斯倫貝謝公司 (SLB) 2006 Q2 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 participants are in a listen-only mode.

Later we will conduct a question-and-answer session with instructions given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Jean-Francois Poupeau, please go ahead.

Welcome to today's second-quarter 2006 conference call.

Before we begin today's call, I would like to review the logistics and the 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 releases or will otherwise be posted on our investor relations web site at www.slb.com/ir.

A detailed disclaimer and other important information are included in the FAQ document, as well as a separate FAQ document covering the WesternGeco transaction are available on a web site or upon request.

For 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 will take questions from the audience.

Now, Jean-Marc will discuss the financials.

Thank you, Francois.

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 $0.73, up $0.14 sequentially and $0.34 above same quarter last year, an 87% increase.

After charges of 43 million mostly related to the acquisition of Baker Hughes' 30% minority interest in WesternGeco, earnings from continuing operations were $0.69.

Oilfield Services generated 1.124 billion in pretax operating income and the pretax margin was 27.2%, a 160-basis-point improvement sequentially.

By area, the highlights were as follows.

North America pretax margin was down 90 basis points sequentially to 29.7% and entirely due to the spring breakup in Canada, the impact of which being mostly offset by strong performance in the Gulf Coast and U.S. [land].

Latin America pretax margin was 19.2% sequentially, up 300 basis points, reflecting improved profitability in older GeoMarkets and particularly in Mexico and Peru, Colombia, Ecuador.

Colombia and Ecuador.

For ECA, our Europe Africa CIS unit, the pretax margin was sequentially up 390 basis points to 24.9%.

All GeoMarkets contributed.

A sharp rebound in Russia after the first quarter was adversely impacted by the weather conditions, a strong activity in the North Sea and also in the North and West Africa.

During the quarter, Schlumberger concluded the final stage of the acquisition of [Petroline] Services Company in Russia for 165 million in cash and about 4.7 million common shares of Schlumberger.

Middle East-Asia pretax margin improved a further 170 basis points sequentially to 33% with again this quarter a strong contribution from Saudi Arabia and also China.

WesternGeco pretax margin improved 200 basis points sequentially to 31.9% as a result of strong marine activity and a better than expected level of sales of multi-client [service].

Return on sales reached 22.9% in the second quarter.

As previously announced, Baker Hughes' 30% minority interest in WesternGeco was bought for 2.4 billion on April 28.

The purchase price allocation to the various class of assets after a fair value adjustment has been completed.

The incremental amortization and depreciation expenses generated by these fair value adjustments, combined with a revision of the economic life of the marine fleet and the multi-client portfolio consistent with the result of the valuation exercise is not material for this quarter and thereafter.

The transaction was funded up to 50% with our [cash-in-hand] and 50% with short-term borrowings.

A 9.3 million charge was incurred to liquidate some financial investment before maturity to fund the acquisition.

Excluding the onetime charge of 21 million for in-process R&D and the loss on the sale of the financial investment, the acquisition was about $0.015 accretive for the quarter and we expect it to be accretive for the remainder of 2006.

Getting back now to Schlumberger as a whole, the effective tax rate before charges and credit was 23.4%, slightly lower than our previous guidance of the mid-20s due first to a geographical mix, second to positive developmental of certain tax issues.

For the rest of 2006, we expect the effective tax rate to remain in the mid-20s.

The earnings of the quarter included an expense of 28 million relating to stock-based compensation, a sequential increase of 2 million and 18 million over the same quarter last year.

We expect stock-based compensation expense for the full year to be about 112 million.

The return on capital employed by Schlumberger was stable at 34.3% in the second quarter versus 34.1% in the first quarter.

At the end of June, the net debt was 3.2 billion, an increase of 2.4 billion during the quarter, reflecting essentially the 2.4 billion WesternGeco minority interest acquisition.

A stock buyback of 213 million and other acquisitions in cash for a total of about 300 million were offset by strong cash flows from operations.

CapEx, including 38 million of multiclient service capitalized, was 587 million for the quarter and is expected to reach approximately 2.5 billion for the year.

Finally, during the quarter, we repurchased 3.6 million shares for 213 million at an average price of $59 as part of the new 40 million shares buyback program approved by the Board of Directors last April.

And now I will turn the conference over to Andrew.

Thank you, Jean-Marc, good morning everybody.

Strong second quarter sequential growth patterns proved to be the opposite of the first quarter of 2006.

Sequential growth in North America slowed as impressive results in U.S. land and exceptional performance in the Gulf Coast were partially offset by a prolonged spring breakup in Canada.

Outside North America, sequential growth rates improved dramatically as Russia recovered from the severe winter weather and other regions showed accelerating trends.

The growth was general, but the performances in the Russian, Arabian, Arabian Gulf, North Sea, West Africa and China GeoMarkets were particularly satisfying.

