斯倫貝謝公司 (SLB) 2006 Q4 法說會逐字稿

Welcome to the Schlumberger earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Mr. Jean-Francois Poupeau.

Please go ahead.

Thank you, Julie.

Welcome to today's fourth quarter 2006 conference call.

Before we begin today's call, I would 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 and 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 which is available on our website, 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 fourth quarter activity and outlook.

Finally, we'll take questions from the audience.

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.

Fourth quarter earnings from continuing operations before charges and credit were $0.92 per share, up $0.11 sequentially, and $0.40 above same quarter last year.

Oilfield Services generated $1.317 billion in pretax operating income and the pretax margin was 28.4%, a 23 basis point improvement sequentially.

By area, the highlights were as follows: North America pretax margin was up 29 basis points sequentially to 30.8% due to the rebound in deep water activity in the Gulf Coast and a strong performance in U.S. land, more than offsetting the profitability decline in Canada;

Latin America pretax margin was 21%, sequentially up 43 basis points, primarily reflecting improved activity and margin in Mexico; for ECA, our Europe, Africa, CIS unit, the pretax margin was sequentially down 28 basis points to 26.2%, strong performances in Nigeria, Continental Europe, West Africa were offset by seasonal drilling shutdown in Russia, and more unfavorable activity mix in Caspian and project start-up costs in north Africa;

Middle East Asia pretax margin increased 43 basis points sequentially to 33%, with improvements in the Gulf, Thailand, Vietnam, Libya, and India more than compensating for lower profitability in Indonesia, Brunei, Malaysia and the Philippines;

WesternGeco pretax margin was $273 million and improved 116 basis points sequentially, to 37.9% as a result of higher level of sales of multiclient service.

Getting back now to Schlumberger as a whole, the effective tax rate before charges and credit was 23%, slightly below our guidance, mainly as a result of a favorable geographic earnings mix in WesternGeco.

In 2007, we expect the effective tax rate to be in line with the rate for the total year 2006, although we may experience the usual volatility of the effective tax rate on a quarterly basis due to the earning mix.

The earnings for the quarter included $30 million of expenses relating to stock-based compensation, the same level as last quarter, and $23 million over the same quarter last year.

We expect stock-based compensation expense for the full year 2007 to be approximately $150 million, a $36 million increase over 2006.

We also incurred during the quarter $14 million of expenses relating to the relocation of our research facilities to Boston, which were offset by foreign exchange and insurance gain.

The return on capital implied by Schlumberger was a record 36.3% in Q4 versus 32.9% in the last quarter.

At the end of December, the net debt was $2.8 billion.

In the quarter, the stock buyback of $119 million, CapEx of $900 million, and business acquisitions of $248 million were more than offset by very strong cash flows from the operations.

CapEx, excluding $59 million of multiclient service capitalized was $841 million for the quarter, and is expected to reach approximately $3 billion for the year 2007.

During the quarter, we bought back 1.9 million shares for $119 million at an average price of $64, as part of the 40 million shares buyback program approved by the Board of Directors last April.

Since April, the cumulative number of shares bought back amounts to 13.6 million shares for $814 million, at an average price of $60.

Yesterday, the Board of Directors approved a 40% dividend increase, representing a quarterly dividend share of $0.175 payable April 6, 2007, to stockholders of record on February 21, 2007.

This reflects the current level of earnings reached, as well as our views on the long-term outlook for the company.

And now I will turn the conference over to Andrew.

Thank you, Jean-Marc.

Good morning, everybody.

Full-year revenues grew 34% in 2006, far exceeding our original expectations.

This was driven by significant price increases, a rich portfolio of new technology, and stronger activity in almost all GeoMarkets.

WesternGeco performance during the year was particularly impressive, being led by the resurgence in exploration activity and the continued rapid growth of Q-Technologies services.

All geographic areas grew uniformly on a sequential basis.

Fourth quarter results produced new record levels of revenue and net income, despite seasonal weather-related weakness in the North Sea, parts of Russia, and U.S. land, as well as activity-related Russia, and U.S. land, as well as activity-related weakness in Canada.

WesternGeco achieved further significant progress while strong performances were recorded by Schlumberger Information Solutions, Well Testing, and Artificial Lift.

Looking at the quarter in more detail, sequential North America was led by the U.S.

Gulf Coast as a result of greater deep water activity and increased demand for drilling and measurements, wireline, and well testing services.

Sales of completion products were also strong in the gulf coast, and contributed to the overall performance.

On land, weather slowed activity in some areas, but the U.S. land geomarket continued to grow through sustained demand for well services and drilling and measurement services.

