margin profitability didn't quite compensate for lower multi-client service sales.

Net income on a 100% basis improved by 1 million to 36 million, due to a more favorable effective tax rate. For Schlumberger as a whole, the effective tax rate before charges and credits was 24.9% slightly lower than the previous quarter, and in line with our previous guidance. For the rest of the year, we expect our effective tax rate to remain in the mid-20s. The return on capital employed by Schlumberger reached 24.5% in Q2 versus 21.2% in the last quarter, and 15.2% in Q2 last year.

At the end of June, our net debt dropped to $1 billion, 240 million. A decrease of $55 million reflecting mainly a strong cash flow from operations. CapEx including 12 million of multiclient service sales capitalized reached 394 million for the quarter, versus 330 for the first quarter.

For the total year CapEx are now estimated at $1.7 billion, including the conversion of a 6Q vessel for Western Geco. We bought during the quarter 2.8 million shares for an amount of $189 million. So far as part of our 15 million shares buyback program, we have acquired 8.9 million shares for a total amount of 583 million.

And now I will turn the conference over to Andrew.

Thank you Jean-Marc. Good morning, ladies and gentlemen. Second quarter results showed substantial increases both year-on-year and sequentially. Higher activity and stronger pricing contributed to the corresponding sharp increase in pretax operating margins, which strengthened across all oilfield services geographical areas. Compared to the first quarter pricing firmed further in North America and positive signs emerged of increasing pricing power overseas.

Looking at the world geographically, sequential revenue increases were highest in the U.S. land, Russia, Mexico, Saudi Arabia, North Sea, U.S. Gulf Coast and Venezuela Geo markets where technology and demand was strongest for integrated project management, well completions and productivity, and well services operations. In Western Geco a sharp increase in marine activity offset a decline in multiclient sales.

Year-on-year increases were strongest in U.S. land, Russia, the Middle East Gulf, Nigeria, Mexico, and Venezuela Geo markets with all service technologies recording double digit increases. Double-digit growth was also realized in all Western GECO business lines. In North America, strong margin improvement was seen in spite of a sharp decline in Canada, due to the extended seasonal impact of the spring breakup. Pricing gains were almost universal across the region, while wireline and well services technologies were in demand and crews worked at near capacity.

In the Gulf of Mexico an improved mix of activity, as well as higher pricing led to margin improvement. In Latin America, the sequential increase in operating margin was the result of improved operating results, as well as higher margins on third party managed services on the IPM projects in Mexico. This was coupled with greater operating efficiencies on well services operations in all Latin American geo markets.

In Venezuela continued progress was made on the PRISA project, with the signing of a short-term renewable agreement with PDVSA. This resulted in a resumption of the activity for the six barges. Discussions continue regarding the settlement of certain outstanding receivables.

In Europe, CIS West Africa, margin growth was driven mainly by the North Sea, Russia, West Africa, and Caspian geo markets. Demand was strong for well services, and wireline technologies. Significant progress was made in Russia, where technology uptake remains strong and is key to the continued development of hydrocarbon resources.

The cooperation and confidence established during the initial period of our minority holding of PetroAlliance has confirmed our belief that the company will play a major role in our continued expansion. We are therefore very pleased to announce the acquisition of a further 25% equity stake. Activity improved across all 11 geo markets in the Middle East/Asia area, highlighting the global nature of this business cycle. The most significant contribution was from the Saudi Arabia, the Arabian Gulf, China, Thailand, Vietnam geo markets.

Increased drilling and accelerated production of new technology in China, benefited drilling and measurements, wireline, and well completions in productivity activities. In the Gulf, and Brunei, Malaysia, Philippines geo markets strong operating margin improvements resulted from a combination of increased activity, higher pricing and new project startups. The importance of a 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.

In the quarter, IPM third party managed services rose to 39% of all IPM revenues, as opposed to an average of 31% was experienced in the first quarter. This increase reflected a higher number of completed wells, in addition to other projects reaching various stages of completion.

Total IPM revenues for the second quarter were $308 million. Western Geco saw robust marine activity offsetting a seasonal decline in multiclient sales. Marine activity growth was most notable in Europe with a start to the North Sea season.

Conventional activity grew, increasing exploration work and increasing land work in the Middle East. Demand continued to grow for Q technology services, with vessel utilization remaining high, and Q land activity growing in the Middle East. During the quarter the fifth Q vessel was commissioned and began work.