Many technologies saw positive sequential growth rates worldwide with Seismic, Drilling and Measurements, Well Testing, Completion Systems and Integrated Project Management being particularly strong, driven by a combination of increased activity, project demand and technology-led pricing power.

Seismic has now become the fastest-growing Schlumberger technology.

Led by increased demand for Q-Technology, WesternGeco revenue increased 47% year-on-year end the segment has the healthiest backlog in its history.

Pretax operating margins reached 32%.

Record marine revenue, high vessel utilization, additional land crews and further growth in Q-Technology sales and strong multi-client all contributed to this impressive performance.

During the quarter, we commissioned the 6 Q marine vessel, the Western Monarch, to help address the increased demand for Q-Marine Technology.

The vessel already has a backlog through May 2007.

Demand remains strong for marine and land acquisition and the continued success of both Q-Marine and Q-Land are ensuring a continually growing backlog [and] healthy pricing.

Looking at the geographical performances of Oilfield Services in more detail, results in North America were driven by the U.S.

Gulf Coast and the U.S.

Land GeoMarkets which were both strong sequentially as pricing increased and activity intensified.

Prices for Drilling and Measurements, Well Services and Wireline Technologies improved further over the prior quarter with completion sales also contributing to the results.

Canada was hit by poor weather and a protracted spring breakup that led to significantly lower revenue.

New technology was an important contributor to the growth, particularly in well testing, where operations in the Gulf of Mexico set new world water depth records with a Jack well test for Chevron and subsea completion for Kerr-McGee.

In Latin America, rising activity and increased demand for drilling and measurements and well services technologies led to a strong 300-point sequential gain in pretax operating margin.

Important contributions were also made by Artificial Lift and Completion Systems product sales in several GeoMarkets and by the Casabe integrated production management project in Colombia through performance-related incentives.

In Venezuela, (indiscernible) [barge] activity was maintained in western Venezuela and other activity with Pedevesa in the country showed a sharply increased trend.

Results in Europe, CIS and Africa benefited from a strong rebound in activity in Russia following the severe winter weather that affected the region at the beginning of the year.

Operators worked hard to catch up on work programs that had been postponed in the first quarter.

Operating margin in the area grew by an impressive 390 basis points, driven by strengthening pricing, higher efficiency, increased demand for new technology and a highly favorable activity mix in the developing exploration market.

The North Sea GeoMarket made further progress on the back of growing exploration activity in Norway and accelerating demand for new technologies, such as the Wireline Quicksilver probe contamination-free sampling technique, very high offshore rig spread rates and the need to better characterize the smaller accumulations that are currently being developed place a high premium on the speed and accuracy that this measurement provides.

Among other Schlumberger technologies, Well Testing Services saw increased demand in the North Sea and in North Africa.

In the Middle East and Asia area, a strong sequential growth was recorded, resulting from new exploration and development activity and generally higher rig count levels throughout the region.

Pricing further improved across the area while demand for new technology was sustained.

Operating margins grew by 170 basis points to reach 33% as activity shifted to the higher-margin Drilling and Measurements and Well Testing Services that feature a more exploration type activity.

Performance-related incentives in the Bokor integrated project management project in Malaysia also contributed to the quarter's growth.

Among new Schlumberger technologies, the Scope and Scanner families of services continued their market penetration with jobs in Latin America, Mexico and Libya.

Scanner technology has now been introduced a total of 19 GeoMarkets with more than 500 jobs recorded for the Sonic Scanner device alone.

Among other Drilling and Measurement technologies, the first PowerDrive Xbow rotary steerable job was run for Saudi ARAMCO.

Xbox is the world's first through-tubing rotary steerable system capable of sidetracking in diameters as small as 3-7/8.

With the commercialization of Xbow technology, Schlumberger Drilling and Measurements now offers the widest capability in directional drilling in the industry.

At WesternGeco a number of new services have been announced, including completion of the first rich-azimuth towed-streamer project over the [Shenze] field in the Gulf of Mexico designed to better illuminate the formations between a complex soil canopy.

The unique capabilities of Q-Marine that take advantage of bearing receiver angles and offsets make the towed technology particularly valuable in this type of survey.

During the quarter, we announced several small but highly significant acquisitions that will add to our reservoir definition capability.

The purchases of TerraTek and Odegaard offers significant opportunities for the integration of reservoir measurement and parameters across a range of Schlumberger technologies.

TerraTek is a global leader in measurements and analysis in geomechanics.

TerraTek will become the Schlumberger geomechanics laboratory center of excellence and will offer rock mechanics evaluations, unconventional gas reservoir analysis, large-scale drilling and completions performance testing, as well as log to core integration.

This acquisition brings together existing Schlumberger expertise with TerraTek knowledge to create a unique organization focused on the understanding of the reservoir as it is drilled and produced.

