斯倫貝謝公司 (SLB) 2006 Q3 法說會逐字稿

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

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

Later there will be an opportunity for questions and answers with instructions. [OPERATOR INSTRUCTIONS].

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

We'll now turn the call over to your host, Vice President of Communications and Investor Relations, Mr. Jean-Francois Poupeau.

Please go ahead, sir.

Thank you, Rod.

Welcome to today's third quarter 2006 conference call.

Before we begin today's call I'd 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 release or will otherwise be posted on our Investor Relations website at www.SLB.com/IR.

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

Today's agenda, Jean-Marc Perraud, Chief Financial Officer, will begin with commentary on the financial results.

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

Finally, we'll take questions from the audience.

And now Jean-Marc will discuss the financials.

Thank you, Jean-Francois.

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

Third quarter earnings from continuing operations before charges and credits were $1 billion or $0.81 per share, up $0.08 sequentially and $0.38 above same quarter last year, an 88% increase.

Earnings from continuing operations after charges and credit were also $0.81, up $0.12 sequentially and $0.37 above same quarter last year.

Oilfield Services generated 1 billion 213 billion -- 1.213 billion in pretax operating income with a pretax margin of 28.2%, a 99 -- 99 basis points improvement sequentially.

By area, the highlights were as follows, North America pretax margin was up 81 basis points sequentially to 30.5%, due to the rebounding activity in Canada after the spring break-up and the strong performance in U.S. land more than offsetting a drop in Gulf Coast and Alaska.

Latin America pretax margin was 20.6%, sequentially up 135 basis points, primarily reflecting improved margin in Mexico, in spite of a revenue decline.

For ECA, our Europe, Africa, CIS unit, the pretax margin was sequentially up 156 basis points to 26.4%.

The main contributors were the Caspian, North Sea, and Russia.

Middle East Asia pretax margin declined 46 basis points sequentially to 32.6% with sustained margin performance from all GeoMarkets except China which had a less favorable revenue mix than last quarter.

WesternGeco pretax margin was $242 million, and improved 482 basis points sequentially to 36.8%, as a result of strong marine activity and a high level of sales of multi client service.

Getting back now to Schlumberger as a whole, the effective tax rate before charges and credit was 24.1%, broadly in line with our expectation.

We expect the effective tax rate to remain in the mid 20s next quarter.

The earnings of the quarters included 30 million of expenses relating to stock based compensations, the sequential increase of $2 million and 20 million over same quarter last year.

We expect stock based compensation expense for the full year to be about $114 million.

Also, the move of our headquarters from New York to Houston resulted in exceptional expenses of 9.3 million during the quarter.

The return on capital employed by Schlumberger was 32.9% in Q3, versus 34.3% in the last quarter, reflecting the full impact of the WesternGeco transaction on the capital base.

At the end of September, the net debt was 3.2 billion, same level as last quarter.

The stock buy back of $482 million and CapEx of 653 million were offset by strong cash flow from operations.

CapEx for the quarter included 50 million of multi client service capitalized.

The total CapEx for the year will reach approximately $2.5 billion.

During the quarter, we bought back 8.1 million shares for 482 million, at an average price of $59, a spot of the new 40 million shares buy back program approved by the Board of Directors last April.

Since April, the cumulative number of shares bought back amounts to 11.7 million shares for $494 million.

And now I will turn the conference over to Andrew.

Thank you, Jean-Marc.

Good morning, everybody.

Continuing strength in seismic activity and increased demand for drilling services and well placement technologies were the highlights of the robust performance in the third quarter.

The outstanding results at WesternGeco where revenues grew 17% sequentially were due to significant strength in multi-client data sales and very high marine utilization.

With more than 85% of WesternGeco's acquisition activity now focused on exploration and appraisal operations, the industry's effort to replace and increase reserves is clearly under way.

Overall growth in the quarter was broad-based with significant strength in Canada following the spring break-up and on land in the U.S. where pricing remains strong and pressure pumping backlogs were unchanged.

These improvements were supported by growth in the Caspian, the North Sea and Arabian GeoMarkets.

Burgeoning exploration activity in Vietnam and eastern Russia added further impetus to these results.