Revenues in Canada were flat with the third quarter, as natural gas activities slowed in areas of shallow gas and coalbed methane activity.

Operating margins increased modestly as a result of a favorable activity and mix in the Gulf Coast, together with strong demand for higher margin information solutions products and higher well services and drilling measurements activity on land.

Sequential growth in Latin America was mainly driven by increasing activity in Mexico, where all technologies showed growth.

Increased demand was also seen in Venezuela, Trinidad, and Tobago for drilling and measurements and well testing services, while higher sales of Artificial Lift Systems and information Solution products were noted in the Peru, Colombia, Ecuador and Latin America south.

On the other hand, reduced drilling activity in Peru, Colombia, Ecuador, and the deferral of certain work performed during the quarter in Venezuela tempered growth somewhat.

In Venezuela, discussions regarding the new contracts for drilling barge work and the settlement of certain outstanding receivables were ongoing at the end of the quarter.

Overall, pretax operating margins improved sequentially driven by the growth in Mexico and Venezuela, although growth was partially offset by the less favorable activity mix on IPM projects in Mexico, Peru, Colombia, Ecuador, and Latin America South.

Results in Europe, CIS and Africa were driven by higher activity in the North Sea, western southern Africa, and in continental Europe.

By technology, demand was particularly strong for Well Services, wireline, and well testing, as well as for product sales in the North Sea.

Overall growth, however, was hampered by weather-related slowdowns in the North Sea and seasonal drilling shutdowns in Russia offshore Sakhalin.

The same combination resulted in sequential growth in operating income, although the affect was masked by a more unfavorable activity mix in the North Sea, western southern Africa, and the Caspian GeoMarkets, as well as project start-up costs in north Africa, and the seasonal slowdown offshore Sakhalin.

In the Middle East and Asia, fourth quarter revenues continued the grow past the $1 billion mark.

This was driven by increasing rig counts in the Gulf, India, Australia, Papua-New guinea, and the Libya GeoMarkets and by sustained exploration activity in Thailand and Vietnam.

In contrast, deep water activity was lower in the Brunei, Malaysia, and Philippines and the area also experienced weather-related issues as heavy rains in the Arabian GeoMarket delayed and lengthened rig moves.

By technology, demand was strong for wireline, well testing and IPM services as well as for sales of information solutions products and Artificial Lift Systems.

All of these technologies grew by double digits in the quarter.

Sequential growth in operating income from the area resulted from this strong demand for services and products, although the affect was mitigated slightly by lower high margin drilling and measurement services and reduced sales of high-margin completion systems products compared to the third quarter.

Amongst Schlumberger Technologies, the increasing range of drilling and measurement's technology higher margin services made further progress with the rapid deployment of the Scope family of MWD and LWD services continued.

Not only is this technology now available in more than 20 GeoMarkets, but it has been used to drill one-sixth of the total footage of Drilling and Measurement Services during the year.

Schlumberger completions was also a strong contributor to growth, and to add further technology to our products and services in this critical area of reservoir production, we are acquired Reslink, a Norwegian-based supplier of advanced completion solutions.

With key engineering and manufacturing centers in Algard, Norway, and in Houston, Reslink focuses on designing and building robust and reliable smart well completions for advanced well completion and production optimization applications.

WesternGeco reported another record quarter with pretax operating margins growing further to reach 37.9%.

These results were driven by strong multiclient sales, and increased land activity, although Marine decreased slightly as additional resources were deployed on Phase II of E-Octopus, the world's first multi-client survey wide azimuth survey in the Gulf of Mexico.

Full-year 2006 growth in both revenue and operating margin has been exceptional as demand has accelerated for exploration-driven seismic searches.

Marine vessel utilization reached 99% and price increased by more than 50%.

Q revenues have continued their impressive growth and now account for 29% of total WesternGeco revenue.

As a result, and in order to meet future demand, we have announced the construction of an eighth and ninth Q vessel to be delivered in 2008 and 2009 respectively.

In addition, we will be deploying a sixth and seventh Q land crew in 2007.

In other activities, integration of the Odegaard data inversion software is proceeding well and we expect the results of the recently-awarded contract to integrate a series of Q-Marine time-lapse service in the North Sea to benefit from the inversion technology.

I would now like to make some comments on the assumptions governing our outlook for future activity.

At our investor meeting in September 2006, we reiterated our expectation that absent any dramatic world economic slowdown that were to reduce hydrocarbon demand, Schlumberger will continue to see high growth through the end of this decade and well into the next.