As a result of lower spare capacity and higher Q technology update, pricing leverage has grown. Operating margins declined slightly as the dropping multiclient sales were only partially offset by increased margins in marine and data processing.

Schlumberger has had a very strong quarter with a sharp growth in operating margins due to increasing activity, strong pricing momentum and accelerated technology and production. The industry response to the current lack of spare production capacity has now begun in earnest. Growing levels of activity, and increasing preparations for new projects in the Eastern hemisphere, indicate a trend that will continue in the coming quarters.

I will now turn it back to Doug.

Thank you, Andrew. Kent, would you please open the lines for questions?

Certainly, it would be my pleasure. Ladies and gentlemen [OPERATOR INSTRUCTIONS] Our first question comes from the line of Ken Sill with Credit Suisse, please go ahead.

Good morning gentlemen, and congratulations. Seems superfluous at this time, but obviously a great quarter. Andrew, I'm going to ask the question that I know a lot of people are curious about. One of the things you cited as an area of strength was essentially the pressure pumping business well services North America. You mentioned strong pricing gains in the press release. Could you kind of update us on how you see that market evolving now, and whether you're still concerned about capacity issues affecting pricing as we move forward?

I don't have a concern for the balance of 2005 any longer, which is a reflection -- not a reflection on the capacity, it's a reflection on the activity. In other words, the overall level of activity looks like being higher than I originally thought. So 2005, I don't have a concern anymore.

And can you discuss the -- kind of the magnitude of price increases you've been seeing? You know, if not specifically in pressure pumps, but in North America?

No. I think that the -- the overall rate of price increase in percentage terms in the second quarter, has been stronger than it was in the first quarter. Let me say it that way. So there's no loss of momentum.

Accelerating it sounds like.

Yes.

Okay. Thank you.

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

Perhaps this is a followup but in the quarter here, you've posted over 40% incremental margins both looking at it year-over-year and sequentially for the oilfield. Given all that you see right now, do you believe that those kind of incremental margins are sustainable and for how long?

Let me put it this way, Geoff. I think that we still have considerable pricing power. I also think that we're starting to see considerable inflation in the system and it's a question of which one is going to go faster.

Can you elaborate a little bit on the inflation comment and where you see that and is it --

Not only in materials but even more importantly we're seeing it in the cost of labor now.

And are you taking any new actions in regards to labor in -- where you're getting labor from or anything else that -- ?

No, our problem is retention. Our problem is not getting it. Our problem is people poaching our labor. So we have put certain retention mechanisms in place. We have had a general salary adjustment fairly recently, so you know, we have to get that back in pricing.

Got you. And you feel comfortable you'll be able to do that?

At this point in time, yes.

Great. Thanks very much.

And we do have a question now from the line of Michael Urban, Deutsche Bank. Please go ahead.

Thanks. Good morning. In Russia obviously pretty good quarter there, and you're speaking favorably about the outlook by continuing to up the stake in PetroAlliance. Have you seen any negative reaction of part of your clients, or any concern in terms of the investment environment there, and the tax take going up and the marginal economics deteriorating a bit at high oil prices, given the tax structure there?

Yes. I -- you know, my opinion is that if there was an adjustment in the marginal tax or you know, if they lifted this artificial ceiling on the barrel, then some of the customers will invest more. So -- but it's not -- I don't think it's reduced our activity, but I think if the tax regime was changed, it could substantially increase activity still.

Okay. So more of a something as an inhibitor to future growth rather than hurting you?

I think Russian oil companies are behaving like any other oil company. When the terms aren't good, they don't invest so much. They know their costs are going up, so they feel like they would like more of the marginal take.

Absolutely. Wouldn't we all? And in the -- the quarter just to try to get a sense for how much was the market, and how much -- how much did PetroAlliance contribute roughly, or how should we think about that?

Well, the contribution PetroAlliance from this quarter was very small, because actually we consolidated on the 20 days of revenue.

Out of the full quarter.

So the vast majority of the improvement was underlying market growth?

Yes.

Okay. Thank you.

And we do have a question now from the line of Brad Handler with Wachovia securities.

Thanks. Good morning.

Good morning.

Three months ago on the call you talked about Middle East. Maybe it's the Middle East Asia region being a source of dramatic growth, and obviously that's starting to come through. If you could help put it in some perspective, what we've seen in this quarter, and what we expect to see in the last half of the year, some of the larger projects that you said might be starting up?

