斯倫貝謝公司 (SLB) 2007 Q1 法說會逐字稿

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 our host, Mr.

Jean-Francois Poupeau.

Please go ahead.

Thank you, Julie.

Good morning, and welcome to today's first quarter 2007 conference call.

Before we begin today's call, I would like to review the logistics and the agenda for the call.

Some of the information in today's call may include forward-looking statements as well as non-GAAP financial measures.

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, Simon Ayat, our 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 first quarter activity and outlook.

Finally, we'll take questions from the audience.

Now Simon Ayat will discuss the financials.

Simon?

Thank you, JF.

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

First quarter net income was $0.96 per share, up $0.04 sequentially, and $0.37 above the same quarter of last year.

There were no charges or credits in any of these quarters.

Oilfield services generated $1.4 billion in pretax operating income, reaching a pretax margin of 29.5% and 82 basis points improvement sequentially.

By area, the highlights were as follows: my following comments reflect sequential comparisons.

North America pre-tax margin increased by 59 basis points to 31.4% due to an improvement in Canada after the seasonal low of the fourth quarter, strong activity in Alaska and overall efficiency more than compensating for the slight decline in U.S.

land on lower activity.

Latin America pretax margin was 22.4%, up 136 basis points, primarily reflecting improved margins across all geomarkets led by our Latin America, South and Mexico geomarkets.

The finalization of the drilling and engineering contracts associated with the drilling barges in Venezuela resulted in the recognition of the previously deferred revenue and associated costs.

However, only had a marginal impact on the area's pre-tax operating income.

For ECA, our Europe, Africa, CIS area, the pre-tax margin was up 150 basis points to 28.3% with a strong performance in the west and South Africa, north Africa, and the North Sea geomarkets.

While Russia was impacted by the seasonal slower activity in the earlier part of the quarter.

Middle East, Asia, pre-tax margin increased 165 basis points to 34.3%.

The improvements in the following geomarkets, Arabian, East Mediterranean, India, Thailand, Vietnam and Australia.

Marginal declines were experienced in China and Brunei Malaysia Philippines geomarkets.

WesternGeco pretax margin was $266 million, an improvement of 142 basis points to 37.7%.

Marine declined as a result of lower utilization due to [transitting] vessels was compensated by the other product lines, mainly multi-client.

Now turning to Schlumberger as a whole, the effective tax rate was 24%, in line with the full year 2006 rate.

This remains our guidance for 2007, though we may experience volatility on a quarterly basis due to the geographic mix of earnings.

The earnings for the quarter included $37 million of expenses relating to stock-based compensation as compared to $30 million in the previous quarter.

We expect this expense for the full year 2007 to be approximately $140 million, a $26 million increase over 2006.

As of March 31, net debt was $2.8 billion, unchanged from last quarter end.

Significant fluidity events during the quarter included $332 million for the stock buyback program, CapEx including multi-client of $615 million, and a seasonal up swing in working capital.

CapEx excluding $62 million of multi-client surveys capitalized was $553 million for the quarter, and is expected to reach approximately $3 billion for the year 2007.

During the quarter, we bought back 5.2 million shares for $332 million at an average price of $64.19.

This brings the total share buyback under the 40 million shares repurchase program announced last October '06 to 18.7 million shares for $1.15 billion at an average price of $61.14 per share.

Now I turn the conference over to Andrew.

Thank you, Simon.

Good morning, everybody.

First quarter sequential revenue growth was driven by acceleration in international activity in geomarkets in Europe, Africa, the Middle East, and Asia.

Oil fuel services revenue increases were highest in the west and southern Africa, Arabian, North Sea and eastern Mediterranean geomarkets, although double-digit growth was also seen in Alaska, Australia, Papua-New Guinea, Thailand, Vietnam, North Africa and India.

The stronger international activity coupled with efficiency gains in North America propelled oilfield services margins to a new high of 29.5%.

Increasing demand for wireline, drilling and measurements and well testing technologies, as well as for WesternGeco services contributed to this highly satisfactory overall financial performance.

In North America sequential and seasonal growth in Canada was moderated by project slowdowns and declining activity in regions of shallow gas and coal bed methane production.

Elsewhere in the Alaska geomarket recorded strong revenue growth for increased exploration activity and stronger demand for drilling and measurements, well testing and well services technologies.

However, this was insufficient to offset lower U.S.

land activity and a change in the service mix in the U.S.

Gulf Coast.

In Latin America, strong revenues were recorded as negotiations with Pedavesa related to the PRISA rig management and engineering contracts were completed, enabling recognition of previously deferred revenue.