Odegaard brings the expert capability that will be needed as Q-Seismic is combined with other Schlumberger reservoir-centric measurements.

Odegaard is a leader in advanced surface seismic data inversion software that can extract reservoir parameters from seismic data.

This technology will be the key to the new success of such techniques as the deployment of control source electromagnetics which will require integration with other measurements to bring additional value.

Odegaard will become part of WesternGeco.

In Russia, we also completed the first stage of the acquisition of PetroAlliance, whose performance over the past year has far exceeded our original expectations.

Our outlook for the remainder of 2006 contains a number of different elements.

Firstly, some temporary slowing of natural gas activity in North America not be excluded, although currently there are no clear signs of this.

Secondly, in the Eastern Hemisphere, sequential growth rates will continue to be strong, although we expect them to be slightly lower than the blistering pace of the second quarter.

The extraordinary [catch-over] activity that took place in the second quarter in Russia will not be repeated, but activity will remain strong.

The short-term outlook for activity in Mexico will remain uncertain and until all of the electrical issues are solved.

The rest of the world will continue to see strong growth trends through activity growth and technology and pricing effects.

I am particularly encouraged by the relative growth rates of our different technology segments and the resulting revenue quality.

Our customers of all types have growing concerns with the renewal of reserves through defining extensions to existing reservoirs, as well as finding and defining new reservoirs, and this is now a discernible trend in our growth rate.

This is obvious in seismic, but it is more evident in our Wireline, Drilling and Measurement and Well Testing Services.

This, coupled with a very high spread cost of rigs is placing a premium on both measurement quality and reliability and execution.

Reserves renewal and the development of new fields will be fundamental to a sustainable renewal of the world's oil production capacity for both oil and gas.

Absent the drop in demand, it will take several years to achieve this.

And as we have often stated, reserve quality and accumulation size, including that of the Middle East, Russia and Central Asia, will be smaller and more complex to define and develop.

We remain confident that the duration of the cycle will be long and that our technology portfolio is well adapted to this new chapter in the history of oil and gas.

I will now hand call back to Jean-Francois.

Thank you, Andrew.

We will now open the call for questions.

(OPERATOR INSTRUCTIONS).

Michael Lamotte, JP Morgan.

Thanks, guys, great quarter.

A problem with going first and only having one question is which one to ask.

Let me go to Latin America, because there's a lot of talk about the Eastern Hemisphere obviously.

But that market was not expected I think by most people to grow beyond double digits in '06, and yet year-to-date, revenues were up 23%, operating income is up 51%, revenue per rig is running 16, 17% up.

What is the -- can you -- can we narrow it down in terms of two or three trends, Andrew?

Are there -- I know it's a very diverse market, but can you try to (MULTIPLE SPEAKERS) two or three trends (MULTIPLE SPEAKERS).

Actually, I would say that I would say that Mexico, up until now, has been about what we expected, slightly better, but quite good.

I would say that the real change we've seen is in the amount of activity and the efficiency of activity in Venezuela.

Pedevesa is very active.

And PCE -- Peru, Colombia, Ecuador -- with a very wide diversity of customers and situations as you will have seen from the newspapers, has in fact also remained extremely active.

And as always, when the oil price and the gas price are high, Argentina resurges.

Argentina is a bit like U.S. land -- you know, it depends -- it's extremely price-sensitive.

So the actual overall level of activity and perhaps the efficiency of the activity in Latin America has probably meant a lot more than people expected, Michael.

Has the competitive mix changed at all?

In Latin America?

Yes.

Not (indiscernible) -- you mean amongst the service companies?

Yes.

Not discernibly, no.

Very good, thanks guys.

Ole Slorer, Morgan Stanley.

Thank you.

I would like to go back and have you elaborate a little bit more about talking about the change in your business outlook to be more exploration-oriented, rather than drilling-oriented.

Is this a global phenomenon, regional phenomenon?

Is it is something that you can see in the backlog, for example, at WesternGeco now?

Is it turning more towards exploration rather than development in the Q-Seismic, for example?

And what does this mean for your in terms if the changing product lines that will drive the business and margin impact, et cetera?

Okay, so can I answer seismic, and then try something on the rest?

I tried to wrap it all into one question, not to break the rules.

That's okay, but the answers area bit different.

So firstly, yes, the WesternGeco portfolio, including the Q portfolio, has now substantially shifted back towards exploration.

In fact, it's not far from three-quarters of the current portfolio I think would be classified as either rank exploration or delineation of existing fields.

Now in terms of the rest of our services, what we are seeing perhaps which we should have foreseen more but it turns out to be happening and it's almost everywhere in the world, is that the cheapest oil is the oil closest to where you have production facilities.

So you are seeing an awful lot of delineation from existing reservoirs and that has led, if you like, to an acceleration in the measurement, or measurement while drilling, or logging while drilling and well testing services so that people know exactly what they are tying back to their existing production facilities.

