斯倫貝謝公司 (SLB) 2005 Q4 法說會逐字稿

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

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

Later, there will be a question-and-answer session and instructions will be given at that time.

If you need any assistance during the call today, please press star then zero.

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

At this time, I'd like to turn the conference over to Schlumberger's Vice President of Communications and Investor Relations, Mr. Doug Pferdehirt.

Please go ahead, sir.

Thank you, John.

Good morning and welcome to today's fourth quarter and full-year 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 forward-looking statements as well as non-GAAP financial measures.

A reconciliation of any non-GAAP measures we discuss are contained in today's press release or will otherwise be posted on our investor relations Web site at www.slb.com.

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

Finally, we'll take questions from the audience.

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

And now, Jean-Marc will discuss the financials.

Thank you, Doug.

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

Fourth quarter earnings from continuing operations before charges and credit were $1.05 per share, up $0.19 sequentially and $0.46 above same quarter last year, an 82% increase.

Net income was $1.08 per share reflecting the $21 million gain on the sale of 8.5 million shares of Hanover Compressors.

Oilfield Services generated 852 million in pretax operating income.

The pretax margin was 23.9%, a 180 basis point improvement sequentially.

By area, the highlights were as follows: North America pretax margin was up 360 basis points to 26.7%, due to the Gulf Coast recovery and strong activity in Canada.

Latin America pretax margin was 14.6%, sequentially down 150 basis points reflecting mainly reduced profitability in Venezuela and Latin America South.

For ECA, our Europe/Africa/CIS unit, the pretax margin increased 100 basis points to 22.3%.

Improvement came from West Africa, North Africa and Nigeria.

Middle East/Asia pretax margin improved a further 150 basis points to 30.7%, with a strong contribution from old and Middle East GeoMarkets, and BMP, our Brunei/Malaysia/Philippines GeoMarkets.

WesternGeco pretax margin improved 410 basis points to 23.7% as a result of very strong multi-client service sales and despite a seasonal decline in marine activity.

During the quarter the return on sales on 100% basis achieved 15%, a level previously established for the entire company.

For Schlumberger as a whole the effective tax rate before charges and credit was 23.5%, slightly lower than the previous quarter and in line with our previous guidance.

The return on capital employed by Schlumberger reached 31.9% in Q4 versus 26.3% in Q3.

At the end of December, our net debt dropped to 532 million, a decrease of 504 million during the quarter, reflecting a strong cash flow from operations.

Cap Ex including 23 million of multi-client surveys capitalized reached 517 million for the quarter versus 408 during the third quarter.

We repurchased during the quarter 2.1 million shares for $204 million.

So far as part of our 15 million shares buy back program, we have repurchased 13.1 million shares for a total amount of 962 million at an average price of $73.

Yesterday, the board of directors approved a quarterly dividend per share of $0.25, a 19% increase over the previous $0.21 dividend.

A two-for-one stock split was also approved.

Now some guidance for 2006.

First, the stock-based compensation expense in 2006 is estimated to reach $110 million compared to 40 million in 2005.

Second, we expect our effective tax rate to remain in the mid-20s for the year.

Depreciation and amortization expense is expected to reach about 1.5 billion in 2006.

And finally, Cap Ex is now estimated at 2.4 billion, including 150 million of multi-client service capitalized.

And now I will turn the conference to Andrew.

Thank you, Jean-Marc.

Good morning everybody.

The very strong activity we've seen in the fourth quarter resulted in new record levels of oilfield revenue and pretax operating income for Schlumberger.

All areas of both Oilfield Services and WesternGeco benefited as customer spending continued to increase to respond to a need for new supplies of oil and gas.

Strong progress around the world was only moderated by residual hurricane effects in the Gulf of Mexico, an unfavorable revenue mix in Latin America, and the usual seasonal weakness in marine seismic.

At Oilfield Services, sequentially growth in the Eastern hemisphere was greater than growth in the United States for the second quarter running confirming the increased activity, improved equipment utilization, and stronger pricing in those markets.

Within North America, the Gulf of Mexico and Canada was strong sequentially, as activity intensified and pricing strength amplified.

Significant improvements were recorded for Well Services and Wireline Technologies.

Activity in the Gulf of Mexico returned to stronger levels albeit with some residual effect following the extensive damage caused by last quarter's hurricanes.

Further, pricing strength, stronger Well Services and Wireline activity and better resource deployment in the Gulf of Mexico draw the sequential improvement in operating margins.

In Latin America sequential growth was strongest in Mexico as a result of IPM third-party managed service.