This accounted for the majority of the area's revenue growth but had little effect on pre-tax operating income.

Pre-tax operating margins improved sequentially through a more favorable activity mix in Mexico, an increased drilling and measurements and well testing services in Peru, Columbia, Ecuador as well as increased wireline well services and Well Testing services on higher Artificial Lift system sales in Latin America South.

Results in Europe, CIS and Africa were driven by higher activity in the west and South Africa North Sea, north Africa, Nigeria and Libya geomarkets partially offset by seasonal weather related slowdowns in Russia and the Caspian.

By technology demand was particularly strong for drilling and measurements, wireline, well services, and well testing services.

Within this context, demand for exploration services in west and southern Africa, higher demand for drilling and measurement services in the North Sea, and for new technology well testing services in Tunisia, led to sequential gains in pretax operating margins, in spite of lower Schlumberger information systems and completion sales.

In the Middle East and Asia area, revenue growth was driven by completing exploration activity in the Australia, Papua-New Guinea, and Thailand Vietnam geomarkets and by deep water activity in the eastern Mediterranean and India, coupled with higher overall activity in the Arabian geomarket.

Growth was dampened, however, by lower activity in Brunei, Malaysia, Philippines and a seasonal weather related activity slowdown in China.

By technology, demand was strong for drilling and measurements, well services and well testing services and completion systems sales.

The sequential growth in pre-tax operating margins resulted from the exploration related activity in Australia, Papua-New Guinea, Thailand, Vietnam and India together with increased demand for new technology in drilling and measurements, well services and well testing services in the Arabian geomarkets.

Amongst Schlumberger Technologies, industry acceptance of the Scanner family of wireline logging services continued at a rapid pace, with nearly 1,000 operations completed in 2006 and more than 300 run since the start of 2007, the Scanner suite of downhole rock and fluid characterization measurement services is now active across all areas.

In regions where Scanner technologies have been deployed, their use has bought increased certainty in reservoir modeling to reduce the risk associated with the development of smaller more difficult complex reservoirs.

The Contact family of multi-stage fractures and completion services was introduced during the quarter.

Integrating stimulation technologies such as coil frac and rapid stim, this family provides operators with a broad array of efficient and effective fracturing services, of particular value when placing multiple fractures in a single well.

Already deployed across multiple regions, Contact Services have proved instrumental in improving performance.

In east Texas, for example, contact technology improved production, shortened natural gas time to market, and reduced costs in an unconventional gas play.

In Gabon, stage frac, multi-stage fracturing technology, another Contact service, was used to treat four wells offshore with initial post treatment well performance, revealing a substantial increase in well productivity.

In Kuwait, stage frac technology placed a viscoelastic diverting acid treatment in eight separate sections of the carbonate reservoir well in one trip, resulting in production five times higher than the field average.

WesternGeco reported a solid quarter, with pre-tax operating income increasing sequentially, despite a decline in marine activity through vessel transits and lower land activity through project completions and new project start-up delays.

Pre-tax operating margins reached 37.7%, driven by higher margin multi-client sales in North America and improved efficiencies in land and data processing.

The second phase of E-Octopus, the world's first multi-client wide azimuth survey neared completion.

Located in the deep water Walker region Keithly Canyon areas, the E-Octopus project is part of a family of E-surveys which utilize the most advanced acquisition and processing technology in the industry.

This family also includes reprocessed surveys such as E-Cat, and E-Dog deepwater projects and the shallow water shelf E-Dragon project offshore Louisiana.

Looking ahead, the evolution of Canadian gas production after the lower winter peak rig count and earlier spring break up coupled with high decline rates and the poorer quality reservoirs now being drilled in the United States on land leads us to believe that the fundamentals for reinforced natural gas activity in North America are becoming apparent.

New equipment capacity however, particularly in pressure pumping, will limit service pricing power except for technology brings clear improvements in efficiency and productivity of unconventional gas wells.

Internationally as well as in the remaining frontier provinces of North America, we expect activity to continue to strengthen in the coming months underpinning strong demand for quality measurements and services that improve performance and reduce technical risk.

However, in the second quarter, a number of scheduled dry dock inspections in vessel transits were momentarily slow WesternGeco growth which should resume when the seventh Q vessel is commissioned in May.

The OPEC supply cuts supplied late in 2006 coupled with stronger demand and continuing weak non-OPEC supply performance caused a significant rebound in oil prices.

We continue to believe the most fragile element of current supply projections is the age of the existing production base and the consequent failure of current activity levels to slow decline rates.