I mean, if I give you one market where this is obvious and it's happening, it's the North Sea.

So it's two things -- it's some rank exploration, but actually I don't think the rank exploration in seismic will really translate into drilling until we start getting some of the new build offshore rigs, which as you know, is not immediately.

Oh, those (indiscernible) coming?

They're coming, yes.

So the big amount, if you like, is what we call infield exploration, which is what is happening at the moment.

If I could be as brave as to ask -- you mentioned CSCM (indiscernible) for the first time in one year and nine months as you made the Geo acquisition.

And could you explain a little bit where you stand with respect to majority of this technology and how it will fit in with Q-Seismic?

And also, you spent a lot of time on TerraTek here in the press release, a small acquisition.

But can you tie that all together and explain what this really means for the overall franchise?

I don't think you can make any relationship between TerraTek and CSCM.

So TerraTek is very much a company that has particular expertise in the classification of unconventional gas reserves.

I would also -- a very good process of tying log to core and log to rock samples.

So that's, if you like, much closer -- down the chain from exploration to the point where you start to put things into production.

But in terms of our Geomechanics offering, it's a tremendous complement to what we do already.

And in terms of CSCM, no, we have not talked about it very much, but to be quite honest, we've been slow in increasing our acquisition capability.

But in the meantime, we have been doing a lot of work on the software, the processing and interpretation software.

So I think while you won't see it becoming a huge contributor in the short-term, we are a lot more ready than we were when we bought [AGO].

Thank you very much, Andrew.

Jim Crandell, Lehman Brothers.

Good morning, excellent quarter.

My question, Andrew, is how likely in your judgment is it that we'll see measurable weakness in the North American markets over the net six to 12 months?

And I guess which of your businesses would you be -- would have the most sensitivity to that in the event that we do?

The obvious answer to the second part of the question is North America pressure pumping.

And actually, I don't think we should think of it so much in terms of a strong weakness.

I think what we're talking about is relative weakness.

And if I could explain what I mean, Jim, we all know the U.S. natural gas production North America is on a treadmill and any dramatic reduction in drilling would reduce the gas production numbers very fast.

So what I'm talking about is a relative slowing.

And the only issue in my mind, and I've said this before and please don't ask me to give a date because I still don't know, is that a relative slowing of drilling would allow what we know a considerable capacity additions that are being built into the market and would absorb the backlog quite fast.

So in my mind, it's a question of relative slowing as against the amount of capacity that's likely to be introduced.

And I don't think it's particularly likely in 2006.

And beyond that, I'm not prepared to guess because I don't know what's going to happen with the winter, hurricane season and everything -- and all the other things that can affect the natural gas numbers.

In any event, the two points I would make is I don't think it will be a relative slowing; and secondly, that the issue is not so much the relative slowing, it's the amount of capacity that's being built in front of what people anticipated would be a continuing increase in rig count.

Okay, thank you.

Bill Herbert, Simmons & Company.

Good morning.

Andrew, at the beginning of the year in January, you prophesied that revenues for oilfield were likely to be similar to what was manifested in 2005.

Do you care to update us with respect to that scenario?

And to segue into that as well, I think with respect to your narrative this morning, both your presentation on the conference call and your written summary, increasingly, you're using the word longer-term considerations on the part of your customers.

So without sort or necessarily pegging you for specifics for '07, give us a sense as to the dialog that you're having with customers that relates to business prospects for next year as well.

Thank you.

So I mean, I don't particularly feel like pronouncing strongly on the second half year.

I think we'll be strong.

Whether we'll maintain the same rates I think depends entirely on the North America question, Bill, and a little bit on Mexico and how much of the second quarter Russia effect was the catch-up.

But there won't be a fundamental change in the growth rate from [H-1] except for North America -- except for the caveats on North America.

So the dialogue with the customers on exploration, if I go back to what I said to Ole, there a clear and immediate need to delineate and tie in pockets of oil around existing production infrastructure.

And actually if there were more rigs, more of that would be being done -- I'm talking offshore now.

If you talk about exploration, then actually I know -- we see that there is a real desire to not just on the part of the international companies, but also on the part of the national oil companies, to go back to looking at their reserve base because they -- while everyone has reacted to the lack of production capacity and there have been huge efforts put in place, particularly by the Saudis to solve that problem, the reserve problem in the meantime has not gone away.

And therefore -- for the IOCs or the NOCs.

And, therefore, now, our customers are much more -- they have caught up with their production plans, if you like, and they want to talk more and more about what their future exploration plans might be.

And again, this is a mixture of infield or close-field exploration and rank exploration.

As I said on a previous question, WesternGeco's portfolio is now almost three-quarters exploration.

We don't see any slackening of demand for a considerable period of time for Seismic Services and the next phase.