I think that there is -- there is still more activity to come in the second half than we have seen in the first half in the Middle East. In Asia, I think we probably have seen the bulk of the increase in project activity for this year. But in the Middle East Middle East, I think this -- you know, the startups are still at a fairly early stage.

That might carry through well into --

I think it will carry through. I think it will be gradual. It's not going to be -- it's not going to be all in one quarter, and I think it will probably carry through the next three quarters.

Just as a followup to that, I guess in your release you mention one specific project with Petronas 4, and you've given a dollar amount, $340 million there, obviously a several year project, but how would you character the growth as you see it? Is it going to be large multiyear projects, or how much of it would be multiyear projects versus -- ?

I think going forward as you move towards 2006, what you will see is people bidding more large multiyear projects. Up until now, you know, with the exception of Saudi, I think you've been seeing a lot more smaller projects being added, so -- but you know, with the large -- new large projects that have basically been costed, engineered and are now ready to be bid in function of, people changing their oil price assumptions, are really going to start being bid right about now, so more 2006 than they are 2005.

The PetroAlliance contract you're referring to is the renewal of an ongoing agreement in Malaysia. It just -- it happened to be a very large one that was bid in the quarter. But it's not specifically linked to a project. It's linked to a basket of projects.

Thank you for that. I guess one last followup. The -- the nature of the large projects that you mention, you expect they'll be product service-specific, or are they IPM, or are they both?

No, no. I think that they will be more product service-specific than IPM in the next couple of years. I mean, we will have IPM projects but they're not going to accelerate at the same rate, as perhaps the oil company-led projects.

And it -- probably too early to say but does that suggest that it's that much more competitive so might you see some, you know, margins and people -- people going out to those projects very heavily, a few competitors that can participate. What's your expectation of margins on those large projects?

I think the issue in the industry today is there is more than enough work for everybody. I think that we're all a little bit capacity constrained. I think reliability and efficiency are the huge premium. In other words, the ability to deliver, it is not just a question of bidding, which is good for pricing but it's also good for -- very good for the established players.

Thanks very much.

Great. Thank you. And we do have a question now from the line of Mark Urness, Merrill Lynch.

Good morning.

Good morning, Mark.

I wonder if you could elaborate a bit on what type of work you're doing in China, and also from a macro perspective whether or not the slowing oil demand growth in China is a concern to you or not?

Let me answer the first part. We do not sell equipment in China. We only do service, and therefore what is really quite rewarding to me is, we signed our first contract in China 25 years ago. Basically they used us as a technology window. In other words, they kept some of our wireline trucks running, just to see where the technology was.

But now that they have become so anxious to improve their energy supply by any means, all of a sudden we're starting to see considerable interest in advanced technologies to solve real difficult technical problems, which are no different than technical problems anywhere else. I'm talking about producing tight jars, producing from highly fractured reservoirs. All the things that we know how to do elsewhere in the world, but they've not asked us to help up until now, and suddenly in the last year, we're starting to see considerable interest in us helping them to do that.

So the segments that have benefited the most so far are wireline, drilling and measurements and to a certain extent, well productivity and completion segment. We have also done some fracturing work in China in very difficult reservoirs,but this is a real change in their attitude towards us. Because in the past they just wanted us to sell equipment and go away.

And the demand thing doesn't worry me particularly, because you know, everyone is focusing on the IEA's demand remarks in the last week or two. No one seems to have focused on the supplier, and what is really interesting is if you look at the supply numbers for the first half year, the nonOpEx supply is about 1.2 million barrels a day below what the IEA currently has in their forecasts. So you know, I don't think there is a significant elasticity being developed in supply demand for it to significantly affect the price.

Okay. And then as a followup, you mentioned that many customers now are proceeding with multiyear contracts, based on higher oil price assumptions. Could you address at what oil price do you think that the project plans would change? In other words, what's the minimum sort of threshold you think oil prices need to stay above in order for activity to continue in the robust fashion that it's -- ?

I think people will get really worried if it started dropping towards 30, but I don't think that it dropping from 58 to 40 would make any difference at all, because it's not a question of not -- not only a question of the short term economics. It's also a question of the long-term renewal of the production -- the production base.

Thank you, Andrew.

Thanks. And we do have a question then from the line of John Dowd, Sanford Bernstein. Please go ahead.

Good morning. Nice quarter.

Thank you.

When rig day rates increase, it clearly benefits companies such as Schlumberger that provides services and technologies that can save rig time, or replace rig time, and when I look at the contract bookings for the offshore rig companies, it appears that the E&P spending on rigs will be accelerating into the second half of this year.