This environment, when coupled with delays in the increasingly complex projects that our operators are undertaking means the supply response to create adequate levels of spare production will take longer than we originally anticipated.

As in any severe economic recession that will impact hydrocarbon demand, Schlumberger remains exceptionally well-placed to benefit from this environment.

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

Thank you, Andrew.

We will now open the call for questions.

Julie?

[OPERATOR INSTRUCTIONS].

We'll go to the line of Kurt Hallead.

Please go ahead.

Good morning.

Good morning.

I was wondering, Andrew, if you could just provide -- highlight a number of different technical challenges in the commentary, and if you can provide more color on those technical challenges the industry faces and how you think Schlumberger is best positioned to differentially benefit?

I think in the technical challenges today there are two or three broad families that are, if you like, topical.

I think the first is that the effect of rig pricing on the overall cost of operations, particularly offshore, places a huge premium on service quality and reliability because down time is so expensive.

If you couple that with the fact that the industry has a large number of low seniority personnel, service delivery is becoming a key differentiator at this point.

The second one I would point out which I talked a lot about before is the fact that people are developing, even for oil, much smaller and much more complex reservoirs, which means that to get the economics right, the quality of the information that you have up front, be it seismic, wireline or logging well drilling or well testing information, is very critical to the economics of the whole project, and therefore there is a premium on the quality of information.

The third one which I would point out is the fact that as the reservoir quality for natural gas, particularly unconventional natural gas becomes poorer, the efficiency as well as the speed and the ability to have high initial rates of productivity that you can do in natural gas works wells through technology is becoming more important.

Those are sort of, if you like, the three broad categories that we sort of think about in this, at this point in time.

If I get one follow-up here, just you obviously referenced some of the issues on the pressure pumping side on many, many occasions over the past year or so.

Yes.

Is that the only product line or area in the North American market where you envision there being some difficulties or do you think there is a risk hereof it spreading to other product lines?

I think it depends what activity levels we finally see.

Within Schlumberger's portfolio of products and services, that's the only one I am really concerned about.

Great.

Thank you, Andrew.

Thank you.

Our next question comes from the line of Ole Slorer.

Please go ahead.

Thank you very much.

I wonder, Andrew, whether you can give a little more color on the oil business mix in North America.

You highlighted that pressure pumping was the only area where you were concerned, and you have been concerned for a little while.

Your revenues went down in North America yet your margins kept on expanding, which I found quite interesting in light of some other comments that we've seen, but how sustainable is that in light of the way you see the pressure pumping market and the other businesses and assuming that you highlighted also for the first time I think in a very long time that you thought that the service activity North America was set up for a recovery, so how confident do you feel that the margins that you have in North America is sustainable and your business is is right sized?

Firstly, you will notice I didn't put a timing on the recovery.

Yes, I did.

I just think that the fundamentals of moving towards the point where at some stage your recovery is going to happen, so secondly I have to congratulate our North American organization on a very professional management of that cost base, which to a large extent, took place in the fourth quarter, not the first quarter, and therefore they went into Q1 having adjusted a lot of the cost base, particularly in Canada, and the other thing is don't forget, I would say that the Gulf of Mexico and particularly some of the -- though it is very small -- the increases of activity, particularly exploration in Alaska give us some protection.

This being said, we're not going to be able to sustain margin increase if there is sort of major reduction in U.S.

land activity at the same time as there is a large increase in the volume of hydraulic horsepower that comes into the market, but the down -- how long that will last is again dependent on when drilling picks up again already, so they've done a great job.

They can't be totally protected in a market where capacity is eroding price.

It sounds like you feel you have the situation pretty much exactly where you want it to be?

Today they have executed -- I talked in January about plan A and plan B.

They executed plan A flawlessly, so they have adjusted.

In the current market circumstances they have made the adjustments they need to make.

Perfect.

Just one small follow-up on exploration related technologies.

You talked about CMI about a half year ago.

Is there anything new there in terms of being ready with a product to market in terms of integrating EM and seismic in Q?

Let me just say that before the end of the year we will have news for you.

Okay.

Thank you very much.

Thank you.

Our next question comes from Michael LaMotte.

Please go ahead.

Thanks and let me offer my congratulations on a great quarter.

Thank you, Michael.

First question, Andrew, following up on Ole's margin question in North America, the management of the cost base.

I guess it was termed efficiency in the press release.

Does efficiency mean more than just cost base and how much of this is sort of ongoing refinement as opposed to rapid adjustment to plan A?

I think the rapid adjustment phase is over, and now, yes, they have to work on efficiency, and they very have plans they're executing and are not -- again, I don't wish to be too pessimistic.