And I'm sure you know that there are a number of companies who cannot drill the exploration wells they would like to drill at the moment because they do not have an offshore rig.

And so the next phase will be when we start to get offshore rigs freed up to drill the exploration wells.

So the level of dialogue I would say in the last six months around improving or increasing the reserve base has increased fairly dramatically.

Thank you very much.

Ken Sill, Credit Suisse.

I wanted to dig into the old pressure pumping question a little deeper.

Capacity is clearly growing, demand has been growing faster than the rig count for awhile.

But on the price side, every few weeks we seem to hear a rumor and you guys are always singled out as the guy that's either signing contracts without cost escalators or lowering prices.

And I've talked to your guys and that has proven to be not true.

But is your outlook for capacity actually creeping up relative to demand in the slowdown -- is that affecting how you guys are pricing pressure pumping in North America?

And what exactly are you seeing on pricing?

And then I guess it all really ties back to -- is -- how big is the gap right now between demand for pressure pumping and the current capacity?

That certainly depends on the level of rigs that keep drilling, Ken.

So on pricing, no, I don't think we've seen any change so far.

We have had one or two operators suggest that we go longer for cheaper but I don't think we've accepted any of that, at least not to my knowledge.

My feeling is that, that won't happen until the operators can clearly see that they have more leverage over the capacity or coming capacity.

And as you know, I said in the press release and in my remarks, we do not see any clear signs of that today.

So I actually think that the two key dynamics to the extent to which the rig count either stabilizes or contracts and the speed with which new capacity comes into the market, and that is fairly well-known.

There are some uncertainties around it.

So really the issue is, how much activity will there remain out there, and if it drops, how quickly will the backlog get caught up.

And I say once again, we see no clear signs of that today and we suspect won't be in 2006.

And just kind of as an extension, you're seeing gas production worldwide, a lot of projects out there, a lot of a LNG.

How long before that translates into an increase in pressure pumping demand in some of these international markets, or is that --?

It is translating into demand right now, but a lot of it is offshore.

Okay, thank you.

Dan Pickering, Pickering Energy Partners.

Good morning.

Andrew, several places in the press release and your comments today, you talked about performance drilling or performance incentives.

Could you help us understand maybe what percentage of your revenues or profitability are involved in contracts that have sort of performance incentives, and how do you (MULTIPLE SPEAKERS) the second half (MULTIPLE SPEAKERS)?

The actual financial number in the context of total Schlumberger is minuscule.

I am just trying to point out that, after a lot of doubts out there about IPM, they are beginning to perform on some of these production management contracts extremely well.

And (MULTIPLE SPEAKERS).

It's not a financially significant number yet.

It would be in the case of Colombia or Malaysia; but at the number of Schlumberger, no.

Okay.

And do we interpret your second quarter profitability levels, your margin levels in the international regions -- are those sustainable?

Any second-half issues that would say, we might see any sort of down-tick in profitability or margin?

Only limited to Mexico, Dan.

Okay, thank you.

Kurt Hallead, RBC Capital Markets.

The question I have really relates to the pricing dynamic, both for North America and international.

I know you guys had referenced in your prior conference calls how some of your international contracts were going to be rolling to new pricing mechanisms.

And I just wanted to know if you can characterize for us how far along in the process some of those contracts are.

In other words, are you 50% through, or is there another 50% to be realized?

And could you give us some sense of that, both in the international and North American markets?

In North America, I think we're almost 100% through, and that does not mean that all of the new pricing has been applied, but the renegotiation phase is probably substantially over.

In the international -- that particularly applies to U.S. land, not necessary to offshore Gulf Coast.

In the case of international, I would say we're in renegotiation with somewhere between 50 and 75% through the renegotiation and reestablishment of new pricing, but the actual implementation is behind that.

So we anticipate that we will still have a pricing effect in the second half of this year from negotiations done in the first half.

One follow-up on the seismic side.

For the first half of the year, WesternGeco has put out 30% operating margins.

It sounds like, based on your outlook for Seismic, that should be a sustainable margin well into 2007.

Could you put that in the context vis-a-vis your comments in prior periods about at some point in '07 capacity becoming an issue for Seismic?

So in other words, can you sustain 30% margins, even with new capacity coming on next year?

Actually, I don't think that new capacity will be a huge issue in 2007.

The efficiency -- I mean, you're assuming somewhat that these boats will all be on time and that they will shake down and be shooting seismic wells in 2007.

I don't think that 2007 is a huge risk.

(MULTIPLE SPEAKERS).

Today when we look at it, the number of surveys that are not able to find a boat will absorb the backlog beyond 2007, in terms of new boats.

So that the backdrop would support kind of a 30% margin type of run rate sustainable?

Certainly through the middle of next year, yes.

Great, thank you very much.