Increased IPM activity in Latin America South, a new drilling and measurements contracts in Peru, Columbia and Ecuador also contributed to growth.

High levels of barge activity were maintained in Western Venezuela, and discussions regarding the settlement of certain outstanding receivables due for the PRISA contract were ongoing at the end of the year.

Although sequential revenue growth was in line with worldwide strength, sequential operating income suffered through the effect of lower margins inherent in the third-party managed services associated with IPM operations, in addition to fewer software sales in Venezuela, and reduced profitability in Latin America South.

In Europe, CIS and Africa, the strong year-on-year and sequential revenue increases were driven by the North Africa, West Africa and Caspian GeoMarkets, but these were surpassed by the growth in Russia where full-year revenues grew by more than 50%.

This figure includes 18% growth in the GeoMarket, Schlumberger activities and strong contributions from the companies in which Schlumberger has acquired ownership or majority ownership positions.

Results in Russia also contributed to robust growth in year-on-year and sequential operating margins through higher efficiency.

Area margins grew as a result of strengthening activity in North Africa with renewed operations, including exploration by international oil companies and accelerated technology deployment in West Africa.

Results in the Middle East and Asia highlighted the supply-side response to the future demand for oil and gas.

All GeoMarkets in the Middle East contributed significantly to the sequential revenue advance.

The growing market for drilling and measurements technologies, a new wireline campaign in the East Africa and East Mediterranean GeoMarket, together with strong Wireline services and well completions and productivity activities in the Arabian Gulf GeoMarket, continued growth in Saudi Arabia drove this improvement.

In Asia Well Services enjoyed strong pricing in the Brunei, Malaysia and Philippines GeoMarket, and that GeoMarket also experienced significant progress on the Bokor integrated project management production operations.

The Middle East and Asia pre-tax operating margins reached the 30% level rising to 30.7%.

The Arabian Gulf and the East Africa and East Mediterranean GeoMarkets recorded full-year 2005 revenue increases of more than 30% and operating income growth of more than 40% compared to 2004.

Similar growth rates in Asia were achieved in Brunei, Malaysia, Philippines, Thailand, Vietnam and Australasian GeoMarkets.

Our performance was also fueled by a number of significant introductions of new technology.

Early in the year, we introduced the Scope generation of logging while drilling services.

Scope brings new levels of precision to well placement, improved efficiency to the drilling operation, and latest generation wireline-type measurements to LWD formation evaluation.

It also brings wireline quality formation pressure measurement with the same precision and efficiency.

Success in the fourth quarter included a remarkable job in Alaska where the PeriScope 15 deep electromagnetic imaging technology kept 6,800 feet of horizontal lateral well within the most productive part of an 8-foot thick reservoir.

Scope technology was also used in the Norwegian sector of the North Sea to keep a horizontal well within reservoir sands for more than 1600 meters, making the well the best producer in the field.

This well was even more remarkable as it was drilled jointly from a remote customer Schlumberger team working from an onshore operation center.

Late in the year, Wireline introduced the next generation of wireline logging equipment under the commercial name of Scanners.

The Scanner family of rock and fluid characterization services takes reservoir evaluation to the next step.

The three-dimensional scan of the formation giving customers a deeper understanding of their reservoirs.

Scanner technology enables customers to evaluate formations more confidently and assess their reserves more accurately.

Through better understanding, operators can reduce risk and optimize the field productive life.

Uptake has been enthusiastic and in the North Sea, Norsk Hydro used the Sonic Scanner advanced acoustic service to provide quality data and rock formations where no other technology has provided usable data.

As a result, the technology will be used by Norsk Hydro to improve understanding in many difficult to drill formations.

WesternGeco continued to deliver excellent results reporting notable improvement in sequential and year-on-year revenues and operating margins.

Full-year results were led by continuing market acceptance of Q technology, higher multi-client sales and improved operating leverage on marine operations.

Q technology revenue more than doubled over 2004, representing 24% of total revenue in 2005.

Utilization of the 5 Q equipped vessels reached 93% in the quarter.

Q technology activity is expected to grow by another 80% in 2006.

Sequentially, multi-client revenues were up in a number of areas led by North America, where block renewals and upcoming first quarter lease sale in the Gulf of Mexico all contributed the results.

Multi-client data sales in West Africa, the Caspian and Asia point to a strong renewed interest in exploration.

The sequential decline in marine was a combination of a number of separate events that included winter slowdown in the Northern hemisphere and the transit of affected vessels to other areas.

Looking ahead, several trends will define activity in 2006.

First, rig count increases will be largely limited to onshore work as the global offshore rig market will remain constrained by supply until new builds are mobilized beyond 2006.