If there is severe price erosion, it won't be sufficient to counteract that, but they will keep trying.

I guess I am asking more sort of on details in terms of what those initiatives entail?

Is it just head count management or is it --

It is not just head count management.

I would rather not disclose it, some of the ideas on a conference call, Michael.

Okay.

I will shift to the second question, then.

From an activity standpoint, it seems like the northwest shelf of Australia is perking up.

There has been some large gas discoveries recently announced, and I guess the Japanese are accelerating perhaps the timetable on some of the L&G development talk in that region.

If we take a longer term perspective, three to five years, is that in your view an area we should be keeping an eye on as a --

I think that in -- it is very interesting.

In fact, a lot of the discoveries the Northwest shelf are not recent.

I mean, there have been large volumes of what is known as stranded gas which has been known about for a long time.

What is I think happening which is very interesting is that there is a premium on security, physical security, and Australia is seen as a highly stable country, and therefore some of the gas developments that a few years ago were not getting done or were being postponed way into the future are accelerated because there is this notion of premium on security of supply, so, yes, I think that as L&G volumes grow, Australia -- the developments in Australia are likely to be accelerated at a rate that we would not have envisioned two or three years ago.

In fact, I am going down there next week, so I will know more when I get back.

Interesting.

Thanks.

Thank you.

Our next question comes from the line of Bill Herbert.

Please go ahead.

Thanks.

Good morning.

Good morning, Bill.

Two regions that stuck out for me from a profitability and margin improvement were ECA and the Middle East, and what struck me in terms of reading the non-geomarkets commentary were the litany of longer-term projects that you signed up.

My question is as follows: we had exceptional margin improvement quarter on quarter oilfield overall, and given the continuation of long-term projects that you continue to sign, realistically, what is the rate of change that we can expect going forward with respect to the continuation of the significant margin improvement that you have enjoyed?

I think you have to assume that while we will probably continue to achieve some overall improvement in overseas markets, it is likely to fluctuate.

We tried to point out in the press release, for example, that in Middle East we had a very favorable exploration mix in Q1.

Right.

ECA is a little bit the same thing because when you can assume that when western southern Africa is very strong, there is a lot of exploration wells being logged and tested.

Yes.

There will be fluctuation, but overall, we still feel we have room for some expansion albeit on a trend at a much lower rate.

I think you have to accept that Q1 was a heavy exploration element.

Right.

So that leads to a related question, and sounds like you answered it.

The question was going to be margin improvement being driven predominantly by price or mix.

Sounds like mix.

Yes.

I mean, these are contracts that were probably signed last year, so there is price improvement is built in.

Yep.

When you get a mix effect at the same time, it is quite powerful, yeah.

Second question or category if you will is while the results on WesternGeco continue to be very prosperous and the right of improvement slowed a little bit in the fourth quarter, but over the past several quarters the rate of improvement has been exceptionally strong yet the backlog has remained flattish for three quarters in a row.

What accounts for that and again refresh us on the visibility for seismic going forward.

Well, I think the way that I can account for the backlog is probably to say that our strategy is not necessarily to win the first tender.

Okay.

As long as we feel comfortable that the overall amount of seismic work going to be big is sufficient in volume, that's slightly to remain our strategy, except where we can lock in long-term agreements at the right price, which we've only done two so far.

Given the fact you have three Q vessels on the way, doesn't sound like you're too worried about the sustainability of strong conditions.

No.

Thanks very much.

Bye bye.

The next question is from Dan Pickering.

Please go ahead.

Good morning.

Good morning, Dan.

Was hoping -- want to circle back to the U.S.

for a second.

As we look at out through the remainder of the year, Andrew, we have a seasonal slowdown in Canada, sounds like some margin pressure in the pumping business.

I am just wondering if as we look at Q2, Q3, kind of back to this margin question and kind of wondering if in aggregate you see North America as a market where you will grow revenues in '07?

I don't think we are counting on any -- in terms of Schlumberger, any significant growth in North America in '07.

And then --

In revenue, top line.

Right.

Correct.

I guess the mix impact will matter on the margin side.

Right.

Same general sort of question for Geco.

You indicated second quarter we will see a number of marine vessels in transit or dry docking, and I was hoping that you could help quantify for us a little bit, is that a kind of dramatic downtick, slowing growth, I wasn't sure if that meant year-over-year, quarter over quarter, just looking for a little more color there.

Actually we were looking at the sequential.

What's happening in the seismic business is we think things are going back towards if you like a more traditional seismic pattern, where you have very good multi-client in Q1 as a carry over from the previous year, and then in Q2, you have less multi-client and a lot of vessel transits, so we have, in addition to that we're using the vessel transits to do a lot of the regular dry docks and modifications.