James Stone, UBS.

I want to ask a similar question just related to the rest of your [OFS] business.

Andrew, with pricing coming online in the international markets a little bit more strongly in the second half of the year that you just referenced, can you give us a sense of what inhibits you from increasing your margins further in the Eastern Hemisphere or the international markets in the second half of the year?

What would offset those price improvements and why shouldn't we be forecasting meaningfully higher margins or margin improvement into [2008]?

I think the single biggest factor which will offset pricing is wage cost.

Logistics cost, and we have a lot of -- D&A will increase.

That will not absorb all the pricing increases we've got, but it will offset it to some extent.

So it won't be -- pricing will not be 100% foolproof, by any means.

So it sounds like though you will have -- you're saying that most of the pricing increase or majority of the price increase gets covered up by these factors.

How much of that is sort of startup costs on new jobs that may not last (technical difficulty) in the second half?

I don't think we have many startup costs.

Apart from one or two very large contracts, I don't think we have a huge amount of startup costs.

And I think you are overemphasizing what I said when you say that most of it well get absorbed.

I'm not going to go to a number, Jamie, out of the price increase that will fall through, because I don't know.

But I'm just saying that it is not 100% foolproof, there will be some cost offset to it.

Thank you.

That's very helpful.

Robert MacKenzie, Friedman Billings Ramsey.

Good morning.

Andrew, I just wanted to ask, delve a little bit deeper into some of the strong performance here.

Geographically, you outperformed one of your big competitors fairly substantially in virtually every GeoMarket.

Where and in which product lines do you think you're gaining the most share, and what do you attribute that to?

Well, I don't want to -- actually, I think that these comparisons between myself, or between Schlumberger and our largest competitors, suffered dreadfully from the fact that we don't have the same portfolios.

What I would say is that the everything I said earlier about the importance of measurements means that the acceleration of growth in pricing we have seen has been in our high value-added segments.

So essentially, Seismic, Drilling and Measurement, Wireline and Well Testing, and that has a very favorable effect on our overall margin performance.

I would also say that there is a huge premium out there today which is priced by our customers on reliability.

I was reviewing a case in one of the North Sea GeoMarkets yesterday where a customer in paying a day rate of $450,000 a day, his spread cost is probably close to 1 million, and the Quicksilver Probe is doing something in a couple of hours that would with another tool would take 10 or 15.

So the saving to the customer in rig time is so huge that the pricing effect of paying for the new technology in Quicksilver Probe really is irrelevant to him.

So I think that it's in our higher value-added product lines, but it's also very much linked to excellence in execution at this point in the cycle, because of the spread cost of rigs.

My follow-up question is, very often we see a seasonal slowdown in the Middle East, I guess due to very hot weather.

Given your context, do you expect to see that this year, or do you think we will just (MULTIPLE SPEAKERS) through it?

Traditionally, a little bit of a slowdown and it sort of overlaps the end of the second quarter, beginning of the third quarter.

And I don't see any reason that will be different this year.

Thanks.

Daniel Henriques, Goldman Sachs.

Hi, good morning.

My question is about the outlook for consolidation.

I would like to get your thoughts, Andrew.

Do you think that this recent market correction, concerns about natural gas, do you think the outlook for acquisitions, meaningful acquisitions, not the smaller ones they're still having, but for larger acquisitions, do you think it makes it more likely, less likely, just any thoughts you have about consolidation in the industry?

And especially also if you could talk a little bit about seismic consolidation as well.

Thank you.

I think that, were there to be a substantial correction in the North American market, then obviously it would open the way for people to look at consolidations.

I think meaningful consolidations today, absent a substantial slowing of activity, have two problems.

One is obviously the value, and the other in fact is just the sheer disruption in execution.

We are flat out.

Even though we're adding huge numbers of people, we're still flat out.

So the idea of adding a disruption of a major acquisition I think would be probably not something that we would envisage at this point in time.

Now in terms of the seismic industry, you know the players as well as I do.

I don't think it's unlikely that there would be one more major consolidation in the industry, but that's not my decision.

Geoff Kieburtz, Smith Barney Citigroup.

I'm going to come back to the North American question with a single four-part question.

And I can hear from you comments so farm Andrew, that you don't currently see a lot of parallels between today and the way the industry unfolded in the second half of 2001.

But I wondered if you could give any comments as to the differences you see between then and now, what you would be looking for that might signal that you're wrong, and if we start to see a significant deterioration in North America, what action would Schlumberger take, and with respect to outperform the market from a revenue perspective?

Well, actually, I think that the, if you like, the biggest difference between the gas market in 2000 and 2001 and now is the Gulf of Mexico, because basically, you have seen a huge decline in shelf gas, and that decline in shelf gas has been replaced by poorer reservoir quality gas on land, be it conventional or nonconventional, coalbed methane, and to a certain extent, imports from Canada.