By technology, Drilling and Measurement's PowerDrive and Scope services saw further strong growth backed by strong technical and operational performance.

The range of both product lines is unmatched in the industry, and their combination enables increasingly complex well profiles to be drilled.

As a result these services continue to expand their range and reach as the industry seeks to improve performance and mitigate risk.

Other Schlumberger technology segments that benefited from the quarter's overall activity pattern included Well Services, Completion Systems, and Data and Consulting Services.

In more detail, results in North America were driven by the Canada and U.S. land GeoMarkets which were both strong sequentially as pricing held firm and activity intensified.

Activity was particularly strong in Canada following the prolonged spring break-up in the second quarter with significantly improved utilization of both personnel and equipment.

Growth in U.S. land resulted from sustained demand for Well Services, Drilling and Measurements, and Wireline Technologies.

Activity was more tempered in the Gulf of Mexico, where seasonal cautionary planning for the hurricane season resulted in a modest fall in activity that nevertheless remained strongly ahead year-on-year.

In Latin America, weakness in Mexico led to a sequential decline in revenue in spite of the positive trends emerging in the Venezuela, Trinidad, and Tobago and Peru, Columbia, and Ecuador GeoMarkets.

This resulted from budget limits in PEMEX being reach somewhat early, although the effect on sequential operating income was more than offset by improved margins on integrated project management activity, primarily as a result of the reduced level of lower margin third party service.

Overall pretax operating margins in Latin America grew by 135 basis points which were underscored by increasing returns on Wireline in the Latin America South GeoMarket and higher margins on Drilling and Measurements and Wireline Services in the Venezuela, Trinidad, and Tobago GeoMarket.

In Venezuela, discussions regarding new contracts for the drilling barges and the settlement of certain outstanding receivables have progressed at the end of the quarter.

Pending the finalization of these new contracts, revenue recognition was deferred on certain work performed during the quarter.

Results in the Europe CIS and Africa were driven by higher activity in the Caspian and by strong demand for drilling and measurement technologies in the North Sea with these services being delivered at premium pricing.

Overall growth was seen in the Russia GeoMarket as land drilling activity increased, and there was particular strength in the eastern Russia GeoMarket in Sakhalin and the start of exploration drilling elsewhere.

Pretax operating margins grew by 156 basis points on a more favorable activity mix and pricing gains in the Caspian and North Sea GeoMarkets.

The Middle East and Asia area third quarter revenues passed the $1 billion mark, representing a 5% sequential increase.

This was driven by strong activity in the Arabian GeoMarket as rig count continued to increase in Saudi Arabia, where drilling has now begun on all four of the gas joint ventures.

Elsewhere, activity was strong in the Thailand and Vietnam GeoMarket as exploration activity strengthened and drilling further increased in Australia.

The slight sequential decline in margin was due to a less favorable revenue mix, mobilization expenses for Q4 drilling campaigns, and the absence of a retroactive price increase recorded in the second quarter.

Among Schlumberger technologies, the increasing range of Drilling and Measurement's new technology services made further progress during the quarter.

PowerDrive rotary steerable technology continued its worldwide expansion as a new member of the family was commercialized.

The new service, PowerDrive Xceed 900, responds to the need for point-the-bit capability in larger hole sizes from 12.25 to 17.5 inches, and complements the existing range of services for smaller hole sizes.

Total footage drilled by Schlumberger rotary steerable technology continued to climb sharply and reached 2.4 million feet by the end of the quarter.

Operational performance of PowerDrive has been particularly strong with equipment reliability, which has doubled since the end of 2005, becoming more and more critical as rig day rates climb.

Drilling Services' reliability is also shared by the expanding scope -- range of Scope MWD and LWD services.

Scope technology has now been deployed to 20 of the GeoMarkets with 10 of these already offering the full scope of TeleScope, Echoscope, StethoScope, and PeriScope services.

The PeriScope deep electromagnetic imaging-while-drilling service continues to enjoy rapid acceptance due to its ability to detect formation changes sufficiently far ahead of the bit to enable correct steering decisions to be taken.