We're not talking about a dramatic drop overall.

If I can -- if you're wondering if there's some secular change here, we do think that it is very likely that WesternGeco will have a very balmy summer, so it is nothing secularly changed.

It is just if you like a set of circumstances that means sequentially the second quarter will not be as good as the first.

Okay.

Very helpful.

Thank you.

Thank you.

Our next question comes from the line of Jim Crandell.

Please go ahead.

Good morning.

Andrew, I think nobody understands what's going on in the market like Schlumberger does.

With that as an intro, what do you think has happened to your global market share in rotary steerables, LWD and wireline and as a result of the introduction of scope and scanner family of tools and what in general has been a more aggressive stance to CapEx vis-a-vis your competition?

Well, we don't comment on market shares specifically.

In terms of their penetration, both scanner and scope don't have direct competition for a lot of what they do, but in terms of their client/customer penetration, we're extremely happy, and while we have been extremely aggressive on CapEx, if we could build more in terms of manufacturing and subcontracting capability in the short-term, we would probably build more.

Okay.

And the second question is, without actually putting numbers on it, can you at least talk to the impact that the Scope and Scanner families are having on profitability in those businesses, and secondly, could you talk about sort of the impact of the Contact family of services in fracturing and how the impact on that business might compare to the impact of those other technologies that I mentioned on LWD and wireline?

Let me take it back backwards.

Contact is too soon for us to really measure the full effect.

We do know that particularly overseas it has been extremely successful and profitable.

In the context of our total well services business, it is still marginal.

Let me take Scanner again.

In the context of Schlumberger wireline the penetration of Scanner market wise today is still too small for us to measure it overall effect on profitability, but pricing is extremely satisfactory.

In the case of Scope, there is absolutely no doubt that it has had a significant impact on margins in drilling and measurement.

Okay.

Good.

Thank you.

Thank you.

Our next question comes from Pierre Conner.

Please go ahead.

Good morning, everyone.

Good morning.

I do have to say good result, too.

My question is maybe a little follow-onto Michael's on the efficiency, and I know you don't want to get into too much detail, but if we strip out mix and make the assumption of no pricing gains here, could you maybe at least geographically give us where some of that was?

Is that all efficiency gains as a result of matching plan A in Canada?

Is there some other North American efficiency gains?

No.

There is some North America, some U.S.

North America as well, yes.

Yes.

Canada was essentially Q4, and U.S.

would have been Q1.

To the extent again on that efficiency gain, how far or how much more opportunity is there in efficiency gains, Andrew?

I really can't put a figure to it, Pierre.

I think in terms of the infrastructure, the structure that we have in place now, there is still some more to do, but it is not -- it is very difficult for me to put a figure to it.

Still more.

My second question related to WesternGeco, you mostly answered, but on the sequential side I am assuming transit is sequentially similar, but dry docks, is that where the biggest difference is?

Yes, correct.

Very good.

Thank you.

I will turn it back.

Thank you.

We'll go to the line of Ken Sill.

Please go ahead.

Good morning, guys.

Good morning, Ken.

Digging into the one everybody is trying to figure out that nobody seems to understand is pressure pumping, so on plan A, reduce your capacity or just become more efficient with what you're doing, I am kind of curious, you keep hearing these rumors that plan B is being executed and people are actually cutting pricing.

Have you guys selectively or in any instances you're aware of, Andrew, actually had to cut your pricing or cut your price back?

Carefully prepared remark for Q1 is that there is no discernible trend in the first quarter.

Okay.

That's good.

Then you do mention that where you can differentiate with technology is obviously an area where you can see better than expected results.

If you look at a lot of the growth that's been in the Barnett shale where you're doing slick water fracs, are some of the other kind of manufactured gas plays, oil shale plays in North America more amenable to the use of differentiable technology or are they similar to Barnett in that it is a horsepower and hydraulic equation, and they're not as technology -- they don't benefit --

We would not accept that the Barnett is purely a horsepower and hydraulics equation.

We think even in the Barnett if the right technologies are brought along, it could make a significant drilling difference to drilling times and initial production profiles, so we would not take that as -- I think people use when there is no technology, then everything is driven by cost, and therefore slick water fracs and just drill and pump is the way that people have gone.

I am not sure it is always going to be like that.

Overall, yes, we think that in fracing and a way some of these nonconventional gas wells are drilled, there is considerable technical progress to come.

That's good.

And then just one final housekeeping question.

That's you guys say that the impact of deferred revenue recognition was marginal.