So the treadmill effect of that, plus the fact that the efficiency of completions these days means that initial well depletion is much, much higher, even than it was in 2000 and 2001, means that maintaining North America gas production today is a treadmill.

And if you get off of the treadmill, it slows down awfully fast.

So that's why in an earlier question, I replied that if there was a slowing, we felt that it would be -- it would have to be temporary.

And the danger to the market for services is much more that it slows just enough to absorb all of the capacity that we know is out there being built.

Now in terms of maintaining a superior performance, we would go back to relying on deepwater Gulf of Mexico I think to do that if the gas market was depressed because it would be very difficult for us beyond certain very specific project -- technology projects to maintain a huge differentiation in the North American market in a glut of capacity.

The one thing that I would do very differently from what I did in '99, 2000 and 2001 is do my best to find the people in North America, temporary or permanent assignment overseas, in order that they remain on the payroll and contributing to the Company.

And in fact, given the state of overseas markets today, that would not be very difficult to do.

Any thoughts on what might be an early warning sign to either you, or more importantly, to the rest of us on the phone that you will maybe -- the confidence in the North American market?

I can only tell you what I look at, and that is the components of the land rig count every week -- how many gas exploration, how many gas development, how many oil exploration, how many oil development.

And to the extent that I see gas development and gas exploration slowing, I would take that as the first leading indicator.

Great.

Thank you very much.

Pierre Conner, Capital One.

I wanted to ask a little bit more about the backlog and WesternGeco and expand on -- you mentioned three-quarters of the backlog is acquisition related to true exploration.

If you could give us a historical and then expand a little bit on the margins that are embedded.

You've mentioned the strengthening price environment.

And do you see the margin sequential improvement then contribution more from pricing, or more from mix in the backlog with Q-Technology?

It's pricing at the moment to the extent that -- no, it's two things, sorry.

So in terms of Q-Technology, we're at 91% utilization.

We just produced one more vessel, so that adds one-seventh, one-eighth more capacity.

And then, we are introducing two, three, maybe for new Q-Land crews by the end of the year.

So to the extent that Q gets pricing premium, that is in effect.

But the overall thing in marine, it's not a huge change.

In land, it is a huge change in the quantity of Q, but not in the total number of crews that we're running.

And the other aspect of marine is of course there is a huge shortage of boats, so a lot of the pricing in marine is in fact supply-demand for boats at this point in the cycle.

In terms of -- I said close to three-quarters of our marine work particularly is exploration.

I would say that that -- it's a long time since it has been at that level.

I suspect that 18 months ago, we were probably below 50% on pure exploration.

Okay, thank you.

Mike Urban, Deutsche Bank.

I wanted to spend a little more time on the seismic capacity issue.

I know we've talked about it a lot, but I think it's an important one.

You certainly sound more confident about the ability of the industry to absorb the capacity coming on.

I just wanted to understand if that's a function of your increased backlog, the visibility you have, just basically the uplift in the market overall.

Or, is it also a function of increased capacity intensity or technologies and techniques like Q, like wide-azimuth, that effectively increase the vessel intensity or the capacity intensity relative to the amount of data you are acquiring?

Certainly that is a part of it and certainly Q is a part of it, but I would say that perhaps the largest degree of confidence we derive is that when we look at the surveys we know people want to shoot and we measure them against the actual capacity and the known capacity that is coming to the market, we don't see it getting into balance in 2007.

And unrelated follow-up, there has been some concern in Russia about the resource nationalism that we've seen and the upstream spreading into the service sector.

Do you see any of that, or does it just not matter because the technology isn't available from the local players?

I think that every time there is a manifestation of resource nationalism, be it (indiscernible) buying (indiscernible) Gas or Gazprom buying (indiscernible), these questions arise.

Our experience is that it doesn't last.

And the fact is that our customer base is now so widely spread in Russia that we don't think that's a serious threat to the service industry.

Great, thank you.

James Wicklund, Banc of America Securities.

I got on this call so long ago I hate to think how long some people have been on here.

I was going to ask you the previous question about the [Syvnef] issue that was in [Interfact] that the previous gentlemen asked about.

It said that you had done $100 million worth of work or so with Syvnef and it was being lost to local competitors.

Can you -- I understand that it's all political nationalism to a large extent, but will there be an impact to reaching your revenue goals in Russia this year?

No.

This year is not an issue.

The issue will be next year, if there is one.

And do the indigenous companies have the capacity to really have an impact on your revenue?

Not yet.

There is one indigenous service company which is building up a considerable portfolio by buying into the existing service base of Russian service companies that essentially belong to oil companies.

I don't consider them a competitive threat at this point in time.

Buying out your partners in PetroAlliance -- does that make you less Russian?

No, the partners are delighted to stay with us.

Last question on Norway.