During the quarter, PeriScope technology was used on a number of jobs, from coalbed methane wells in Canada to wells off shore Nigeria and to heavy oil projects in Latin America.

You will see further expansion of this technology family in the future, as new capabilities become available.

WesternGeco reported another record quarter with pretax operating margins growing further to reach 37%.

Strong marine revenue, high vessel utilization, additional land crews and a further growth in Q-Technology sales all contributed to this performance.

The Q-Land crew count increased from 4 to 5 during the quarter as a new crew mobilized for operations in Libya.

A number of new contracts have been announced, including the first ever 3-D over-under multi-azimuth survey in the Norwegian sector of the Barent Sea.

The survey design made possible through the unique capabilities of Q-Marine extends the frequency bandwidth to better image the complex sub-basalt geology in the area.

Elsewhere as part of the growing uptake amongst the client base, ONGC extended their Q-Marine contract by two years, and PETRONAS Carigali awarded a new contract for Q-Marine work on various fields offshore Malaysia.

Finally, I'd like to make a few comments on the assumptions governing our outlook for future activity.

High levels of natural gas storage in North America with consequent volatility in the price of natural gas have recently begun to impact activity, particularly in the areas of higher cost coalbed methane and shallow gas production in Canada.

This has not yet materially impacted our activity.

However, if the coming winter fails to stimulate strong natural gas demand, there is a growing likelihood of excess equipment capacity in the pressure pumping business at some point in 2007.

Activity growth elsewhere for both oil and gas will remain strong as our customers continue to fight decline curves and bring in new fields.

I'll now hand the call back to Jean-Francois.

Thank you, Andrew.

We will now open the call for questions.

Rod?

[OPERATOR INSTRUCTIONS].

Daniel Henriques, Goldman Sachs.

Hello?

Hello, can you hear me?

Yes.

Good morning.

My question -- I have two questions.

First in North America, when you talk about -- when you look above the winter and the risks of overcapacity in pressure pumping, do you think that a normal winter with normal temperatures, do you think that scenario you would have overcapacity there, or are you referring to the risk of a warm winter?

Well, I don't -- I'm not really good at judging the exact effect of the particular degree of winter severity on overall drilling activity.

We haven't modeled that yet.

I think that a normal winter would attenuate the effect.

In other words, if it was a normal winter with a sufficient draw down, it would -- any effect on pressure pumping would be lesser than if it's a warm winter, that's very obvious.

But what the actual degree of each -- each degree of winter temperature's effect on storage is, I don't really know.

Okay.

And in terms of incremental margins, your incremental margins remain very strong year-over-year in North America.

Are you seeing any impact on pricing yet in the third quarter or in the beginning of this quarter because of slowdown in the U.S. specifically?

No.

No.

We are seeing no effect on pricing so far.

And last question.

The multi-client, you continue to invest less than some of your peers, the sales remain strong, the outlook remains strong, can you update us on how you think about multi-client investments for 2007?

Well, we would actually like to invest more.

The problem is vessel availability because the return we're getting on the vessels in proprietary service is such that it's a big decision to pull them off and put them off on multi-client.

Now, a lot of our success in multi-client in the last quarter has been due to the reprocessing and conversion of time to debt of existing data that we already had.

So a lot of the success in multi-client is currently coming out of reprocessed existing data rather than new data.

Okay.

Thank you.

Geoff Kieburtz, Citigroup.

Good morning.

Good morning, Geoff.

I'm going to start off on the same subject, ask it a little bit differently.

It looks like you have trimmed modestly your CapEx plan for '06.

Is that -- does that reflect any change in your capacity additions specifically in the North American pressure pumping market?

Jean-marc, do you want to comment on the overall number?

The overall number I think we were consistent, around 2.5.

Well, I just -- referencing the FAQ where it was 2.1 for oilfield last quarter.

It's 2.0, as I said, modestly.

I think that has far more, Geoff, to do with the capability of our manufacturing organization to deliver the last 100,000 -- $100 million.

Okay.

All right.

Just wanted to clarify that.

There is no specific reduction that has taken place.

Okay.

If you do see evidence of an excess in the North American pressure pumping market, what do you do?