Second, shortages of people and equipment across the industry are likely to result in both significant cost inflation and project delays, placing a high premium on reliable suppliers of both technology and skilled personnel.

Third, technology that can improve the productivity of a limited base of skilled personnel will be in high demand.

This is clearly demonstrated both by the success of the petro seismic to simulation suite of software tools, and the growing acceptance of remote monitoring of job execution to achieve superior performance from technology.

Fourth, exploration programs where Schlumberger has an unmatched portfolio of services will show a large increase in 2006, and this will continue for a number of years.

Overall, we expect our top line growth in 2006 to be similar to that experienced in 2005.

The industry has already recognized the need for an unprecedented effort to secure hydrocarbon supply.

Plans are being put in place to achieve this, but it will take several years of sustained activity to develop the new production that can reliably replace today's supply, much of which was developed during the upcycle in the 1970s and 1980s.

In addition, much of the new supply will generally come from smaller reservoirs and more hostile environments where Schlumberger is uniquely placed to meet the challenge.

I will now hand the call back to Doug.

Thank you, Andrew.

We will now open the call for questions.

[OPERATOR INSTRUCTIONS] First to the line of Ken Sill with Credit Suisse.

Please go ahead.

Good morning, gentlemen, and congratulations.

Thank you.

I had a question on you're revenue guidance, you know, the comments you guys are saying the rig count increase is going to be limited, particularly offshore, 25% year-over-year revenue increase.

Is there any way that you can kind of break that down between how much of it's related to pricing, how much of it's related to activity related to rig count going up some and then how much is related to just the increase in non-related rig work that's out there?

I can't possibly break all that down, Ken, but I can give you some general guidance.

So firstly, we do think that land rigs will show a double-digit increase, average '05 over '04 on a worldwide basis.

Secondly, don't forget that a lot of the remobilization of the offshore fleet was not a full-year phenomena in 2005, it was particularly in places like the North Sea, it was a half-year phenomena there and therefore, there is a carry-over of that into 2006.

Then I think that, you know, in some markets, particularly the mature production markets in South America and Russia, the rigless activity will increase and the balance of it will be pricing power carried over from '05 and we can still implement in '06.

And on the pricing, do you think you can be more aggressive in '06 than in '05?

I think it will necessary to be more aggressive because we will suffer in '06 more cost inflation than we had in '05, but at the margin, I think we can still gain.

Okay.

Thank you.

Our next question is from the line of Bill Herbert with Simmons and Company.

Please go ahead.

Good morning, guys.

Good morning, Bill.

Andrew, thanks for the revenue guidance 2006 here with respect to similar rate of growth 2006 versus 2005 versus what was witnessed in '05.

Could you perhaps expound on which GeoMarkets you expect to be demonstrably better in 2006 versus 2005 from a revenue growth standpoint, and which markets do you expect to be more subdued?

I think it's going to be very similar to 2005.

Okay.

I think that the Middle East is still going to see a substantial increase as will North America and, you know, partly because of acquisitions that we made in '05 and partly because of organic growth the Russia GeoMarket will have another very strong year.

So actually, it's a very similar pattern to 2005.

Okay.

And probably the only doubtful one is, which we're planning that way, is the whole of Latin America.

What is different, it seems, is that you've pointed out that the spending mix in terms of exploration spending is expected to increase significantly in 2006.

What are you hearing from your clients and could you amplify as to your confidence in that mix shift and spending?

I think that I would actually, Bill, perhaps qualify that a little bit inasmuch as we think this exploration spending phenomena is a multi-year phenomena.

So we're as absolutely clear in our order book today as in seismic, both land and offshore.

And it is also clear that in offshore, there are customers who would love to drill exploration wells but are constrained by lack of a rig.

Yes.

And that's a fairly general phenomena, which is why I make the point about 2007, 2008.

Okay.

Thank you very much.

Our next question is from Alan Laws from Merrill Lynch.

Please go ahead.

Good morning.

I wondered if you could talk a little bit about what product lines the incremental Cap Ex is headed towards?

A little color on that as to whether how much of it's recap and how much of it's growth?

Well, I think that it will be difficult for me to single out product lines.

If I had to single out one that will be extremely Cap Ex intensive, it would be drilling and measurements.

I think that, you know, the ratio of growth to replacement has probably gone slightly in favor of growth because the swing factor is obviously replacement.

In other words, you have obsolete Cap Ex but you're not going to obsolete it if it's active.

But I would say that in the increase, it's the swing towards growth in technology that's making -- that's giving a higher growth technology ratio to replacement in '06 compared to '05.

