斯倫貝謝公司 (SLB) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Limited third quarter 2008 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 Vice President of Investor Relations, Mr. Malcolm Theobald. Please go ahead.

Thank you, Julie. Welcome to today's third quarter 2008 results conference call for Schlumberger Limited. Before we begin, I would like to review the logistics and format of today's 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.

And now for the call participants and format, joining the call from New York City are both Andrew Gould, Chairman and Chief Executive Officer, and Simon Ayat, our Chief Financial Officer. Prior to Andrew's overview of the third quarter and his comments on the outlook, Simon will first review the quarter's financial results.

And now I will turn the call over to Simon.

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

Schlumberger's third quarter income from continuing operations was $1.25 per share, up $0.09 sequentially, and $0.16 above the same quarter of last year. These results include a $0.04 impact from the hurricanes in the Gulf of Mexico. Oilfield Services third quarter revenue grew 5% sequentially, reflecting strong growth in all geographical areas, despite the impact of the hurricane season.

WesternGeco revenue grew 33% sequentially, reflecting the seasonal strength in marine operations that was boosted by strong multi-client data sales. Oilfield Services generated $1.7 billion in pre-tax operating income, essentially flat as compared to the second quarter, with margins slipping by 135 basis points to 26.7%.

By area, Oilfield Service's pretax operating margin highlights where as follows. My comments are on a sequential basis. North America pretax margin decreased by 283 basis points to 21.1%. Where the recovery in activity in Canada was more than offset by the hurricane effects on the US Gulf of Mexico activity, and the seasonal slowdown in Alaska.

Latin America pre-tax margin declined 287 basis points to 20.1%, as more favorable activity mix in Peru, Colombia, Ecuador and Brazil, were insufficient to offset increased third party managed services in IPM projects in the Mexico/Central America GeoMarket. This effect was amplified by startup costs associated with the Burgos 7 project in Mexico.

For ECA, the Europe/CIS/Africa area, the pretax margin improved 86 basis points to 29%, as Russia experienced a strong seasonal activity rebound offshore east Russia. This improvement, however, was partially offset by the impact of declines in the North Sea, for both exploration and development operations. Finally Middle East/Asia pretax margin moderated by 89 basis points to 35.5%, as a more favorable activity mix in the number of GeoMarkets was insufficient to counter the effects of a less favorable mix in Indonesia, and the shift to lower margin workover type activity in the Gulf.

WesternGeco pretax income of $355 million reflecting an increase in pretax margin by 10.6 percentage points to reach 39.8%, showed strong growth over the second quarter and surpassed the performance of the same quarter last year. Marine had a strong quarter with higher activity at better pricing, while multiclient margins improved with higher sales.

Now turning to Schlumberger as a whole, the effective tax rate was 21.4%, which was slightly higher than last quarter, due to the geographic mix of earnings in WesternGeco. The ETR is expected to be in the low 20s for the total year. Net debt was $1.7 billion at the end of the quarter, representing a sequential improvement of $300 million.

Further, we ended the quarter with approximately $4 billion of cash and investments on hand. In addition, $2.1 billion of committed debt facility agreements with commercial banks were available at the end of September. This compares to short-term debt of only $2.2 billion, reflecting the strength of the Schlumberger balance sheet, and leaving us with more than enough liquidity to meet all corporate and operational requirements.

Significant liquidity events during the quarter included, $545 million for the stock buyback program, and $1 billion for CapEx including 75 million of multiclient surveys capitalized. During the quarter, we bought back 5.96 million shares for $545 million, at an average price of $91.45 per share. Finally, the quarter earnings included $44 million of expenses relating to stock-based compensation costs.

And now I turn the conference over to Andrew.

Thank you, Simon. Good morning, everybody. The strong continuation in sequential revenue growth in the third quarter was led by further strengthening of gas drilling activity, on land and the US and Canada, a very active summer drilling season in Russia, and continuing growth of IPM activity in Latin America.

Margin performance was generally satisfactory. Apart from the heavy impact of the hurricane season on North America, and higher than usual third party managed services revenue at low margins in Latin America, due in part to the start-up of the Burgos 7 contract. Among our technologies, growth was strongest for Well Services, Wireline and Drilling and Measurement Services.