We also stated that growth rates would eventually slow from the breakneck pace of 2006, but would remain way above what was experienced over the long, slow industry adjustment period post 1986.

Short-term declines in commodity prices inevitably produced varying activity growth rates if they are sustained long enough.

However, maintaining the production base of both oil and natural gas in the face of accelerating decline rates, poorer quality, or more difficult reservoirs and eroding reserve replacement ratios will mean that any moderation in activity will be short-lived and self-correcting.

While we remain of the opinion that there is no overall shortage of oil and gas reserves, the world is realizing that the period of cheap hydrocarbon energy has ended, and newer and higher-sustained levels of investment are necessary to meet demand and guarantee future supplies.

We therefore expect to continue to see significant growth in 2007, particularly in the eastern hemisphere for exploration development and production enhancement-related services, where technology is our key to improving our customer's performance and reducing their technical risk.

As part of our capital management program, we repurchased 13.6 million shared under the 40 million share buyback program authorized by the Board of Directors in April 2006.

I'm pleased to report that the Board of Directors has approved a substantial dividend increase for the third consecutive year.

Finally, I would like to add on a more personal note in expressing the thanks of the Company and the Board of Directors to Jean-Marc Perraud, the Chief Financial Officer of Schlumberger.

As part of a planned succession, Jean-Marc will step down as Chief Financial Officer on March 1st, but remain as a financial adviser during a phased retirement.

He will be replaced by Simon Ayat.

I will now hand the call back to Jean-Francois.

Thank you, Andrew.

Julie, we will now open the call to questions.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Ole Slorer with Morgan Stanley.

Please go ahead.

Thank you very much.

Andrew, I would like to ask you a follow-up question on what you stated there, that you see no shortage of oil and gas reserves on a worldwide basis, yet we're seeing serious oil companies come out with production statistics for the fourth quarter signaling very weak reserver placement ratios.

So can you update us a little bit on what sort of conversations are you having with these companies right now?

Well, I'm not going to make you privy to discussions with our customers, Ole, but what I will say is that the question of IOC reserve replacement ratios is a lot more linked to the issue of access to reserves, in my opinion, than it is to any lack of reserves on any worldwide basis.

The other factor that I think we all need to bear in mind is that the new phase of exploration really has only just begun.

I mean, we are still in the early seismic phase.

And therefore, the results of exploration programs, which even in provinces like the Gulf of Mexico, I'm sure are going to be extremely successful, are not going to be reflected in people's reserve bookings for a number of years yet.

That's helpful.

My question was more along the lines of whether there's a dramatic change of focus now as a function of what's been posted, but you seem to indicate that that's the case.

I'm sorry, dramatic change of focus, I don't quite understand?

Dramatic change of focus from exploitation of existing reserves to more of an allocation to the exploration dollar?

I think we feel that the increase -- don't forget exploration is a very small number compared to development or exploitation of existing fields, but the relative increase in exploration is going to be much higher this year and probably will go on increasing, particularly as people get access to new build rigs to perform exploration drilling.

One follow-up, so in 2006, it will have very few incremental offshore rigs delivered from the current run rate, I mean, for 2007 --

Yes.

And what is, how do you think about your growth projections -- you highlight strong topline growth for the rest of the decade and into next, yet, this is a year with very little offshore rig delivery and potential slowdown, as you highlight, in North America.

So how do you think about the 2007 growth rate conceptually compared to the average over the next few years.

Well, I think that the nature of the growth in 2007 is still going to be very much based on increased spend from the NOCs, production enhancement.

Some new field development.

But that we are going to see a swing back towards the IOCs as and when the -- and the rates of growth will be sustained by the IOCs, as and when the new rigs start to come out of the shipyards in 2008 and 2009.

Thank you very much, .

Our next question is from Michael LaMotte with JPMorgan.

Please go ahead.

Thanks, good morning.

Andrew, as we think about the cross currents in North American market, I think Q4 was an interesting quarter to look at, because you had Canada, revenue flat, profit down, rig count down clearly, and yet you had up revenues and profits sequentially.

As we go through '07, how do those cross currents play out if we assume a modest slowdown in U.S. land, Canada continues on its trend, but deep water is obviously picking up as well.

Can you give us more guidance and color on that?

Well, I can -- all I think I can say at this stage, Michael, is that we have every confidence in the deep water we have a lot of confidence in some of the gas plays, but we don't feel, we're not going to make a call internally, I'm talking now, of what the likelihood of stabilization or decline is going to be in gas drilling until the end of February.