Well, we do what we always do.

We adjust the organization to the level of business that we have.

Okay.

Does that mean you just cut or --

No, I don't think it necessarily means that you cut.

Because we're still crimped for a lot of particularly specialist personnel all over the world.

So we can do a huge -- for people we can do a huge amount.

I very much doubt that we'd consider that a slowdown would be long enough to warrant us moving large amounts of equipment to other places in the world.

Okay.

And --

The number one objective would be to preserve the skilled workforce.

Got you.

And -- and you'd noted that there had already been some evidence of slowdown in the coalbed methane and some shallow gas, but it hadn't really affected your business.

No.

Is it going to, or are you trying to say that that --

No, I'm saying that the only -- actually one other point we wanted to make, Geoff, is that we've only seen this slowdown so far in Canada, not in the U.S., right?

And our market share in coalbed methane and shallow gas is not such that it had any material impact on our activity so far.

And that's the situation for Canada.

In the U.S. we've not seen any effect so far.

Okay.

And last question.

On Mexico, were your comments intended to communicate that we kind of have to wait until the next budget year to find out whether Mexico is going to rebound or what's sort of the dynamic --

Personally, I don't have any doubt whatsoever that Mexico will rebound.

Okay.

But you're quite right to point out that I don't think it will be until 2007.

Great.

Thanks very much.

Ole Slorer, Morgan Stanley.

Thank you very much.

I wonder whether we could just turn to Russia a little bit.

There was a big debate on the second quarter conference call, I remember, where the whole nationalistic kind of movements being debated to what extent it would affect your outlook.

And actually I attended the Lukoil strategic review in New York on Wednesday, and they just -- one customer highlighted very much that they've been moving more towards an outsourced approach and highlighted Schlumberger as one of the key partners in hydromodeling, et cetera, but stated that there was still only about 60% of the weight where they wanted to become in terms of the mix of in-house and outsourced approach.

So I was wondering whether you can update.

I don't expect you to comment on any particular customer, but whether you can give us a little bit of more color on how you are reading Russia from your latest kind of data points?

Well, I think that the -- the Russian state and the Russian oil companies do want to significantly increase their participation, and my personal interpretation is that a lot of what's happening is revisiting deals that were made 10 to 15 years ago when the oil price was very different.

And, frankly, that's not very different from what happens in other places around the world.

Now, in terms of Schlumberger, as I pointed out in our investor conference, we are not dependent anymore on any one group of customers, be they international or the Russian domestic companies.

Our fastest growing group of customers is undoubtedly the Russian domestic companies and it's -- Lukoil is an excellent customer.

And the move by the Russian oil companies to outsource their -- some of the internal service companies that they previously used to perform, I consider is still ongoing and, therefore, I think still provides huge opportunities for the service industry generally in Russia, and that as we're sort of quite well established, for Schlumberger in particular.

So what do you -- do you think that Lukoil is fairly typical of the established companies in terms of where they are and where they're going?

I wouldn't want to comment on Lukoil.

So sorry, but that type of a -- that type of -- how big is --

I'm not surprised that Lukoil would make a comment that they -- they are increasing their efficiency of operation by continuing to outsource some of the activities they did previously themselves.

Yes.

And for Russia as a market if you just look at it across everything, where do you think they are now as an opportunity, what's available to you now out of the total market and how do you expect that to develop over the next few years?

Well, I think it will go on increasing.

There are one or two companies -- very large Russia companies who have still not moved to the outsourcing model.

Whether they do or not is going to have a huge influence on the size of the service market.

And as we pointed out in Sugar Land, the trend that is really helping at the moment is the trend towards new field developments, which as it's not classic western Siberia, have a much higher technology content than what was classic western Siberia.

And the move towards exploration in eastern Siberia, not just in Sakhalin, but also in all the sort of non-basins, or it will become in all the non-basins along the pipeline route to China.

Thanks a lot, Andrew.

Michael LaMotte, J.P. Morgan.

Thanks, good morning.

Good morning.

Andrew, I want to follow up on this issue of adjusting the North American pumping market and see if I can't get you to be a little bit more specific in terms of what that looks like with respect to equipment.