Looking at the areas in more detail, performance in North America was led by the Canada Geo market, as activity strengthened significantly following last quarter's spring breakup. Demand was strong for a range of technologies from Well Services, Wireline, and Drilling & Measurements. On land in the US and improving weather in the north, and expanding rig count across all GeoMarkets yielded a solid result. These positive effects were partially offset by a sharp reduction in activity in the US Gulf of Mexico, resulting from Hurricanes Gustav and Ike, as well as by the seasonal slowdown in Alaska for rig and infrastructure maintenance.

In Latin America, sequential revenue growth was strong across the area, led by Mexico/Central America geo market, due to increased IPM activity. In addition, Peru/Columbia/Ecuador continued their robust performance in the second quarter, on a more favorable mix of Wireline and Drilling & Measurements technologies, while Brazil grew as exploration activity led to more demand for Wireline logging services.

Sequential revenue growth in the Europe/Africa/CIS area was driven primarily by activity in the Russian GeoMarkets, particularly in the east, with summer exploration campaigns in the north and south. Through demand for Well Services pressure pumpings remain strong as well. Exploration was also responsible for the strength in the Caspian, through both activity and service mix. In Africa, Libya was particularly strong, as activity grew in both exploration and development work, and western southern Africa also recorded exploration-related growth.

These positive factors were somewhat tempered by a decrease in North Sea activity in both exploration and development, that matched an effective rig count reduction. In the Middle East and Asia areas, sequential growth was led by Brunei/Malaysia/Philippines GeoMarket, as increased exploration activity, resulted in robust demand for exploration-led Wireline and Well Testing services.

The GeoMarket also benefited from strong completions product sales. Good results in Qatar came through service mix that outpaced rig count, while the East Mediterranean and Arabian GeoMarkets also saw improvement. The area's sequential growth, however, was blunted by a decrease in the Gulf, as activity shifted from drilling to workover-type services.

Our WesternGeco sequential revenue grew significantly, led by excellent marine results, and a strong recovery in multiclient data service. The third quarter is seasonally the strongest in Marine and the results were backed by strong activity in the North Sea, and the transfer of three vessels from Multiclient to Proprietary service during the quarter. In Multiclient, increased sales were seen in North America, Latin America and Europe, with the results in North America underpinned by a significant sale in the US.

Data processing also recorded higher revenue, particularly in Europe, North America and India. The positive combination of these performances, however, was partially offset by a decrease in land revenue, as activity reduced and contracts were completed in north Africa and Latin America.

As our Investor Conference on September 30, we highlighted a number of unique Schlumberger technologies that both singly and together offer marked benefits in helping our customers increase performance and reduce risk. The manner in which these technologies can be integrated also offer substantial customer benefit, and a number of these were evident during the quarter.

I would draw particular attention to the StimMAP LIVE, real time fracture mapping and stimulation, as well as to our full-azimuth Coil Shooting Q-Marine data acquisition as examples. I would also point out the continuing uptake of PeriScope, and other members of the scope family of technologies, with jobs performed in Texas, Alaska, Italy, Ecuador, and Brazil.

As we enter the fourth quarter, the recent rapid deterioration in credit markets will undoubtedly have an effect on our activity. Though we anticipate this will be largely limited to North America, and to some emerging exploration markets overseas, the strengthening production profile of North American natural gas, has also led a number of customers to reduce spending early.

At the present time, the rate at which the world economy will slow is becoming increasingly uncertain. We have always maintained that the one event that could slow the rate if increase in worldwide exploration and production spending, would be a reduction in the demand for oil, caused by a severe global recession. At the moment, it is still too soon to predict to what extent current events will affect overall activity in 2009, but we anticipate a slowing in the rate of increase of our customers spending.

However, the weakness of the current supply base, the age of the production profile, and the decrease in reserve replacement ratios, all of which we have indicated on many occasions, are such that any significant drop in exploration and production investment, would rapidly provoke an even stronger recovery.

Schlumberger has an unparalleled technology position, a strong balance sheet, an unmatched global presence, and an excellent and highly motivated work force. I have no doubt that we will emerge from the current turmoil even stronger than before.

And now I will hand the call back to Julie.