Okay.

So we have a plan in place, we have a plan A and a plan B, but we are not going to make the call until the end of February or the middle of March, depending on how winter progresses.

Of course, you'll let us know at the end of February what that is, right?

Well, I'm sure --

Okay, thanks.

The second question on the completions business, you had a lot of comments, more than usual, in the prepared remarks and in the press release.

If I think back to a few years ago, Schlumberger was going to change this business.

We're not going to be the biggest in it, but we're going to change it.

Are we seeing the evidence of that now?

And what exactly are those changes?

Is it migration from a catalog business to an engineered business?

What's the model?

I think the confidence we're feeling at the moment comes from the fact that we now start to have our very successful execution of projects where completions are still products, they'll always be products, but they are part of an engineered system.

Not only an engineered system, but an instrumented system in such a way that the customer's knowledge of what is occurring and the individual completion down hold and his ability to act on that is much better than it's ever been before, and our presence in that market, particularly in deep water is very satisfactory to us, Michael.

I'm not saying we're there yet, but compared to when Saki laid out the strategy in '04, we certainly moved a long way forward.

If I think back to the September analyst day, the reliance of that business on measurement has grown significantly.

Is that fair?

That is fair, but I would also say it's very important that the measurement is only as good as the quality of the products.

This is the ultimate reliability business.

In other words, if you have measurements on a product that's going to be down hole for ten or 15 years, it has to work otherwise there's no point in having the measurement.

Right, right.

Okay.

Very good.

Thanks, Andrew.

The next question comes from Jim Crandell with Lehman Brothers.

Please go ahead.

Good morning.

Good morning.

Andrew, a follow-up first on the U.S.

To the extent you're seeing weakness in the U.S. market today, first, where is it focused geographically?

Second, where is it focused by product line?

And is it activity, price, or both?

The answer has to be that we haven't seen any weakness in U.S. land so far.

Oh, good.

I think the weakness, if it comes is going to coincide with the end of winter, and that's when people are going to make decisions.

So my fear is not so much moderation in the drilling activity, which will obviously have an affect on price, it is the fact that as I pointed out in previous quarters that stabilization or drop in activities also going to be at the same time when people are still introducing a lot of capacity into the market.

And therefore, the most difficult thing to judge and the most -- how can I put it, the most difficult thing for the service industry to manage is going to be price in an environment where activity stabilized, but actual service capacity goes on increasing and I will come back to my favorite here, the one that worries me most is pressure pumping.

Yes.

Okay.

One follow-up, what product lines would you expect to see the most new product commercialization in 2007, and would you expect to see in 2007 meaningful expansion of new technology introductions in either the scope or scanner families of tools?

Well, I think that 2006, the very, very large story was obviously scope, and I think in 2007 the current introductions plus some other planned introductions of the scanner family in wireline and some new products in Well Services will probably be the places where you see the most new technology.

Okay, great.

Thank you very much.

Thank you, Jim.

We'll go to Dan Pickering with Pickering Energy Partners.

Please go ahead.

Good morning, guys.

Good morning, Dan.

Andrew, could you give us a snapshot of Russia, please, some changes there in the way the government's interacting with outside companies?

Has that changed anything in your outlook?

I think you had a 1.25 billion revenue target for '06 and '07.

No, I think that '07 -- so the answer to the first part of your question, does the government's attitude towards oil companies have any affect on our business, the answer is no.

Our customer base in Russia as, I think we described in Houston in September, is now very, very broadly based.

And in 2007 we feel that the spend in Russia to sustain their existing production is going to have to shore considerable increase, so we still think that 2007 will be a year of substantial growth in Russia with some change in the nature of activity.

Part of it is this migration from fracking to horizontal drilling, and the other is that there will be more greenfield activities starting to pop up.

Thank you.

Your capital spending estimates are up 3, 4, $500 million or so.

Where will the incremental CapEx be directed?

Well, actually, Dan, I'm going to say that WesternGeco is up -- a lot of it, obviously, is overseas.

We redid our CapEx plan for North America back in October.

Actually, I don't really want to disclose which segments its going into, for competitive reasons.

Sounds like most of it, though, is international?

Absolutely.

I don't have any problem saying,most is international.

Okay.

Thank you.

Thank you.

We'll go to the line of Alan Laws with Merrill Lynch.

Please go ahead.

Good morning.

Good morning.

Schlumberger information solutions got a lot of ink in this press release.

I was wondering what was the collective size of the contracts awarded in this quarter, and how that compares to the typical quarter, or your to your typical seasonal pattern?