Is there any way that you can --

The impact on the margin.

It actually came in at margining similar to what everything else was for the quarter?

No.

Lower.

Lower.

From an earnings impact it was insignificant, less than $0.01?

Exactly.

Okay.

Thank you.

We'll go to the line of Daniel Henriques.

Please go ahead.

Hello.

Hello.

Hi.

Most of my questions have been answered.

I have more of a conceptual question here.

I know you don't want to comment specifically on market share.

Conceptually how much of your recent market share gains you would attribute to superior, let's say supply chain management and better ability to forecast the market and how much of the market share gain you think is because of truly technological differentiation?

I don't know is the simple answer.

I do know that our ability to react to the increase in drilling, particularly last year was to a large extent due to some supply chain decisions that were made in 2005.

Actually we made some more in 2006 which cover an even longer period, but given the overall increase in rigs, I am not sure whether that allowed us to increase or sustain market share purely in terms of equipment because our equipment today is much more stretched than it was two years ago.

I mean, if I just take an example which is not an accurate example, because I don't know the exact numbers, but where as before we would take three tools to the well site to cover all eventualities.

Today we would take two because we don't have three.

There is expansion in capacity just because of the use of the existing fleet and an expansion in capacity because you built more tools than other people.

So I really don't have an accurate answer to that.

In terms of technology, I think that in scope one or two of the services have helped to displace -- one against competition on the basis of technology, but then there are a lot of technologies the competition don't have which is difficult to measure what effects that's had on overall market share.

I have a follow up.

You had some adjustments with Pedavesa this quarter.

Is there more to come EBIT or operating income besides revenue impact over the coming quarters or nothing material?

No.

Okay.

Thank you.

Nothing material.

Thank you.

We'll go to the line of [Bob Goodoff].

Please go ahead.

My question has been answered.

Thank you.

Thank you, Bob.

Thank you.

We'll move to the line of Mike Urban.

Please go ahead.

Thanks.

Good morning.

Good morning.

You addressed this a little bit but wanted to dig a little deeper into your comments on the project delays and the supply response or lack thereof.

This sounds like a step-up on your comments which were to date have been pretty bullish already.

Just wanted to clarify exactly what you're getting at.

I guess the question is are you suggesting that both the amplitude and the duration of the international cycle are extending or is is it that activity might be pushed out but that's okay because you're going to see supply disappointments and that means the oil price stays high or a little of both?

Well, our thinking is -- I think you need to disassociate the remark about project delays from the decline rate because what we see in the project delays is just the fact that you read about in the press release as everyone else that these incredibly complex projects don't necessarily come in on time.

In terms of the decline rate, our feeling is, and I think there are theaters of activity like the North Sea where you can see this very clearly, that because the resources that our customers have are very much tied up on new development projects, there is insufficient money being spent on stemming the decline rate in their existing production base, and it is not the unwillingness to spend it.

It is just that they don't have the rigs, equipment or people, particularly people, to do that.

To the extent that not enough money is being spent on stemming the decline rate, it makes it that much more difficult to increase production.

So barring the offshore market which you talked about in the past which is probably a function of rig availability, would you say you're actually seeing a step up or acceleration here in activity internationally?

It seems like it in the results and in the margins, and the revenue.

I don't think the step-up in activity is beyond what we predicted or what we were thinking it was going to be, for example, when we had our analyst conference last September.

It is about in line.

Okay.

That's all for me.

Thanks.

Thank you.

We'll go to the line of Kevin Simpson.

Please go ahead.

Good morning.

Hi, Kevin.

Andrew, you have been kind of saying that at some point growth would have to slow down which I guess the wall of large numbers would imply, but the numbers really revenue numbers in the eastern hemisphere it be to continue to be extremely impressive, and I am wondering when those constraints begin to have an impact and or where those -- whether the constraints maybe are being resolved in ways favorable to Schlumberger?

People, customers?

I think the remaining large constraint in overseas markets is now rapidly becoming the availability of new or deep water or semisubmersible rigs, and that means that as they're going to be delivered late in 2008, 2009, and 2010, there is likely to be a plateauing sometime between now and then, though today I can't totally predict the timing of that.

In other words, there will be a pause and a second surge.

And I guess the -- you had said that in the last question that the results eastern hemisphere are maybe overseas particularly were in line with your expectations.

Is that --

I would say that the revenue is in line with our expectations but we were pleasantly surprised by the margins which as we pointed out, I think in the question earlier was to some extent, that's why I gave a warning they will fluctuate due to a very high exploration quotient in the first quarter.