So this is raising the average technology really of the product offering.

Is that true?

I would say capacity and technology.

Got it.

What, the final question is just a little bit follow-on from that.

What would be the incremental margins that you're seeing on you're directional drilling and Wireline on the new capacity adds, essentially?

We don't give out incremental margins, but they're very satisfactory.

Could you put them in context as to, versus the average margin that you see out there for the Company?

Are they 30% above that, or are they --

I'm not going to go there.

All right.

All right, that's all I have.

Thanks, Andrew.

Next we'll go to Ole Slorer with Morgan Stanley.

Please go ahead.

Thank you very much.

Andrew, I wonder whether you could you help us a little bit in thinking about the sustainability or your capacity growth?

I mean 'til you put in place [inaudible] phenomenal international platform and invest it over a number of years from here on, where do you think you stand?

You mentioned that there's a premium placed on companies that have the ability to execute and clearly that's a function of what you've done over the previous several years, not what you're doing right now.

But could you help us how to think about your sustainable growth execution growth capacity by region a little bit and sort of flesh out the way we should be thinking about that?

Sorry, Ole, are you talking about is our infrastructure sufficient?

I'm talking about you put in place a big infrastructure, you're not clearly adding people, you're adding Cap Ex, what sort of volume growth, volume capacity growth do you think you're capable of handling on a sustainable basis over the next three, four years?

I think the only limiting factor on our ability to sustain growth over the next three or four years is the rate at which we can hire and train people.

I don't see equipment being a problem.

Our capacity to build it, provided we are aggressive enough, early enough, which we were in 2005.

In other words, basically the Cap Ex for 2006 was decided in May last year because, you know, there are shortages everywhere.

So if you didn't order it back in May last year, you're in trouble.

We -- I think that we -- our infrastructure in Latin America is sustainable, doesn't need a great deal of adding to it.

The huge infrastructure we built in Russia, I think, was a superb investment.

The North Sea I'm comfortable.

Africa, there are some countries probably in North Africa where given just the shear size of the increase in activity that we will have infrastructure investment, but I'm talking about creating new bases, new computing centers, that sort of thing.

It's not huge.

West Africa, we have made a very significant investment in West Africa already.

Middle East, it's the same as North Africa.

In other words, capacity, just the shear increase in what they're being asked to do will drive some infrastructure investments.

For example, we're having to double our infrastructure in Saudi Arabia.

And the Far East, I'm reasonably comfortable.

And India is growing so fast, we're also making some infrastructure investments there.

But I don't think, you know, I think the only real limiting factor is our ability to hire and train people.

And it appears that you're ahead of the curve there, given what you've already done, but at what level are you now capable of growing your kind of skilled engineer or skilled field person going forward?

Ole, I would consider that a trade secret, but we do have a huge recruiting and training infrastructure in place.

Okay, Andrew.

Thank you very much.

Next we'll go to Kurt Hallead with RBC Capital Markets.

Please go ahead.

Yes, thank you.

Good morning.

Andrew, I've got a question for you relating to your international pricing strategy and it goes along these lines.

Given the capacity constraints currently in the industry and the function of the growth in demand that you see, do you think it's beneficial now to potentially shorten your contract terms to less than a year to try to maximize incremental pricing power in the international markets to the same extent that you've been able to do in North America?

Well, I could say it another way and that is to say that we would not accept a contract of a duration for longer than one year without pricing flexibility.

And that can either be renegotiation of the contract, built-in escalators, or the right after one year to review the pricing structure within the contract.

Have you become more aggressive in that process here?

I know you talked about it in the last conference call a little bit.

Have you started to become a little more aggressive in that process given the constraints in the business?

Certainly we have, yes.

Okay.

And then if I may, just one follow-up here.

In terms of drilling economics you get a lot of questions from clients and so on about how much more pricing power can the oil service industry have.

Maybe another way to think about that is where would oil or natural gas prices have to go before the oil service industry, or you as Schlumberger, start to lose your leverage?

Could you try to provide some color for that?

Well, I think that the constraints that you're talking about, you know, the lack of capacity is really an offshore phenomena at the moment.

And I don't see, I sort of agree with the numbers that you've seen in the surveys flying around about what the drop in the oil price has to be before it would affect programs.

In other words, it has to be really quite considerable because the issue is not just that, the issue is a volume problem.

And, you know, it would -- any severe cuts back in E&P expenditure would multiple the problem going forward.

So I would sort of agree with the figures you see in the surveys.

And then in that context, too, would you agree with the assessment that the E&P industry is likely to drill through or spend through any kind of seasonal variations in the commodity price?

I think so.