So Q4 is always the strongest quarter for Schlumberger Information Solutions.

Sure.

I don't have a number in front of me, but a lot of it is driven, I think, by the continued success of Petrel and people making decisions at the end of the year before their budgets run out.

In the overall scheme of things, I don't think it made the quarter for us, if you like, Alan.

Okay.

That's what I was trying to get at.

The other thing, is this a line that you're going to see more demand for as the NOCs try to get a handle of their resource bases?

Are you going to see more of this type of work?

It seems like a fairly high-margin piece of work.

Information Solutions?

Yes.

I don't think it's just NOCs, I think it's the fact that the Petrol capacity to do size simulation within the same package makes a huge improvement in the productivity of geoscientists.

Everyone is short of geoscientists at the moment.

Any tool that can improve their productivity sells extremely well.

Competitively --

-- not just NOCs, it's everybody.

But competitively, your one-earth model has no competitors at the present time, is that the fair?

Not at the present time, no.

All right.

My second question is really on North America.

It looks like directional drilling, evaluation of the higher-end part of that business is growing in North America -- I'm sorry, U.S. land market in particular.

Is this sort of true?

I know we talked about this before in prior conference calls.

Could you characterize where we are in --?

Actually, I think if you look at the total U.S. rig count and the number of rigs that are still vertical that the penetration of drilling and measurement type of services into the market generally on land is still very low.

Do you think it's going to reach the 70% kind of level on offshore?

No.

I think it's going to be very dependent on how much it can do to improve the production index of gas wells.

I think that's -- I would characterize that, Alan, as an unknown at the moment.

Okay.

Can you characterize it in terms of how much the directional and the evaluation improvements have had on the actual fracturing of the gas wells?

Has this been a big step change?

Well, certainly in unconventional gas, characterization has had a very substantial effect on the judgment of how to produce these wells.

And I think we're in an equation that the industry goes through, and all sorts of places all around the world is how good is a horizontal well?

The cost of a horizontal well in increasing the production index, as opposed to a vertical well you fracture, particularly if you have to stage frac.

So I would say today the jury's out.

Okay.

And does this have any implication for your IPM business?

I see there's some additional Barnett work there.

Do you think this is a potential trend in the U.S. market for you?

Yes, I do.

I do.

It's such an activity-intensive business that that sort of IPM contract to manage or to produce Barnett shale-type acreage, I think, is a trend of the future.

Appreciate the answers.

Thank you.

Next question is from Bill Herbert, Simmons and Company.

Hi, good morning.

Good morning, Bill.

Call you provide us with an update in light of the recent comments on the part of Aramco that their rig counts is going to peak in '07 with regard to updating us with your outlook for Saudi Arabia.

I don't think anybody should be surprised with the plateauing.

They've always been very clear on the number of rigs they're going to contract.

That plateau will still mean that the year-on-year comparison, '07, '06 will look very good.

I don't think -- I think that the -- in the current environment, the Saudis are committed to completing a development program, which they will complete.

I don't see anything dramatic happening in the current environment.

Okay.

Secondly, can you give us an update on your wired pipe venture with VAM?

With the -- you're talking about [Valerek]?

Yes.

We have a lot of IP in the wired pipe domain.

We have some joint engineering studies on the way, with Valerek, and that's really all I'm prepared to say, Bill.

But you would not be prepared to give us any update with respect to timing of the commercial development of that product?

No.

Thanks very much.

Thank you.

Our next question is from Geoff Kieburtz with Citigroup.

Good morning.

Good morning, Geoff.

You mentioned Andrew, in your commented that the topline growth in '06 was a surprise, obviously a positive surprise, you gave some reasons behind it.

Could you elaborate on those reasons?

Where would you point to as the biggest surprise?

Well, I think the biggest surprise was the amount of leverage that we had with new technology and pricing, Geoff.

Okay.

Activity, the field always slightly underestimates, but it's never a huge surprise.

But I don't think going into '06 we realized quite how much leverage we had on both pricing and new technology.

And as you look forward, kind of beyond the near-term uncertainty that we've already talked about, does that at all change your outlook on the multiyear.

Do you think that leverage you've referred to is sustainable over the long-term, or is there something that happened in '06 --

I think what happened in '06 is that there was panic from our customers all over the world as to wether or not services would be available.

So while we'll continue to have some leverage,particularly if our technology is good, I don't think -- that's why I say that growth rates are going to slow from the breakneck pace of 2006.

It's not just a slowing in activity, it's also the fact that we're going to work -- we're going to have to work a lot harder to repeat the pricing and technology performance that we had in 2006.