Do you think Schlumberger revenue growth will continue to accelerate over the balance of this year as a result, or do you expect the revenue growth rate to be in line with the 20% delivered this quarter?

Well, you know, you're talking very much about offshore rigs, I think, John. No? You're thinking more in terms more of offshore than land. No?

I definitely have a lot more visibility in offshore than land.

And the point is that, when rig rates increase it's not just the technology. The thing that really, really makes the difference is reliability.

In other words, you know, a tool failure on a rig with a spread cost of $1 million a day is very expensive if you lose 72 hours, so you know, if you are reliable enough to lose less than your competitors, you do better. So is there pricing leverage in that offshore market considerable? Yes. Where we actually grow faster -- we won't grow faster than the day rates that's for sure, because that's a pure supply and demand market. I would say that, you know, I don't think our underlying growth rate worldwide on the balance of this year, is going to change for much than what it's been in the first half.

Okay. Thanks. And a quick followup. Russian production growth has slowed dramatically.

Yes.

Given that Schlumberger probably has more visibility into Russia than anybody, I was wondering if you could add some more color to this? Do you think that this -- [Yuganskneftegaz] is the only cause of the deceleration, or are other companies seeing production growth slow as well?

We've always said that there are two factors playing. One is that we are moving towards the end of the period when it was easy to access the existing well stock that was drilled in the Soviet era, and to work that over, and to produce more. Still possible, but a lot more difficult than it was three or four years ago.

And the second thing is, what the previous question was about, and that is to say that this ceiling on the oil price after which the operators only benefit marginally means that people are reluctant to invest more.

Great. Thank you very much

Thanks, and we do have a question from the line of Terry Darling with Goldman Sachs.

A couple followups. First on John's theme there revenue growth year-over-year probably looks similar in the second half of the year, but given the incremental margin trends continuing back half of the year, we would expect your year-over-year profit growth to continue to rise. Is that fair?

[laughter] Yes. We're not going to start giving guidance, Terry, but it's a logical conclusion, yes.

Just in terms of trying to understand where we are in the process of pricing impacting your nonNorth America business I know those are longer contract-type markets for you, what percentage of the contracts you have, that would be relevant to this discussion in nonNorth America markets, do you think have rolled to a higher price book? Where are we in that process of getting your entire business up to the -- sort of the leading edge?

I would -- I would -- and I cannot be entirely precise here, but I would guess that we are probably -- halfway through renewal. However, that is not fully reflected in our numbers, because, you know, some of them may have only started a month ago if you see what I mean.

Sure.

But I would say that the renewal process we're probably halfway through.

That's very helpful, and on the macro comments you had we certainly would agree with your view on the supply side for oil productive capacity. However, I think there have been some comments out of Saudi, that they see their spare capacity increasing in the second half of the year, but I guess I'm really interested in your view of the impact of the rig count, which I think is getting close to 60 at this point with I think an outlook to be headed to 100 by the end of '06. What kind of an impact do you think that will have on productive capacity when we get -- you know, we get to that point?

I'm not going to second guess Aramco. I think that Aramco's rigs will probably be -- you know, don't forget there's probably one third on gas, one third on maintaining the exists production capacity, and eventually one third on the oil.

So I think that the current rigs will be largely sufficient to sustain the production capacity they have, but you know, I -- if you look at the program of field developments they have real increases are coming over the next couple of years.

The last question I want to get into the weeds a little bit on the LWDMWD business. That's the area I perceive the lead times, you know equipment electronics from your suppliers is getting the longest. First off, is that a fair understanding -- of where your bottlenecks are?

I would -- I would say that machine shops are just as big of bottlenecks as electronics.

I guess what I'm trying to figure your out is do we need to worry about as a company-by-company basis as we move into '06, companies you know, managing this growth versus capital discipline, you know, balance differently, and is there risk that you know, you're not able to get the equipment that you need relative to your competition, probably more in '06 than '05, in order to meet the growth requirements of your customers spending?

Well, I don't want to tell my competition what we're up to. All I would say is that people who are not thinking seriously about their '06 CapEx now will not get it.

So fair to say that could be an issue then. Thanks.

Yes.

Okay.

Our next question comes from the line of Michael LaMotte, JP Morgan.

Good quarter.

Thank you, Michael.

My question really has to do with scope and ABC and where we are from a deployment standpoint, because if I look at the CapEx guidance for the back half of the year relative to the first half of the year, and incorporate GECO, it looks like your baseline CapEx is actually sequentially falling in to the back half? Am I calculating that correctly, because we're getting to the point of global deployment on those two technologies?