I think what's happened in the North Sea this winter is really significant.

I mean when I was running Sedco Forex, for example, you would expect to where all your jackups not to shut down in the winter because it was too expensive to move them and you would expect a lot of the semis not to work through the winter, and this year, everyone's working straight through the winter.

Excellent color.

Thank you, Andrew.

Next we'll go to Michael LaMotte with JP Morgan.

Please go ahead.

Thank you.

Andrew or Jean-Marc, if you all could perhaps quantify what you expect the cost inflation to look like in '06 versus '05 and perhaps, you know, within that context, also speak to perhaps what percentage of your contracts do cover that inflation?

I'm looking for, I guess, a net inflation number that could flow through the P&L next year.

I think that labor costs will be in double digits and the inflation will be well into double digits, Michael.

Okay.

I think that the equipment costs are largely known because that's equipment that's been ordered in 2005.

And finally, that number, the inflation number in the equipment is not hugely significant.

But everything around transport, logistics, freight, shipping is going to be pretty heavy.

I mean, I just saw this morning some blanket contract renewals just for hotel rooms.

Hotel rooms in Dubai are up 34%.

So it's going to be a big number.

I can't give you a quantification over the whole spectra, but it's going to be a big number inflation.

Okay.

Biggest on the personnel side then?

Yes.

'06 feels like a year where there's going to be less equipment moving around so from a transport--

Well, I think the equipment moving around will be new equipment.

Okay.

Okay, good.

Can you address perhaps the mix shift in services in North America?

I think at least I know I generally think of North America as a very basic service, almost commodity-like business, particularly on the land side, but the results in Canada and even some of the other unconventional basins that are incrementally growing faster in '06 versus '05 are creating a greater call or a bigger call on your technology services.

Can you address that?

I think that probably for Schlumberger, the most significant shift that you're seeing from nonconventional gas plays is that they require a much higher quality of reservoir characterization than traditional gas.

Because, you know, the producibility of an individual shale is absolutely key, and therefore, you know, operators are quite content to spend a lot more money on characterizing it before they complete and frac than they would be for a traditional gas field.

Okay.

And then is that translating further down into even the application?

Because I know that getting the frac right is critical, too, in terms of staging.

Yes.

I think, by the way, I personally that's still at a very early stage and you will see significant improvements in frac technology in the coming years to address that market.

And then if I can ask just one sort of big macro question on, you mentioned the North Sea and activity going through the winter, I think one of the things that's caught me by surprise is the rate of depletion in that basin and even on the shelf of the Gulf of Mexico ex-hurricanes.

Are you seeing anything there that perhaps as a follow-on to Kurt's question about drilling through this, for all the talk about nanotech supply growth and concerns about gas supplies coming back online, et cetera, what do you see as sort of a trend line decline in the shelf of the Gulf of Mexico?

I think --

-- and where's that going?

I think you have to separate depletion from decline rates.

And decline rates in function in the North Sea on wells that have been completed with very new technology are extremely fast.

They also pay back extremely fast and I think that where rigs are available, people will be drilling a lot more of those wells today.

The trouble is that the North Sea is a rig-constrained market.

And the Gulf, you know, the decline in gas production, the decline rate for new wells in the Gulf is very, very fast, but that's not a new phenomena, it's been like that for, Doug, how long would you say?

The past 10 years.

Past ten years.

I get the sense there's an air pocket coming in the Gulf of Mexico with so much of the rig activity now focused on cleaning up post-hurricane that the delaying of the well, of the actual drilling programs in the first half of '06 --

We didn't --

Exacerbate the problem.

We didn't think activity for us would be back to normal until the second quarter of '06.

And I think that's probably still a true statement.

Now, what effect that will have on ongoing production as opposed to production that was stopped by the hurricanes, I really couldn't quantify it.

Great.

And then last one for Jean-Marc.

Could you perhaps walk through the P&L mechanics of the increase in option expenses related to FAS 123?

Sure.

On stock-based compensation, yes, we mentioned that we are increasing from 40 million in 2005 to 110 million in 2006.

So we can break that down a little bit.

Out of the $70 million increase, you have 20 million which are related to the implementation of FAS 123R.

As you remember, we preadopted FAS 123 in 2003, so what we're talking about is basically grant pre-2003, which are still vesting for a couple of years.

So that amount is $20 million, actually declining to 5 million in 2007.

The rest of the increase is related to a new grant and the stock price, obviously.

Because when you Black-Schole, it's a function of your stock price, as you know.

So I would say that about 40 million, then, is basically just the rest of the new grants.

Thank you.

Congratulations.

Thank you.