I'm not worried about it, I just think it's going to take a lot more work.

And when you think about a slowing of the rate of growth, are we talking about falling in half?

Well, no, I'm saying -- I'm still maintaining my high double digits through the end of the decade, Geoff.

Okay.

But what we've got in the bag from '04 would kind of -- you can get there with mid-teens?

Yes, but I don't -- I don't to be granular on 2007, which I suspect --

No, keeping it in the multiyear outlook.

The multiyear through the end of the decade, I still feel confident we'll be in the high teens.

Okay, okay.

From here?

Yes.

And just last question, on the near-term outlook, as you contemplate the possibility of a slowdown in the North American market, which I think you've already alluded to, would you characterize Schlumberger today as being more or less sensitive to a slowdown in North America than it was in 2001, 2002?

I suspect that we are slightly less, I don't -- I haven't got numbers in front of me, Jeff.

I would expect we're slightly less sensitive, but not a great deal less sensitive.

The big difference would be Russia.

Right.

In 2001, Russia would have been $100 million, now it's 1.2 billion.

Got you.

Thank you very much.

Thank you.

We'll go to the line of Ken Sill with Credit Suisse.

Please go ahead.

Good morning, gentleman.

Good morning.

Two unrelated questions.

On pressure pumping, you've been expressing concerns about capacity in North America.

You guys are the biggest pressure pumping company in the world.

What are your --

No, no, no, we're not.

You're not.

I don't want you to upset Halliburton.

What is your outlook for pressure pumping in the rest of the world, outside of North America?

You have to remember that fracturing is very much a North American business, and there are whole markets overseas where fracturing is just beginning.

So long-term overseas, we think that Well Services, just from the sheer point of view of introduction of the technology, has a huge future.

The other thing is, if you look behind the North American gas market, the whole point of Well Services and activity is to improve production.

And therefore, as fields get older, as our customers concentrate more and more on extracting more oil from their existing properties, we think that Well Services still has a very big future in front of it.

It may not all be just natural gas fracturing.

That makes sense to me.

It was just something that is myopically focused on North America.

And then an unrelated question, your equity income in joint ventures was up very substantially in Q4.

Is that still primarily the MI joint venture?

Is there anything unusual in that number this quarter?

No, there's nothing unusual.

You know our structure, so it's primarily MIM.

Okay.

So that's just still growing faster than the rig count worldwide?

I suspect also that in 2006, and I don't know which quarters it came in, but the Arabian drilling company in Saudi Arabia also had a huge expansion.

And that's probably making a more significant contribution than it did in the past.

That's correct.

Okay, thank you very much.

Thank you.

The next question comes from Mike Urban with Deutsche Bank.

Please go ahead.

Hello?

You've been -- you're very clear, obviously, in expressing the differentiated growth that you see would be eastern hemisphere.

What would be interesting as you look out into '07 and beyond, is there any kind of meaningful change in the composition of that either geographically or on a product line basis?

Either rank ordering, or just thinking about the relative rates of growth and what might change versus what we've seen over the last year or two?

Well, I think that the accelerate -- as we move forward in the eastern hemisphere, we're going to be moving more out of the just pure development, which is what we've seen for the last couple of years into more exploration.

And that, essentially, I think, is going to be focused around Russia, Caspian, Central Asia.

And I think the other thing, which is the change that applies equally to the U.S., but it's very significant overseas as well, is where all the new offshore rigs go.

I can think of almost every theater where submersibles are needed or where outside the U.S. is short of semisubmersibles as well as the gulf of Gulf of Mexico.

And the follow-up to that would be, Latin America has been a region that's lagged for various reasons.

It looked like at least in the quarter you had some promising results there.

Is that a region that does a little better here going forward now that we're past the election cycles?

Yeah, we think that '07 will be much better prospects in Latin America than in '06.

Great, that's all for me, thank you.

Thank you.

We'll go to the line of Brad Handler with Wachovia.

Please go ahead.

Thanks, good morning.

Good morning.

If you could speak, please -- I guess a very near-term question -- if you could speak to Russia in Q1, help me calibrate a couple of elements.

We had this extended holiday season and I'm wondering if that knocked off the first half of your January, and perhaps we have a very warm winter, and I'm trying to get a sense what that is on your business, assuming that's positive, but how much so, and if you can help on that?

I think the biggest single affect on our Russia business in Q1 and Q4 is the shutdown of Sakhalin.

I'm not aware of any particular -- compared to last year, because the extended holiday season is a phenomenon every year in Russia, because the orthodox Christmas is much later than ours.