Well, let me while Jean-Marc is looking up the numbers, no, we're certainly not getting to the point of global deployment on either scope or ABC, Michael. ABC is much more advanced than scope, but you know, the -- an orderly deployment of scope through the world is still going on at this point in time.

Michael, with the 330 million on the CapEx for Q1, 394 and now our forecast for the year is 1 710.

That's with multiclient.

With multiclient. Right?

Right.

Okay.

So that leaves 986 for second half which is higher than --

Higher. Okay. Good. Thank you. On the buyback, Andrew, obviously it was up significantly from the run rate in the last few quarters.

Right.

Is this a new pace and if you keep it, obviously you'll finish up in about three quarters -- about three quarters ahead of --

Our approach in the second quarter was tactical.

Okay.

So I can't -- you know it's not necessarily going to be the same approach going forward, Michael. We will complete the program on time, but how we do it will -- the second quarter is no guide to how we will do the rest.

Okay. Good. And lastly on the barges in Venezuela, they're all six working now?

They're all five -- five are actually working, one is being mobilized as we speak.

And can you give us an idea as to what the average utilization was in Q2?

Certainly for one it was zero, and the other five it was about the same. A net increase in one going forward.

Okay. Very good. Thank you.

Thanks. And we do have a question from the line of Ole Slorer, Morgan Stanley Dean Witter. Go ahead.

Thank you very much. Just to clarify, Andrew, was there anything -- this is really a very good quarter and was there anything in the quarter that in any form or shape was unique, such as a large completion of sale, or draw of equipment sale, or draw anything along those lines?

No. I mean, we -- typically our revenue is -- is mostly service and therefore, you know, even in a ramp up period, it's not going to be violently fluctuating up or down, and we don't have any one product line that can make a huge difference in one quarter. I mean, we could have an exceptional sale of artificial lift for example, but we would normally point that out to you, so no. No, that's not the case.

Okay. I just wanted to clarify that number one. And number two, in the past year, kind of been coming into a paradigm, it's very difficult to model the company compared to historical trends in that we maximize the rate count and you historically have highlighted the importance of rigless growth, and I was wondering if you can give us some sort of sense of what you think that the organic, of you exclude pricing, what is the organic growth rate that you think you can sustain over the medium-term in your organization, in terms of a head count and equipment addition? How should we be thinking about that?

I don't think for a moment we're at a stage that we're not going to be able to follow, in terms of equipment or head count, the likely evolution of the rigs. If you look at the rigs, my feeling is that thanks to the Chinese, there will be no limit on the number of land rigs that the world deploys.

I mean, having read that there's now a Chinese land rig in the Rocky Mountains, I think that's a sign of the times, and in terms of offshore rigs you know better than I do, how many are under construction, and I think -- so I think that if there is a limit on organic growth in any sector of the rig market, these -- that there may be for periods of time a slight shortage of offshore rigs, but I don't think we'll have trouble following.

And in terms of rigless, that is where, you know, we -- it's a question of us having sufficient resources to deploy into rigless markets, where we think the profitability is suitable, because there is no shortage of that work if you want it.

No shortage of that work -- ?

The swing factor for us will be how much will be rigless.

So you don't see any constraints to a sort of steady organic growth -- ?

Not at this point in time, no.

One slight followup question, you mentioned the North America pressure pumping market that you had specific concerns in 2005. Can you talk a little bit longer term and whether you see any sort of risks that the U.S. market could go the way the Canadian market has gone over the past four or five years, in terms of fragmentation?

I think if I listen to what people in North America are telling me, there is still sort of considerable amounts of capacity under construction, in pressure pumping particularly. That will come to the market in '06 as opposed to '05, and the point is when does the capacity addition start to outstrip the activity, and at this point I don't have a good feeling about '06. Sorry. I don't have a strong enough feeling about '06 to give you an opinion Ole.

Thank you Andrew.

And we have a question from the line of Jim Crandell, Lehman Brothers.

My question is about R&E spending and CapEx. R&E spending I think was actually down a little bit year-to-year, but aside from the quarter-to-quarter change, it does seem that it's pretty flat. What should we read into that as far as the outlook for R&E spending over the course of this year and next year?

And secondly on CapEx, could you comment besides Western Geco where you've actually raised CapEx, both by product line and geography over the course of this year, and what you thinking is of CapEx as you go into '06?