Is it lowered CapEx, retirement acceleration?

Can you give a little bit more detail and color there?

I think that -- I don't -- actually, to be frank, I haven't looked at the plan, but I would imagine that the first -- if it's necessary, the first reaction to equipment will be to retire some of the very old and tired pieces that are out there.

CapEx, I don't think we're going to fundamentally adjust what we had planned for this year or next year.

Okay.

And then -- and that would lead us to believe that the market's really not that out of balance, perhaps.

No.

Michael, let me be clear.

For the market to -- you all know that I've been saying for a long time that the market would add capacity to the point where it creates an excess, which is -- there's nothing new in this.

It's always been before.

I mean, we all remember NASCO and Fracmaster and all these other companies that get swallowed up in the first downturn.

So what's happening in North America is there is no -- there's nothing new in this.

So I think that what -- all I'm saying is that should gas storage levels result after next winter in an adjustment in the level of drilling, and I have -- don't -- please don't ask me whether it's going to be because I have no idea.

[Laughter] That was my next question.

Then the excess in pumping equipment will come quicker.

Okay.

I won't beat that dead horse anymore.

Let me just ask quickly what the impact of the deferrals in Venezuela were in the quarter.

Somewhere close to $20 million.

Okay.

Great, thank you.

Michael?

Yes, Jean-Marc?

We also deferred the costs associated with that revenue.

Okay.

So it's not all 20 million income.

Okay.

Thank you.

James Stone, UBS.

Good morning, guys.

I just wanted to talk a little bit on the seismic side, first of all, Andrew, can you give us a sense of what the ramifications are in terms of your outlook for offshore drilling demand from some of these enhanced seismic surveys like the E-Dog that you talked about in the press release and should we anticipate similar projects like this in other basins outside the Gulf of Mexico?

Actually, I think that the likelihood of us doing an E-Dog-type project outside the Gulf of Mexico with a possible exception of parts of Norway, is very unlikely.

What makes E-Dog so powerful in the Gulf of Mexico is because it is revealing horizons that people knew existed, but really didn't have enough confidence to drill.

So to the extent -- I mean, what -- it joins what I said in the investor meeting, James, very much that the Gulf of Mexico has a long way to go.

And what new -- these new seismic techniques are doing, be it wide azimuth, multi-azimuth, Q and all of the rest of it, is opening up or increasing the confidence or mitigating the risk associated with drilling in the Gulf of Mexico.

So in the long-term, yes, I actually think that it will increase the -- particularly the semi-submersible offshore rig count in the Gulf of Mexico.

It'll take a few years, but that's where it's going because it is revealing new horizons.

Okay.

And then my follow-up to that is, I mean, the seismic margin's at 36 and almost 37% in the quarter, just extraordinary.

I mean, I'm trying to get a sense as to how much more upside you guys see in the margin front on seismic, or should we look at this as being very heavily influenced by strong multi-client sales in the quarter that are probably not a repeatable event as we -- at that magnitude as we move forward.

I think -- I think acquisition margins for marine, land, still have some -- there's still some room to expand those.

Multi-client is like the film business.

If you make the Titanic, the margin is absolutely huge, right?

But if you make a film that's bad, you get zero.

So I actually -- to the extent that we go on producing very solid multi-client projects, we'll go on having very solid sales.

But we can't -- it's impossible to plan sustaining a margin in a businesslike that.

So it can -- it can either -- you can have a positive surprise, you can have a negative surprise.

But I would agree with you that the current multi-client margin is probably at the top end of the range.

Great.

That's very helpful.

Bill Herbert, Simmons.

Hi, good morning.

Good morning.

Sticking to seismic for two seconds here, significant improvement in margins, up almost 500 basis points.

How much of that was driven by multi-client?

You said the preponderance of it, but was virtually all of it driven by that?

Jean-Marc?

No, actually when I commented, I put in order, I said marine activity first and then multi-client.

I missed that.

Thank you.

And then secondly, with respect to the multi-client mix, you were up about $54 million in terms of revenues from multi-client sales quarter [technical difficulties]; correct?

Correct.

Yes, we did 147 million last quarter, 201 million this quarter.