I'm not sure if there's any -- I'm not aware of any significant affect, either due to the holiday season or the weather.

Okay, fair enough.

As a follow-up, unrelated follow-up, if you could speak a little bit more to Venezuela, it felt as though I heard the same thing on the last conference call, does that suggest that the talks have made no progress through the course of the quarter, and just a clarification, there was no revenue booked from the barges business throughout the quarter, and so now it's two quarters where you've been deferring revenue?

It's not two quarters.

But the answer is that we made significant progress in our discussion, with [Pedavesa] they just weren't signed at the end of the year.

So there is -- I don't anticipate any issue there.

Okay.

All right.

Fine.

Thank you very much.

Turn it back.

Thank you.

Our next question is from Robin Shoemaker with Bear Stearns.

Please go ahead.

Thank you.

Andrew, I was wondering if you could update us on the issue of cost pressures on Schlumberger, and the issues you referred to previously, wages, other areas of cost, both in the U.S. and international?

Well, I think that the cost pressure on wages and salaries for petrotechnical experts and certain very skilled technical professions has not diminished at all.

And actually, I don't think it's going to diminish in 2007.

I think that some of the material cost pressures will abate and we will certainly be much more actively managing those items than we were in 2006.

But I don't see any dramatic reduction in cost inflation, particularly on wages and salaries in our industry.

Okay.

Is the level of poaching of one company to another still as much as it was as a cause of cost pressure, and what is Schlumberger's hiring goal in 2007?

Is it up or down from last year, which I think was 6,000, or something like that?

Well, our overall hiring goal in 2007 is going to be below 2006.

By exactly how much, I don't know yet.

And part of that is the moderation in North America, and part of that is the success we had in 2006.

So in 2007, we will be concentrating on training and bringing through the system the people we hired in 2006.

Now in terms of poaching between companies, we don't lose many people to our competitors, but we do lose a lot to the oil companies, and I think there may be a slight pause in that at the moment, but I don't think it's going to last very long.

That's why I say I think the pressure on wages and salaries for petrotechnical experts and certain very specialized technical people will continue to be there in 2007.

Okay.

Thank you.

Thank you.

Our next question comes from Morton Nystrom with Kaupthing Bank.

Please go ahead.

Thank you, guys.

Congratulations on a good quarter.

Just a question regarding WesternGeco.

Could you give us some more color on your backlog since it has been dropping.

Is that related to the onshore business, or its it related to the offshore business?

We're a little surprised you think it's dropping.

Certainly in Marine, we don't think it's flat with the last quarter, which is about right for this time of year.

And if we look at the bulk of 2007, we don't have a large amount of Marine capacity left to sell.

Land fluctuates, so I really can't make a adjustment, but there's no -- I can't read anything significant into the change of the backlog between Q3 and Q4.

Okay.

Just a follow-up on that.

I've seen that oil companies want to secure seismic vessels at the earliest dates now than they did, indicating that having receiving tenders for 2008 in terms of seismic capacity for offshore?

I'm not sure whether we're receiving tenders, but I can tell you we are having discussions with oil companies concerning 2008 seismic programs.

Thank you.

Thank you.

The next question is from Pierre Conner, Capital One Southcoast.

Please go ahead.

Good morning, Andrew.

Good morning.

Actually, my question is a follow-up to Morton's put differently.

Of your backlog added, is there any relevance to the geographies of where that backlog was added?

I'm assuming it is mostly marine, is it the North Sea you mentioned in the press release?

It's fairly general, but the seismic business migrates in the function of the weather.

The backlog we're booking now I suspect in the North Sea is probably all booked, Canada's probably all booked, the arctic work for next summer is probably all booked.

And I suspect what we're bidding on now is the migration back to Africa, the southern hemisphere in next winter, the winter 2007, 2008.

Okay.

It's fairly general, Pierre.

Got it.

Maybe as a follow-on, remind us on your sixth and seventh Q land crews that have been improvised, where do you see those going?

I don't know, Pierre.

Okay.

Probably Middle East North America, I suspect.

Got it.

Good.

Thanks, guys.

Thank you.

The next question is from Stewart Glickman, Standard & Poor's.

Please go ahead.

Good morning, Andrew.

Good morning.

A question on your CapEx.

It looks like your capital spending plans for '07 are somewhere in the low teens percentage growth.

I'm just wondering how much of that is going towards WesternGeco versus how much is going to Oilfield Services?

Yes, it's about $2.6 billion for Oilfield Service, and $400 million for WesternGeco.