So R&D, you know, we traditionally will not function R&D in function with activity, because we don't want to have to cut it in downtimes, and I personally have a very strong belief that R&E can only usefully employ so much of an increase in any one year because this is about putting projects together. Hiring top class people, all the rest of it, so you know, we -- R&D is a bit flat at the moment.

It will increase a bit next year but not in a dramatic sense, and in fact what we are doing is we are putting a lot of the increase back into our R at this stage, as opposed to D, which is a little bit a sign of the times, and also a sign that Schlumberger is now a pure oilfield services company, and again I think that's where the money should be going.

In terms of CapEx, by far, the biggest use of CapEx that we have is drilling and measurements in terms of relative increase. After that it would -- to an extent be well services but I'm not saying -- it's not necessarily well services North America. Wire,line some increase but not huge.

So it will be dominated, I think, by drilling and measurements with well services second and wireline a third, and geographically Middle East is obviously absorbing a huge amount of CapEx at the moment, as is Europe, Africa, and Russia. They will be the -- they will be the two principal users.

How about the ramp in CapEx as you look at '06?

I think that D&M and well services will continue to grow. Wireline will grow to some extent, but it's not nearly the same size increment.

Would you expect CapEx to exceed $2 billion in 06?

Too early to say.

We do have a line from Kurt Hallead, RBC Capital Markets.

Thank you. Andrew, I was wondering -- got a lot of positive issues in all your geographic areas, and with the number of different product lines, are there any areas that are underperforming relative to your expectations and if so what are you doing to address that underperformance?

Well, one or two areas -- I wouldn't say areas but specific countries, I don't want to mention their names, which are underperforming and in those cases, you know, as we have no problem transferring the people and equipment to areas that are more prospective, where it's very easy in this market to adjust the cost base, but they are somewhat -- I'm talking about three or four countries worldwide, that's all.

And the underperformance is due to just a lack of spending in those areas?

Yeah, a lack of investment.

And then my followup here is in terms of use of cash, you have repurchased about 3 million shares in the quarter.

Yes.

What's -- as you continue to generate more and more cash, are you -- how would you rank that use of cash now, in terms of share repurchase or dividends, or special dividends, or something else along that line?

I've always said I don't like special dividends, so I think we're not going to comment on that one. We'll complete the program as I said. We will complete it tactically, if that's the right word. And we said last year, and we did that we would review the dividend on a more frequent basis than Schlumberger typically did in the past, so I think that, you know, I'm not going to say we'll do anything, but certainly the Board will review the dividend again at the beginning of next year.

And if I may, just one last thing on a GEO market basis. I wonder if you could address the prospects for the North Sea market heading out into the 2006, vis-a-vis the prior peak levels that were experienced in '97, and do you see any prospect of increased activity whatsoever beyond the deep water, except for the deep water and the Gulf of Mexico?

I think both the markets you're talking about are going to be rig constrained. I think people would like to do more, but I think both in the case of the Shelf and the Gulf and the North Sea, they're going to be rig constrained.

And that doesn't necessarily constrain your revenue opportunities because of the rig -- ?

Well, it means the opportunities -- in the North Sea it does to a certain extent, but it means that the revenue opportunities we'll have will be rigless.

Understood. Okay. Andrew, I appreciate it.

Thanks and we do have a question now from the line of James Stone with UBS.

My question's been answered. Thanks.

Thank you very much. And we do have a question now then from the line of Bill Herbert with Simmons & Company. Please go ahead. Hi. Good morning.

Morning Bill.

The first time we have mentioned China in an earnings release in a while. It was the focal point at the June analyst meeting last year, with respect to identifying future growth markets. I'm curious as to whether you could define that market for us, in terms of what's the revenue generation, or what percentage of the Middle East Asia Pacific revenues are coming from China now?

Well, currently it's tiny, Bill. It's not a significant part of MEA

And is tiny less than 5%?

Is tiny less than 5%? Yes, it is.

Okay.

It is less than 5%.

Okay.

And the only reason we're signaling this quarter is because it's the first time we've actually seen China respond or -- China to seek us out for different types of services, and to work on specific projects, as opposed to using us as a technology window, particularly on land.

It's the first time you've expressed anything about China in an earnings release in a while, but you also took pains to highlight it at the analyst meeting, and so update us as to your expectations with respect to China going forward? Do you still consider it to be a key growth market?

Well, I'm an optimist.

Yes.