Yes.

So what I'm trying to understand is the incremental increase in revenues, how much of that was driven by essentially older data surveys, sales of older data surveys or almost --

A very significant part, if not all.

Okay.

That's good.

Thanks.

Last question, I know it's early days and you gave some loose parameters at the analysts conference, but do you have any sense with regard to capital spending budget for 2007?

No, we're in -- we're still in -- we're in the process of finalizing that at the moment.

But it's not -- it's not final to the point where we want to make a comment yet, Bill.

Yes, I guess what I'm trying to get at is how locked in is that budget as we speak right now, given the fact that equipment and tool deliveries are extending and not contracting, so essentially you would have had to order?

So all the long leadtime items and critical path items were ordered in the early part of the summer.

Okay.

That's all I have.

Thank you.

Thank you, Bill.

Dan Pickering, Pickering Energy Partners.

Good morning.

Good morning, Dan.

I want to -- I guess I want to ask a little bit about the message behind the message, Andrew, on the pressure pumping side.

I understand how Schlumberger plans to react in terms of capacity [technical difficulty], but essentially I hear the message which is industry guys stop adding capacity, but you're not changing your CapEx plans.

Are you hoping that others will?

Are we eventually going to move to a pricing methodology to get people to stop adding capacity?

I mean, what's the -- how's this play out?

So actually I think, Dan, that the -- the amount of capacity that's been added in the poorer quality resource, so shale gas, et cetera, is such that it shows that today in producing that resource, there is very little technical differentiation.

And the long-term name of the game has to be improving the production index in shale gas wells, which means that we have to bring technology to change that market from a market that is purely a commodity of how much slick water can you pump, to a market where between the -- between the stimulation and the completion, you actually improve the productive index of those wells.

So the long-term game for me is still technology in that market.

Okay.

That's helpful.

And then as we look into the fourth quarter, given kind of the things that you see at this point, would you expect that any of your four main GeoMarkets would be softer on the top line or any of your specific PSLs that would be softer, quarter-to-quarter?

The four main areas?

Correct.

No, I don't think so.

Okay.

Thank you.

Sorry.

Do you -- Jean-Marc wanted to add something.

You were talking about GeoMarkets or areas?

Areas.

Areas.

Okay.

Okay.

Thank you.

Alan Laws, Merrill Lynch.

Good morning.

A couple quick questions.

First one's high level.

Do OPEC cuts and Saudi's recent comments on defending price give you any pause for concern or factor into the secular growth backdrop that you see for the balance of the decade?

No.

I mean, actually, well, my view is that the whole -- the whole position of the oil price and the pessimism that surrounds it has been completely overplayed.

I mean, it's true that U.S. crude and product inventories are high, but if you look across the world, they are not very high.

And more importantly, as we've always said, if you look at demand, there is no -- I think, no significant sign or no major sign of significant weakness in demand.

So I think that -- I think OPEC is defending the price, but I don't think there is a huge danger of a price collapse and as we've always said we don't need $65 oil for our customer's spending plans to be maintained.

They will maintain them at a much lower price because the basic issue of renewing supply has not really changed very much.

Great.

Thanks for that answer.

The other one was on the gas side.

For quite a while, your comments on North America have included sort of pricing and demand growth verbiage and this quarter pricing was pretty much dropped and demand was characterized as sustained.

Other than, say, pressure pumping, what does your -- I guess, your longer-term crystal ball reveal about North American growth potential for other services over the balance of the decade?

Apart from pressure pumping?

Well, actually, I think that then you have to look at, again, what I just said to Dan Pickering and that is technology in the non-conventional resource is going to evolve.

And there are a lot of questions around how you actually exploit this resource that have not been answered.

So for example, there is the old age debate -- the old debate that's always existed of is fracking more efficient than horizontal?

Are there ways that we can drill these wells better and cheaper, more productive?

And so over time, if you assume that sustaining the gas production base is going to be -- get tougher and tougher, then we still -- I'm still in the longer term very optimistic about North America.

Is there a potential secular demand growth story for other services within that, other than pressure pumping, then?

Reservoir characterization and things like that?