We, in addition, you have $300 million of multiclient, which I expected to be capitalized in 2007.

Okay.

One unrelated follow-up, you mentioned that you think if there's any moderation in activity in the U.S., it's likely to be short-lived and somewhat self-correcting.

I'm just wondering if you have any plans to redeploy any capital out of the United States, if in fact there is any weakness that becomes apparent in early '07.

Not at this time, perhaps but for some very specific technologies or tools that we're very short of in other fields of operations.

But basically we're talking about small items that be be flown in and flown out.

Thank you very much.

We'll go to the line of Rob MacKenzie with Friedman Billings Ramsey.

Please go ahead.

Good morning.

Andrew, you mentioned in the press release increased use of Q services in some of the sub-salt deepwater plays in the Gulf of Mexico.

Can you give us a feel for how the Q technology stacks up against prestacks, depth migration of existing conventional seismic?

The answer, I think is that it gives you a better image, and as much as you have a better signal to migrate from time to death.

And also, when you -- the way that people are looking at sub salt now is to use these multi-azimuth wide-azimuth surveys, and Q has a huge advantage in that in as much as the steered streamer system of Q allows you to shoot while you're turning.

Whereas every other conventional system, they have to stop shooting while they're turning or make very, very wide sweeps, which means that the efficiency of a Q shoot compared to a conventional shoot on any form of wide azimuth is very, very high.

Okay.

And the related follow-up, there's been some estimates that perhaps in the subsalt there's as much as 50 or 60 million barrels of oil to be found.

What's your view on that play?

And can you share with us how you think Schlumberger stacks up on that play and where your competitive strengths are in your other product lines?

I think that the illumination of subsalt is something that is going to -- we believe very strongly is going to make the Gulf of Mexico resource continue for a long, long time to come.

I don't want to make a bet on what the actual size of it is, because as we move forward, we're really going to be in an exploration phase for the next seven or eight years, and we're not really talking about development until beyond 2015.

As you know, be it in seismic or wireline or drilling and measurements, Schlumberger and particularly well testing, Schlumberger has a very strong portfolio of services and exploration.

So we see the Gulf of Mexico as being a very strong area of operation for us over the next few years, particularly, again, when people start drilling more exploration wells, when they get more deep water rigs.

Okay, great.

In terms of market share, I'm familiar with a lot of technologies, would it be fair to say that your market share in complex stuff like deep water, particularly subsalt is substantial higher than in other areas?

We have a very healthy market share.

Thank you I'll turn it back.

Thank you.

We'll go to the line of Jim Crandell with Lehman Brothers.

Please go ahead.

I have a follow-up question, Andrew.

Our spending survey showed the biggest five Russian companies up 42% in E&P spending '07 versus '06.

The way your business is running, do you think -- do you see that kind of growth among the largest companies in Russia for '07?

I think the intention is there, Jim.

I think the execution will have to -- it's not a question they're not wanting to, it's a question of how efficiently they can deploy that much money that fast.

One of the issues in Russia, as you know very well, is efficient rigs.

I certainly think their intention is there.

Whether it gets done or not at that level, I think, is another question.

Okay, great.

Okay.

Thank you.

Thank you.

Our final question comes from the line of Kevin Simpson with Miller Tabak.

Please go ahead.

Thanks and good morning.

Good morning, Kevin.

Just a quick question on -- two quick questions, actually.

One on multiclient, it looked like -- seasonally always strong in the fourth quarter, but it seemed to be differentially stronger.

Was there anything unusual there?

It looks like you're getting more exposed to that part of the business.

Is that accurate?

Is that something that strategically now with more exploration that it's going to be able to produce extra normal returns for you?

Actually.

One of the reasons that it was so good in the second half of 2006 was the success of this huge time to debt mine migration on conventional seismic.

It ended up being called the E-Dog project.

But proportionately, we're not investing a great deal more in multiclient than we did in the past.

We still have extremely good prefunding of almost everything we do.

So we're not -- I don't think the financial exposure is getting any greater.

Technically, I think that where we are starting to differentiate is when we actually do Q-acquisition as an input to multiclient.

But it's not proportionately to the past a huge increase in our exposure, Kevin.

Okay.

Are there any more well tests like the jack test last year that are likely in the lower tertiary --

I don't know.

I doubt it.

There will be some very large well tests, but whether they're lower tertiary I don't know.

Thanks a lot.

Great quarter.

Thank you, Kevin.

Thank you, everyone, for participating in today's call.

Julie, can you please provide closing comments?

Certainly, thank you.

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