You know, I just don't think that the timeframe with which we get -- get a critical mass business in China, will be the same as it was in Russia.

Okay.

And in Russia we got the opportunity because basically the internal oilfield services industry collapsed, and in China it never has collapsed, so it's going to have to be done with technology differentiation and the rest of it, so it will take longer but it is after Russia if you like, the very last large oilfield services market in which we don't have a very significant service presence.

Are you at all concerned as you increase your technology profile in China, about shall I put it intellectual property vulnerabilities or local competition, if you will, imitating your technology and putting it to a competitive use?

Bill, no more than I've been concerned for the last 25 years.

Okay. And Iraq? Any update on that front recognizing that it's as chaotic as it ever has been?

The last assessment was still that it was too dangerous for us to do anything. There is some small hope that we may, you know, the conditions may be such in southern Iraq, that is north of the Kuwait border by the end of the year, for us to look at it but I wouldn't count on it.

And the last question the put call agreement with Baker Hughes on Western Geco, when does that kick in?

November. November the -- November.

Okay. Thank you very much.

And we do have a question now from the line of Jim Wicklund, Banc of America Securities. Please go ahead.

Good morning, guys. Andrew, you talk about execution being one of the keys from this point on, and I know this is an exceptionally broad statement so take it as such, but what -- what areas geographic, product, political, what areas are your biggest challenges to execution over the next 12 months?

You mean just straight execution of -- of work, Jim?

Yes. Execution of Schlumberger increasing profitability.

That's an interesting question. Well, we have a considerable number of exploration projects in eastern Siberia.

Okay.

Which is, if you like, in terms of sustaining a logging truck or a testing team, really at the end of the daisy chain. I mean, it's a long way from anywhere. I would say that West Africa, given the size and complexity of projects that people are trying to do, logistics and support is still difficult.

Okay.

But otherwise, I don't -- you know, I think it's a question of training and focus, local knowledge, and all the rest of it, but I don't see any huge difficulties.

Okay. You guys have -- have led the industry in the nationalization of work forces. You mentioned that you're constantly getting poached. That's the liability of being the technology leader.

What do you do over the next three years, to maintain -- retain -- I know you're talking about you're paying retention bonuses, but we graduated 250 PEs out of the U.S. last year. What do you do over the next three years to maintain your 'people edge'?

The poaching that concerns me is not from my competitors.

But from oil companies.

Right and so there is a point after which you can defend yourself, because in fact, in some ways the technical positions in a service company like Schlumberger, are a lot more interesting than the technical positions in an oil company, where they tend to be in fairly limited geographies, and perhaps limited to certain types of activity. So we do -- we are able to attract -- keep people by their love of the job they do.

And then again, you know, there are cases where, if an oil company decides they really want someone from us, and in fact, we had a case recently of one guy who had a very, very, very narrow specialty which is very critical in deep water drilling, and they basically tripled his salary, you know. And in those cases you really can't do much, so we just really have to watch it all the time, and we are using classic retention type tools to encourage them to stay.

From what countries are you getting most of your new people? Technically?

Oh, it would be 15 countries, Jim.

Okay.

I don't particularly like --

I understand. Okay. Last point. The previous question asked about the standstill on the Baker Hughes, what is the dissolution procedures with the MI joint venture with Smith?

It's the same as the Baker Hughes mechanism but the standstill expired, when Jean-Marc?

in Q3 last year.

So you can bid them for what they don't own or vice versa?

No comment.

Okay. Okay, gentlemen, thank you very much.

We have a question from the line of Dan Pickering with Pickering Engineering.

Hello, guys. Andrew, as you look out in the back part of the year here, do you -- the question's been asked a couple different ways, but I guess I'll try it this way. When you look at your basic product lines and/or geographies, do you see anything softer in the back half than we saw here in the second quarter?

I don't. I'm trying -- I'm literally I mean, I suppose that, you know, you have to allow us the hurricane season, which seems to be particularly virulent this year. People worry, not me, but seem to worry about the level of gas storage.

Yes.

Given the produceability of gas these days and the difficulty in maintaining production, I'm not particularly worried that storage is a bit higher than usual. And overseas absent, you know, some geo political event that could affect the market, which you know is never impossible, I don't see anything else that could weaken the scenario.

Okay. So it looks like we've got basically all our GEO markets and major product lines should show improvements, as we step forward for the back part of the year, and it sounds like pricing continues to improve. Do you -- on a Schlumberger overall basis, any feel for what sort of net pricing improvements were reflected in the second quarter results?