A little warning not not to get too far ahead of ourselves in margin expansion.

Yes.

Well taken.

Thank you.

Good quarter.

We'll move on to the line of William Sanchez.

Please go ahead.

Good morning.

Good morning, Bill.

Andrew, just want to follow up on Latin America.

You noted the increase in revenue that we saw sequentially was really driven as a result of the recognition of the deferred revenue.

What's your expectation here I guess as we look next couple of quarters in Latin America in general?

I mean generally we think that as we've said before because of the absence of elections, the need of certain country to say work hard on their production base we think 2007 will be a year of growth in Latin America, and it will probably be progressive as the year continues.

Does Mexico again and areas like Brazil probably lead to second quarter being up from the first quarter as it relates to top line revenue growth?

Yes, but we think it is going to be more in the second half of the year.

Okay.

Fair enough.

My last question deals with Russia.

I know there was mention about seasonal slowdowns there in Russia.

I know in the past you talked optimistically about an increase in upstream spending as a whole this year relative to last year.

Can you give us your general thoughts on Russia as a whole?

Well, actually the first quarter slowdown this year due to weather was not nearly as bad as last year, but the end of winter coupled with the restarting of a lot of activity in eastern Siberia, particularly Sakhalin Island, coupled with the general willingness of our customers in Russia to spend more we think is going to mean its going to be a good year.

Thank you.

Good year.

Thank you.

We'll go to the line of Geoff Kieburtz.

Please go ahead.

This is Jon Stark for Geoff.

You've answered most our questions.

One question.

Talk about efficiency gains in North America.

Are those other than head count, are those being applied to the other regions or is that an effect we could see coming into margin in the other segments?

I would count this today as more of a North America initiative.

They have the -- they have the incentive and the time to focus on it as overseas is still expanding very fast.

If we take some of that to overseas, it is going to be a bit later on.

Very good.

Thanks.

Thank you.

We'll go onto the line of Robin Shoemaker.

Please go ahead.

Thanks.

Good morning.

Good morning, Robin.

Wanted to ask Andrew, I think you commented on the last call that Saudi's activity would reach a plateau in mid-year.

Broadly speaking, is the Middle East land based activity now approaching the level of a plateau?

You mean in Q1?

No.

Well, I think you had indicated in the last call sort of mid-'07, is that the time?

I would reiterate that.

That's what we should think of?

Yes.

Right.

Follow up was just intrigued with this process of fracing I think sometimes referred to as just-in-time fracing with Goodrich Petroleum.

Is that a multi-phase fracing process or how exactly does that improve the efficiency of fracing versus the previous technology?

Well, I think there are two basic technologies that we're talking about here.

The first is the ability to frac different stages in the well without having to remove your tool string which is technology that us and others are all working on and the second is the capacity to use seismic to monitor the prop gages of the frac as it is taking place.

The difference between what we do and what some of our competitors do is we do ours in realtime.

In other words, they can see the results of the seismic as and when it is being performed during the fracturing operation, which means that the engineer -- the fracing engineer, if he seize things are going wrong, alter the frac pattern while he is actually fracing.

I think if you like those are the two basic things we're working on.

As a matter of fact, that latter piece perhaps impacts the overall reserve recovery or potentially --

I think it potentially renders fracs much more efficient.

Yes.

Than a frac where you are basically blind.

Okay.

Or you have a sight mike map, and you only see the seismic map once the fracing is finished.

Okay.

Thank you.

Thank you.

We'll go to the line of Brad Handler.

Please go ahead.

Thanks.

Good morning.

Good morning.

Come back to WesternGeco, please, and your comments about multi-client sales, I am wondering how this -- I don't know what to call it exactly -- the E-animal series, if you could comment on how that may influence sales in the year relative to the historic norms, and I guess maybe specifically E-Octopus is finishing up so it presumably would impact the second quarter favorably.

And probably the third because there because there is still a lot of processing to be done.

The scope of these surveys, they're just so large, is that they gave our customers an ability to do comparisons across very large swaths of Gulf of Mexico blocks which is practically unprecedented.

So far they mostly have been prefunded or over funded before we even complete them.

The sales success of particularly E-Dog are absolutely fantastic, so we're extremely optimistic that the others will be equally successful.

Was the strength in the first quarter of those specific -- of that specific set again --

Not altogether.

A lot of it was E-Dog still.

Okay.

That's fine.

Thanks.

That's all for me.

Thank you.

We'll go to the line of Andrew Dobbing.

Please go ahead.

A quick question on the offshore well testing market.

I guess most of the demand is coming from well clean ups as opposed to well testing.