Next go to Geoff Kieburtz with Citigroup.

Please go ahead.

Thank you.

Andrew, are you beginning to see improving visibility beyond '06?

You've given very specific, I think for the first time, revenue guidance for the year ahead, but are you getting more concrete visibility into two and three years out?

Well, Jeff, I mean, where there are significant development programs that have just -- where contracts are just starting, yes.

So for example, do I have significantly better visibility on '07 in Saudi Arabia than I did on '06 at the beginning of '05?

Absolutely.

The WesternGeco backlog, you know, at the beginning of the year has never been so high.

And we have inquiries for seismic that go way beyond '06 now.

And so I think that in long-cycle exploration, yes, we probably can see that that is something that we will have significant exposure to in '07.

So in general terms, yes, you're right.

We have much better exposure to '07 than we do in '06.

But please don't ask me to get anywhere close to quantifying it.

Well, no, I'll back off of that.

Thank you.

And what about the profitability here?

I mean, you've got something a little north of 40% incrementals in '05 versus '04.

Should we think about that as being a floor that you're going to improve upon or is there reason to think that that would more likely be lower going forward?

Well, I think it's going to be, I think an ambition should be to sort of maintain that fighting inflation with pricing, Geoff.

Okay.

All right.

And even with your increased Cap Ex, it would look like you're going to continue to reduce net debt.

What are your thoughts in regards to managing the balance sheet over the next couple of years here?

Well, I think that we, you know, I don't have any really huge new thoughts since we last talked on this, but basically we will complete the stock repurchase early, and I've no doubt that we will request the board to renew that.

The objective being still that we will not, we don't want our shareholders to suffer dilution through stock programs, be they options or the discounted stock purchase plan for employees.

We will have acquisitions, but not absolutely huge ones.

And I think we're honoring our commitment to review the dividend more often, Geoff.

So it seems.

And lastly, a rather narrow question.

North Africa is getting a lot more visibility both in the text in the earnings release and your comment.

Can you maybe give us a little bit more detail about what's going on in North Africa, maybe by country and sort of is it as significant as the number of mentions that it's gotten this morning?

Well, I think in '06, the story in North Africa is Algeria.

Because if you remember, there was a licensing round in Algeria, a very successful licensing round in Algeria last year, and therefore, you're starting to see a significant number of both seismic and drilling programs start in Algeria.

And you will see in '06 a huge amount of seismic taking place in Libya, which I think will be followed by, you know, the drilling will increase somewhat in '06, but it's really an '07 story because an awful lot of it is going to be exploration.

And then the other place in North Africa where there is significant activity is offshore gas in the Mediterranean in Egypt where there have been good finds in fairly deep water and people are beginning to move towards the development phase.

So across the whole of the North African land and offshore arena, there is much, much higher activity than we've had for a long, long time.

Great.

Thanks very much.

Next go to Mike Urban with Deutsche Bank.

Please go ahead.

Thanks, good morning.

Morning.

You mentioned North America as having a pretty strong growth rate.

A couple of things there.

I mean, is that as much a function of pricing as anything?

But also, is there anything in there or any expectations that you're seeing from, you know, what I would call the re-emergence of the majors, the major oil company customers coming back into the North American market?

On land, you mean?

Yes.

Yes, there is some particularly around shale gas and some of the plays there is evidence of the majors coming back.

I wouldn't say it's had a huge influence so far.

I mean, I think it's more of an '06 story than an '05 story.

No, I think, you know, the big story for us in Q4 in North America as a whole was Canada, which is seasonal, as you know, and the Gulf of Mexico, even though it's short where we were in the beginning of last year, in fact, came back much faster than we thought.

Right.

And, but in terms of the outlook there for '06, you put, I believe, unless I misheard, put North America up there in just kind of below the level of, like, Middle East?

Yes, and that, yes, we think there will be significant increases, again, in activity and in price overall.

Okay.

Great.

And then last question I had was in Latin America in particular, Latin America South, there were some margin issues there.

Are you able to see which countries or areas and what was driving the margin issue there?

I think, no, we said Latin America South.

Yes, in Latin America South, it's basically, it should not be recurring because it's associated to the start up of some project integrated project management, IPM.

So that should not carry over in 2006.

And the other place was Venezuela, where we had in the third quarter, we had some very high margin software sales which didn't repeat in Q4.

Okay.

That's all for me.

Great quarter, thanks.

And next go to James Stone with UBS.

Please go ahead.

Andrew, could you just perhaps on a product basis, give us a sense of which products you're seeing having the best pricing power and which are having the most difficulty offsetting the cost inflation that you're seeing?