I don't want to give you a number. All I will say is that as I said in response to the earlier question, you know, I think the rate accelerated in North America in Q2, and certainly the traction overseas where as you know, I've been a bit tentative in the past about saying how much traction there was. There is definite traction now.

So clearly seeing something now noticeable internationally.

Yes.

Okay. Last question as you look to 2006, do you -- do you have a specific rig count forecast at this point?

No. No, we -- we -- in fact, no, we don't. Because you know, the offshore one is pretty well known. Right? It's not very difficult to do, and the question is how many land rigs are going to get added where?

Okay. Thank you.

Thank you and we do have a question now coming from the line of Kevin Simpson with Miller Tabak, please go ahead.

Good morning. Nicely done. Nice to have the opposite from getting beaten up, I'm sure. A couple of quick questions. One is more general and just wondering if you -- were you surprised by the strength of the quarter, and the strength of profitability and if so, you know, where -- without giving away the store where were you surprised positively?

I was very pleased with the progress they made in South America, because I know they worked very hard to do that. And otherwise, I was not surprised by the strength of North Sea or Nigeria. You could see that coming. I'm a little bit surprised by the strength of the Far East, but maybe that's just a bit further away from it. I mean, the Malaysia, Philippines, Taiwan, Vietnam, all that part of the world, but otherwise, no, not that surprised.

Okay. And obviously based on the stock performance a lot of people were surprised. That's part of the deal.

The other question is on the projects you're speaking of that are just beginning to be bid out, can you characterize, is it more exploitation, you know, is it more, you know, remedial-related work, is it more from big integrateds, or is it NOCs, or is it -- ?

No, I think that we're still largely in a world where sort of the immediate stuff is NOC. I think it's -- we're seeing very definite signs on the part of the majors that they want to go back to doing exploration, and the remedial stuff is all over the place.

But that's a little bit what I said earlier, I think that the big new projects which require considerable engineering, are really only going to be start to be bid in the back half of this year and the beginning of next year.

and so we could be talking about, -- Right through '06 and '07 and scary to say even out to '08?

Well, tell me about the economy, but otherwise, yes.

Thanks and we do have a question from the line of Robert MacKenzie, FBR.

My question is centered around some of those big projects including I guess going back to the Petronas one, that was just renewed. Can you discuss your pricing strategy that you approach those multiyear projects with?

Well, in this market one doesn't want to tie one's self to long-term projects unless you have at adequate protection. When we bid long-term projects now for a particular service line, which is the Petronas case for example, we will build in all sorts of fairly short period escalators, to ensure that the pricing remains intact. So you know, we no longer will bid fix priced for a period of -- I would say -- a maximum we would bid fixed for in the overseas market would be one year now.

And can -- you know, in -- over and above say cost escalators, which I'm sure are pretty easy to translate, what about incremental pricing, over and above costs over the period of a multiyear contract?

Well, that mechanism will work the same as it has always worked. Remember when you bid a contract like that it has to be bid on a common denominator of technology.

In other words, in order for the client to be able to choose between the different suppliers he has to create a basket of technology that is common to the three or four who are bidding, in such a way that he can make a decision.

And the -- what happens in these multiyear contracts is subsequent to that you sell your new technology into the contract, but at the price that you choose to bid it, because it's not covered by the pricing in the underlying contract.

Okay. Fair enough. Thanks.

Okay. Kent, perhaps we have time for one last short question, please.

Thank you and that question will come from the line of Pierre Conner, Hibernia.

Just made it under the wire. Andrew, my question, first, just a real specific one. You mentioned you thought half of your longer term contracts in nonNorth America were under a new pricing regime.

Right.

What would you say that is for your North American contracts on a percentage?

I think on the long-term in North America we're almost 100% through them.

Okay. And just on this question you bring up about moving into an exploration phase finally, relative to and you've harkened back to the period in the industry of the period of the 70s In comparing that. Where would you say we are relative to beginning a true exploration phase versus what we've really experienced for the last many years of this development?

I would say we're 5% of the way into it.

Okay.

I mean, it's very much if you like, the inquiry state. What is different -- what we've seen in the last three months, six months is really different is companies coming back and asking about technology or segments, specifically for exploration projects.

But that's just inquiries in terms of versus significant activity in that arena?

No, it's inquiries, what that tells you, is they're making a budget.

Right. Very good. Thank you for the information.

Thank you all very much for participating in today's call. Kent, would you please provide the finishing details?

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