Well, I -- yes, I don't really want to discuss our strategy in detail on the conference call.

But sure, yes, there are other -- lots of other ideas floating around, yes.

Okay.

I'll leave it at that.

Thank you for the answers.

Jim Wicklund, Banc of America.

Good morning, guys.

Hi, Jim.

Andrew, what is the impact to you guys into the oilfield service industry from Gazprom's announcement that it's going to develop Stockman by itself?

Is that a positive for you guys?

I really don't -- I think that the most likely scenario is that Stockman will be -- not be the first new gas field that Gazprom develops, and I have no inside knowledge, this is purely my personal speculation.

I think there will be other sources of gas that they develop in Russia first.

And, therefore, I don't think it has any short or medium term impact on the oilfield service industry.

Does Gazprom, having the idea of going it alone, if you would, without the participation of IOCs, is that a positive or a negative for the industry or does it matter?

I don't think it matters at this stage of the game, Jim.

Okay.

Okay.

Thanks, guys.

Good quarter.

Thank you.

Ken Sill, Credit Suisse.

Good morning, Andrew.

Hey, Ken.

One question as you look out -- I mean, Q4 looks like it's going to be pretty good, so looking out into '07, your long-term guidance has been for kind of 20% top line growth at good incremental margins.

So the incrementals look better than you maybe have been guiding to.

But if -- if you do have a slowdown in North American activity, what does that do to that kind of 20% -- high teens to 20% growth rate on the top line basis for kind of '07- '08?

Does it have a big impact on your growth -- long-term outlook --?

Not a huge one.

The answer is -- the best answer I can give you today is it does not have a huge impact.

Okay.

And then looking -- so parsing that out and looking internationally.

I mean, trying to -- your rate of change in the rig count, kind of regardless of what happens has to kind of slow down.

Yes.

So how much of the growth is pricing versus kind of activity growth on the rig count and then I guess a third component would be non-rig-related activity which is just the fact that you're having to work harder to maintain reservoirs --

Well, I think -- I think we would not -- compared to this year, obviously the rate of offshore rig count growth has to slow down because of the very high level of utilization and the fact that the new builds are not really going to hit the market until 2008.

I would disagree with you on land.

I suspect that the land rig count overseas is going to increase at the same rate or maybe even slightly faster, outside Saudi Arabia in 2007, compared to 2006.

So I don't think you're looking at a huge activity delta.

And rigless work -- there's always actually scope to -- for that to increase.

So I don't -- I don't see anything today that would make me change the statements I made on top line growth through the end of the decade.

And the implication there is your pricing power is still pretty good then?

I think that -- yes, overseas it's fine, yes.

Okay.

Thank you.

Robin Shoemaker, Bear, Stearns.

Yes, Andrew, you mentioned in your comments that you saw a slowdown in the Gulf Coast region in anticipation or during the hurricane season.

I wonder if -- it's now over to the extent that there was one, if you see a change for the better or if that area continues to be soft or unchanged from the level of the hurricane season?

No, I think -- we think we see a moderate sequential improvement in the fourth quarter, if that's what you're asking, Robin.

Yes, yes.

And you mean we're talking principally offshore, right?

Yes, I mean, what we're talking about in the third quarter is the fact that the operator did not want to be caught by any -- take any risk of being caught by a hurricane.

So there was some down-manning that took place, even though there was in fact no storm.

So the actual number of days that we were able to operate decreased in the third quarter, and it will go back up again automatically in the fourth quarter.

Yes.

Okay.

Just, my second question then is there's been a lot of discussion about cost pressures in the industry going back a couple years now, and I wonder if this kind of plateauing of activity or -- in North America specifically, or if you see any lessening of cost pressures either on wages or other major components of cost?

I think the answer has to be not yet, no.

No?

No.

Okay.

All right.

Thank you.

Anymore questions out there?

Rob MacKenzie, FBR.

Good morning, Andrew.

Good morning, Rob.

My question is around your comments about the penetration of Analysis Behind Casing in China, and how that's growing there.

I wanted to get a feel for any penetration for that product line outside of China, any progress you're making on deploying that more broadly.