I think probably the best pricing power is still around Well Services, though there is considerable inflation there.

But absolutely the best pricing power, I think we have at the moment, is with drilling and measurement technology.

And that offsets, that's not a question of inflation, it's a question of the quality of the technology.

Okay.

And then does it sort of cascade down from there or is Wireline very close to that level?

The Wireline is fine, James.

Okay.

I'm just trying to get a sense are there any areas where you're more concerned about the inflation impact.

Let me go back to the inflation issue.

The inflation issue in 2006 will be a people cost inflation issue.

And I still, I think that we will be able to cover that with pricing, but it's going to take a lot more -- a lot harder work than it took in 2005.

Okay.

Can you just tell me what your headcount was at the end of '05 versus '04?

I think we were up about 4,000 people.

So we're around about 56, 57,000, up from 52, 53.

56 to 57,000?

Yes.

And then, just the last question was, there's some thoughts that Mexico actually that PEMEX might actually increase its spending quite a bit again in 2006.

Do you have any insight into that?

Because you did cite that Latin America was one of the areas where you're not sure about the rate of increase for '06?

I really don't have any more insight than anybody else at this stage of the game and we're sort of waiting to see how that plays out post the elections.

That's very helpful, Andrew.

Thank you very much.

And next go to Terry Darling with Goldman Sachs.

Please go ahead.

A couple questions on WesternGeco, Andrew, just trying to understand how to think about the '06 outlook there.

You've obviously been very clear as to where you see Q going.

Can you update us as to what your capacity expansion plans are there?

In marine we just have one more Q conversion vessel coming out in probably the second quarter, Terry.

So marine, one more Q vessel.

No further additions to the overall fleet at this stage.

And in land, we will add a considerable number of Q land crews, essentially in Middle East and North Africa, maybe one in the U.S. for a very specialized application.

So land, a considerable capacity expansion, marine, one more Q vessel.

So in terms --

That vessel is a net addition because it was mothballed before.

So in terms of, I mean, are you going to have more capacity additions in '06 than you had in '05, I guess would be the way to think about that?

In land certainly, and marine it's flat basically.

Okay.

And any reason to, it doesn't sound like there's any reason to think that pricing on the contract side, either marine or land should not be up as much or more in '06 than you had in '05.

Is that fair?

I think for marine, that's fair.

I'm not so sure that you can be quite that categoric for land.

And then library sales, any thoughts for us there, '06 versus '05?

Our library's getting old.

I think that --

You're saying from a margin perspective, right?

That's okay from a margin perspective.

I think we'll know at the end of Q1, but today it's not obvious where it's going to be, you know, what it's going to be like year-on-year.

I would say it's likely to be stable.

Okay.

So your margins doubled in the segment in '05 versus '04, it sounds like we've got more pricing and maybe similar to a little bit less capacity additions on the marine side, more on the land side, library sales being the wild card.

Are we going to see similar type margin expansion in '06 or is that --

No, one other factor you need to take into account, inflation, our ability to protect ourselves from inflation in marine seismic is a key element there.

Inflation in marine seismic is tough because you have huge fuel bills.

You know, we've done a pretty good job in '05 but we have to go on doing a good job in '06 on inflation if we're to get margin expansion.

Therefore, while I don't rule out margin expansion, I don't think it will be same.

We won't get the same takeup as we got in '05 over '04.

One last cut at that question.

If you look at the revenue growth, '05 versus '04, excluding the Q numbers, you were up about 17%, which I think is roughly what the overall seismic market grew.

You see that rate of change being similar or higher in '06 versus '05?

So I think that rate will change '06,'05 will in fact be slightly higher.

Okay.

Last question.

Coming back to your earlier comment about people constraining growth, as we think about '07, obviously you've 12 months to prepare for that and to get your arms around what you think that growth rate will be.

But based on your understanding of the people issue, what would be the rate of growth that you could not achieve in '07 were we to assume that an unlimited amount of growth was available driven by that people factor?

Is 20 to 30% growth, top line growth in '07, if the commodity environment is there, is that doable based on what you will be able to do in terms of training people over the next 12 months?

Well, I think you have to remove activity, you have to remove price.

So you're talking about activity growth, not top line growth, right, because there's a price element.

I mean if you're talking activity levels, then, you know, if activity, pure activity started to grow above 20%, then I think the whole industry would fall apart.

I don't think anyone could follow in terms of people.

But in the teams, you know, if we do a good job, I think we'll be okay.

Okay.

Super.

Thanks.

Next go to Jim Crandell with Lehman Brothers.

Please go ahead.

Good morning, Andrew.