Can you comment on the growth outlook here as deep water drilling activity picks up and are there any new technologies you're developing in the well-testing market with regards to your landing strings and other equipment?

Thank you.

Well, actually I don't agree that the bulk of it is still clean-up.

A lot of the kicker, particularly this quarter, and this is particularly a cyclical business as you probably know, is large exploration tests, drill tests.

As we -- yes, we are.

I am not going to disclose what we're working on as this market is quite small, but, yes, we are.

Now, in terms of production testing the success of our multi-phase V X technology, particularly in gas is fairly dramatic at the moment because it was the first time we have a well testing multi-phase well testing equipment that can measure very large gas fractures accurately.

This is particularly important when you have gas and condensate, and so it has had considerable success particularly in the Middle East and Russia.

Okay.

That's kind.

Thank you very much.

Thank you.

We'll go to the line of Jim Crandell.

Please go ahead.

Andrew, I have a follow-up question about the U.S.

well stimulation business, and I think if you at least our work shows if you look back to where the market was and where it is today, that the big three companies in that business may have lost 12 to 15 points of market share, at least if you measure by land stimulation, horsepower.

Do you think that the big three companies have set up a price umbrella in that market that have led as many as 8, 9, 10, 11 companies all seemingly very aggressive build capacity and continue to make very good profit margins themselves from this business?

I think the inability of the big three including ourselves to expand capacity or to believe that capacity needed to be expanded to the extent that operators were demanding provided a price umbrella for other people to enter the business, absolutely.

Do you think, Andrew, let's just presume that at least two-thirds of the business is relatively undifferentiated.

Do you really think there is a marked preference for the big three companies over other companies that have at least some expertise in new equipment?

Well, I think a lot of the business is not differentiated because nobody has tried hard enough.

As a business exists today, and that is a large percentage is undifferentiated, I don't see how you can attribute it to the big three companies not adding capacity?

I think there just isn't a big difference in what the Companies provide today and I guess I come back to the issue of do you think --

By the way, I think it is extremely dangerous to talk about the North American fracturing and stimulation market as one market.

It is not one market, and what you're talking about is essentially what has happened in terms of new capacities in unconventional shale gas where low cost has been the -- if you like -- the only guider of production, and if we -- if you make the assumption that technology will never make a difference in nonconventional gas, then you're absolutely right.

I don't think -- I think it is way too early to make that assumption.

Okay.

Does this new technology that you are introducing now which I asked about earlier, this Contact family, will that attempt to differentiate yourself in that particular market?

Yes.

We'll see how it goes.

Okay.

Good.

Thank you.

Thank you.

Our next question comes from [James Film].

Please go ahead.

Andrew, I just wanted to go back to the outlook on the international side and the growth rate going forward.

At what point -- I know it is hard to predict right now.

It is pretty visible when the deep water rigs are coming on, when the Jacks are coming on at this point.

At what point in that interim period between now and the second half of next year do you think that pause, that flattening out where you just don't have any more capacity, your customers are kind of stretched occurs, and how long do you think that lasts?

Well, on the first part of your question, when it actually occurs, it is too early for me to say.

Actually I don't think it lasts very long.

One possibility is that if there is some availability of resources, it gets put to do what I said earlier, which is back into the oilfields to work on the decline rate.

In fact, we are seeing some of that already.

People who don't have offshore rigs to do new programs are increasing the work they do on the very oil production.

I mean, on the exact timing it is too early for me to tell.

But based on the contracts that you have in hand and the programs that you're starting up which presumably are really driving the growth, do you see that hitting you in 2007?

Well, no.

I mean, we've already said that we see high teens through the end of the decade, so I don't think we're going to go below that high teen level in 2007.

Okay.

That's very helpful.

Thanks, Andrew.

Thank you.

Our final question comes from the line of Bill Herbert.

Please go ahead.

Hi.

Just a quick follow-up.

You may have answered this had because I had to hop on off real quick.

If you did I will catch catch up with JF.

The marginal profit contribution from the rigs coming back on to work in Venezuela, the barges, strong revenue gain quarter on quarter, modest profit contribution.

Is there a catch-up on profit to say look forward to on that front?

We have been putting in our press release for the last three years that we were trying to settle this thing.

We finally settled it, and the profit contribution of the settlement is what it is, but it is not great.

Don't take it as any proxy for the future.

We're extremely happy with our relationship with Pedavesa now.

Wonderful.

Thank you.

Thank you.

Julie, thank you very much, everyone, for participating in today's call.

Julie, if you could now provide closing comments for us, I would appreciate it.

Certainly.

Thank you.

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