No, it's doing pretty well all over the world.

I mean, to be quite honest, some of the issues we have today is finding enough engineers to run very complex services, which they are.

But generally, the growth in ABC has been pretty solid everywhere.

I think we pointed out China because it's one more sign of the need the Chinese have to recover as much of their domestic resource as they possibly can.

And they do have a very large stock of oil wells that they can go back and revisit and see whether they have any bypassed oil or possibilities of increasing the production from their existing pack of wells.

But generally it's been pretty good.

I mean, the same could be said about the United States in particular old oil wells, Russia, you name it.

Have you --

I think the -- I think it's one of the messages we tried to get across in our investor show.

But the recharacterization of existing reservoirs is going to be a very important part of our business.

And as I know it's public, we currently have a Q-Land crew working in west Texas with Dawson Geophysical, and the recharacterization of some very old fields in west Texas can reveal some very interesting data.

So, yes.

You're quite right that the part of the improvement in the recovery factor will be using technology, be be it seismic or Wireline or other technologies to -- testing, particularly, production testing -- to revisit very old fields.

Okay.

And my follow up question is the Scope tools, the Scope family, can you give us a feel for how deep the penetration is on percentage of wells, what the upside is left?

Oh, it's very small.

I mean, the penetration we've achieved so far -- J.F., do you know --

20 GeoMarkets.

We've done 20 GeoMarkets, but the actual penetration into the overall LWD/MWD market is still very low.

Okay.

Thank you.

Brad Handler, Wachovia Securities.

Thanks.

Good morning.

Good morning.

Could I ask you, please, to speak to whether or not on the -- I guess on the CapEx side of your business, are you seeing any signs of freeing up or lessening of costs for some component parts, perhaps as a function of sort of slowing growth in some other industries, away from energy?

So maybe Caterpillar is sort of a regrettable example on my part to have to mention, but perhaps they don't have the demand of some other industries, so they're allowing -- there's a little bit more room that can --

Well, unfortunately, a lot of the basic component supplies that we use are the same as the mining industry.

And you talk about Caterpillar as an example.

There could be several others.

But -- and as a -- the mining industry is booming as much as the oilfield services industry, and therefore, I very much doubt that we're going to see a reduction in lead times or any reduction in costs for the basic components like that for some time yet.

The only efforts that have been successful in cost, I think, that we can point to, and that would not be for prime moving equipment like Caterpillars, is where we've diversified our sources of supply.

I think that everyone is trying to qualify new suppliers at the home moment, and that's basically the only way you can have any significant or even any effect at all on cost.

Okay.

Thanks.

That helps.

And in an unrelated follow up, I guess, if you will, can you just speak to the sales of product into China?

There was some commentary made by some of your peers in prior quarter about kind of trying to cut back on that in favor of use of proprietary tools and expanding the services.

Have you taken a stand on that in one way or another?

Should we perhaps expect less sales into China going forward --?

We -- for the last 25 years, we have taken the position that we would never sell our equipment into China because we're in the service business, not in the business of putting our -- putting other people into the service business.

So we've never sold equipment into China.

So what we saw in the margins was simply a function of what services were provided?

Yes, exactly.

No, the -- it's the service mix in China.

We have never sold products into China, apart from things like ESP electrical submersible pumps, which everybody sells as products.

But we've never sold our Wireline equipment or D&M or pressure pumping equipment into China.

Okay.

Thank you very much.

Pierre Conner, Capital One.

Good morning.

Thank you.

Good morning.

Actually, similar question on mix relative to the North Sea.

You mentioned gains there, and I wondered if those were discrete or were you gaining some market share in higher technology that was contributing to those incremental margins there, Andrew?

Yes, I think we have some new contracts that are employing higher technology products that probably came on-line either in the middle of the second quarter or the start of the third quarter, yes.

Okay.

That's fine.

The rest of my question's already answered on the margins at WesternGeco.

Thank you.

Thank you, Pierre.

Any more?

Jim Crandell, Lehman Brothers.

Yes.

My question's been answered.

Thank you.

Okay.

So Rod will be providing the closing comments.

Thank you all for participating in today's call.

Rod?

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