Two questions.

First, could you make a comment about the sort of onslaught of new capacity in North American pressure pumping, and can you also comment, one of your competitors indicated that actual prices in the field are somewhat disappointing and we've had maybe 2 to 2.5% price increases, or he had had per quarter.

How was your experience compared to that, and what do you think of all this new capacity coming on?

Jim, is this purely pressure pumping?

North American pressure pumping. [Inaudible] and stimulation.

Yes, we don't think today, it's not our experience today that there is an oversupply of capacity.

I'm not going to get into the mess I got in this time last year by saying I think there's going to be one by the end of the year.

I do think there's going to be one, one day, that's fairly clear because people are building stuff as fast as they can.

Luckily, manufacturers can't deliver.

Disappointed in the price increases, I don't want to comment on that because I don't know a good answer.

When do you get disappointed with a price increase?

The level you talked about, we will be disappointed with.

I can't say we are yet.

Okay.

Second question, Andrew, new topic.

Can you compare the pace and scope of introduction, let me take out scope, compare the pace of introduction of the Scanner product line to Scope, how quickly you expect to roll it out, and compare the relative impact to your Wireline business over which you've experienced, say, with the Scope product line to your LWD business?

Well, I think you have to take into account that Wireline is a much bigger business than D&M and that the application of Scope is essentially an open-hole complex situation.

So the actual overall impact of Scan, the Scanner Family will probably in terms of growth be lower than Scope has been in 2005.

In terms of quality of data, price premium and all the rest of it, I think Scanner will do just fine.

How quickly would you expect to roll out Scanner on a global basis, either geographically or rolling out the percentage of your --

We will roll out predestined targeted markets where we really think the technology can make a difference, and to be quite honest, we will do it function of the ability of the field organization to absorb it.

In other words, we're not slowing technology introductions, but we're being extremely careful that the field has the capacity to absorb it when they're so busy, that's why we target specific markets.

So that we don't have sort of a rollout plan with an ambition of doing so much by the end of the year.

It's putting it in certain markets, Jim.

Okay, got you.

And Jean-Marc, what is that 2.4 billion Cap Ex budget in '06 compared to '05 actual?

'05 was 1.655 billion.

And that was including 60 million of multi-client service capitalized.

And the 2.5 includes 150.

2.4 in --

Sorry, the 2.4 for '06 include as well some multi-client [inaudible] capitalized for 150 million.

Okay, good.

That's it for me.

Thank you.

Okay.

John, we have time for one more question.

And that will be from the line of Rob McKenzie with Friedman, Billings, Ramsey.

Please go ahead.

I wanted to build on the personnel question a little bit and try and differentiate Schlumberger from your peers.

You indicate potential volume of 15% in the industry.

Where do you think Schlumberger has an advantage?

Clearly there is an advantage to the global recruiting and training, [inaudible] what kind of volume gains do you think Schlumberger and market share gain could Schlumberger achieve through that over the next couple of years?

Sorry, you're not very clear.

The question is what volume increase can we handle or what the differentiation is?

I'm sorry, I'm on my cell phone here.

What kind of, incremental to your industry, you know, potential volume growth of 15% given the personnel limitations, where does Schlumberger stand in your view point compared to that overall industry comment you made earlier?

Well, I think we have a worldwide recruiting and training effort, which is distributed throughout the world.

We are currently constructing two new very large training centers, one in Russia and one in the Middle East, which if I could have today, I would love to have, but I won't have until the end of the year.

So I think we'll be fine at the sort of levels you're talking about, but it is a lot of investment and a lot of hard work.

Getting back to the original question, do you really believe that a lot of your competitors that are predominantly recruiting in the United States market can handle the 15% volume growth?

But I don't think my competitors are primarily hiring in the United States market anymore, because particularly for an engineer standpoint, that market is pretty tight already.

So I mean, I don't think, I think they're doing just what we do, they're hiring everywhere in the world.

The only advantage we have is we've been doing it for a very long time.

Good.

Thank you.

And then on the fighting the inflation with price increases over this year, how much of that do you already have kind of written into your contracts via escalation causes that you talked about earlier?

I think any contract that was entered into after the end of Q1 last year probably has the protection in it.

So it's fairly solid from that point of view.

And obviously contracts that are rolling off now, two years old, rolling off from 2004, we're putting it in.

Right.

So would you say it's the majority, the vast majority of the contracts?

Not, yet, no, but I would just hazard a guess, and I don't know 50% yet.

Okay, great.

Thank you.

Okay.

Thank you all for participating in today's call.

And John, could you provide details regarding the replay?

Certainly.

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