What is the impact of the strike, Andrew, in Norway?

There's been no change since the end of the quarter, Jim.

I cannot speculate -- which means there's fairly minimal impact there.

I cannot speculate which way it's going to go.

Kevin Simpson, Miller Tabak.

I wanted to follow-up on Russia.

I just wondered when you consolidated PetroAlliance, kind of lazy, didn't do the work on that, and how much impact did it have in the quarter?

So actually, we've been consolidating 100% of the revenue since May 2005, Kevin.

And actually, what we did this quarter was the final stage, but buying the 49%, the remaining 49%.

The impact on minority interest was what?

I'm just curious what the impact on quarterly numbers were.

Not significant.

Not really significant.

As Andrew mentioned, the revenue was already 100% consolidated prior to this quarter.

Alan Laws, Merrill Lynch.

Good morning.

I'd like to ask about well testing a little bit.

The well testing part of your business seems to be gaining higher profile in the overall tool box.

And other than just rising demand from higher activity, are there other changes to the drivers for well testings in the current market, like regional demand changes or [expiration] phenomena?

Actually, there's a very interesting phenomena that has happened as a result of the higher oil price.

Well testing always used to be the ultimate way to prove the producibility of the reservoir, because it gave you the opportunity to flow for a sufficient length of time to make a real judgment as to what the reserves were.

Now, well testing often implied flaring, and as a result of that for -- in many theaters, well testing, particularly exploration well testing, activity was curtailed.

It was to some extent replaced by formation test tools.

But the operators now, as they are going into smaller accumulations where they really, really want to know what they have before they make a development decision, are being much more bold I think partly as a result of the higher oil price to insist vis-a-vis the authorities that they be allowed to flow the well.

So you have that element of exploration well testing which had sort of disappeared for a long time which is back in a fairly substantial way.

And the second thing is, with more new developments, there is far more cleanup testing.

As you probably know, you have to clean up the well before you actually flow the production into a flow line that is going through a stock tank or a refinery, and just the sheer level of activity means there is much more cleanup testing than there was, say, two years ago.

Excellent.

And the follow-up to that would be -- where does well testing rank then in terms of profitability in your technology lines?

Let's say it is one of our how higher value-added services.

The last one would be the Jack test that you completed in the second quarter.

Was that a meaningful contributor to the second quarter?

It was a meaningful contributor in the Gulf of Mexico, which is why I talked about impressive -- it was part of the impressive performance of the Gulf of Mexico in Q2.

You want to tell us how the test went?

I don't know the results because the results are not mine, they're Chevron's.

From an execution point of view, it went extremely well.

Only kidding, Andrew.

Okay thanks, that's good for me.

Brad Handler, Wachovia Securities.

Good morning.

I don't know that I have a specific angle in this, but I guess I was hoping you could comment a little bit on Chinese capacity perhaps in the oil field and their capabilities generally.

Is there any sort of a competitive issue that emerges, or is this still one of those things that you say, you know, one day, there may be a competitive threat coming out of Chinese service capabilities.

So I think (indiscernible) competitive threat from BGP, the seismic company that they have built on land, the build being done with [TGG sell] equipment and Chinese labor and a lot of expatriates to the point where they do a reasonable job.

Beyond that, the Chinese domestic service industry performs essentially in China and is sorely lacking in technology.

And we don't see today yet, though it is a long-term threat, that the Chinese invest in enough R&D to make a significant difference in the oilfield services business.

In fact, I have just been in China and the demand for our higher value technologies has never been so strong because with the current energy securities concerns in China, they too are looking at smaller and smaller accumulations -- tight gas, coalbed methane -- all of the other things that they have in sort of fairly moderate quantities.

But at these energy prices, they're important to develop.

So the answer is -- not yet, but it could happen one day.

Okay, thanks.

Robin Shoemaker, Bear Stearns.

Thanks.

I will just change course here a little bit, talk about your work force requirements.

You have had a goal of 3000 engineers and 3000 technicians to be hired this year.

Are you able to find them with the high standards that you maintain for recruitment?

And what about your mid-career and late-career people who have been hired away by customers, primarily I think, and are you making any -- are you seeing any lessening of that trend?

So on our engineer requirements, we are way ahead of our midyear target.

In other words, we actually currently have something close to 80 recruiters worldwide, and we are ahead of our target.

The quality seems to be fine.

On our technicians, we're about halfway there.

On our mid-career hires, I would say we're doing okay.

And on our attrition to the oil companies, particularly of our geoscience population, the trend is improving after some of the retention measures that we put in place at the end of Q1.

It's still an issue, but it's not the issue it was in the first quarter.

Okay.

Thank you.

Alright, thank you.

I will turn it back to the host, please go ahead.

Thank you, Julie.

Thank you all for participating in today's call.

Julie will now provide the closing comments.

Thank you.

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