Thank you. (OPERATOR INSTRUCTIONS) We will go to the line of David Anderson with UBS. Please go ahead.

Good morning. Andrew, I was just wondering, just looking at international land, is it fair to say the majority of your projected 2009 business is already locked up, either through contracts or long-standing agreements?

Specifically land, David?

Yes, just international land.

I would say for the drilling programs that certainly the first half year to nine months are locked up. As you know well, that is not true for workover programs. In other words, they are on a much shorter time scope, and could eventually be canceled.

Okay, and if I look just more just towards offshore work, is it fair to say it would probably be a much larger percentage of that locked up because it can be linked with drilling contracts?

Yes, I think that the fundamental cycle of three-year contracts overseas hasn't changed a great deal, so you can assume that one-third will roll over in 2009.

But with the contracts that are existing in place, can you envision any scenario in which you start to see contracts being broke? I think that is a pretty big concern in the investor community right now.

The operators don't break contracts. They shut down rigs.

Okay.

Normally a contract is for a specific, or an envelope of rigs, and they can always shut down rigs within the contract.

Okay.

So it depends on the drilling contract, David.

Okay. If I could ask one more question, looking back when oil prices peaked back in 1998, it looks like it took something like 12 months until OPEC activity really started to come down, would like to get your perspective on whether we should start to expect a similar pattern out of OPEC, and other NOCs this time around?

I recognize there are a lot of changes in the market, and there is not a perfect historical comparison, but perhaps give us your perspective on how long you think it's going to take, or how long oil prices have to stay low, until you really see a dramatic reduction in their spending?

I think I would be dishonest to say that I know. I don't know, but I will give you my opinion. My opinion is that this is not 1998. But the same basic rules would apply, and the period of time before they meaningfully impact activity, is probably not dissimilar from what you just quoted, Dave.

Okay. So you think something like 12 months or so from the peak, just roughly, you think 12, 15, something like that?

Yes.

Okay.

It depends because there's no such thing as two OPEC members who behave the same way, so it is very generalized what I am saying.

I am asking the question from a generalized perspective as well. Thank you very much, that was very helpful.

Thank you. We will go to the line of Dan Pickering with Tudor, Pickering, Holt, please go ahead.

Good morning. Andrew, just want to understand a little bit better your thoughts as they are today. Maybe six months ago, a couple conference calls ago, we were looking at international, that is a 15 to 20% kind of top line growth market for you guys in '09. I realize we don't know at this point, but I am just trying to understand order of magnitude around your comment on the rate of growth slowing? Are we at single-digit growth right now? Is it a few hundred basis points softer? Kind of ballpark for us.

Dan, I don't know. Sorry. I don't know. We are going take this quarter by quarter. But today I have a little bit better visibility on North America because you know as well as I do what has been happening every day, but on overseas, I just don't have a good visibility to allow me to look at a number.

Okay. I guess the follow-up then would be for both North America and international. You have talked historically about kind of Plan A and Plan B. Plan A is usually the markets continue to grow as you expect. Plan B is they soften. When do you pull the trigger on a Plan B in North America or on international? I mean what is the timing? Walk us through the thought and evaluation process.

Well, I think that Plan B in North America, we will be thinking in Plan B mode unless the temperature drops, and heating days become such that it is obvious that gas supply coupled with the cuts that people have made in expenditure, means that we are going to get to the end of the winter with a low storage situation. But today we are certainly thinking in Plan B mode.

So Plan B mode means that we are careful on head count increases. We are careful on CapEx. We are extremely careful on discretionary expenditure, but when we have Plan B in place, we are working on Plan A at the same time. So if something does change in the spring, we can react.

Okay.

Overseas is very, very different, because no two areas behave the same. Therefore, we can't, if you like, apply a universal plan the way we can to North American gas. So I would say the Plan B overseas, we haven't evoked any of it yet. We are being more careful, but that the areas will make a Plan B as when things start to become a bit clearer. But I have to say between Simon Ayat, to myself and Chakib Sbiti, this is the third time we have been through this.

So we have quite a lot of experience as how to manage the different reactions of the different parts of the world, not only on behalf of our customers, reaction to our customers, but also the internal measures that need to be taken.

Okay. Thank you very much, Andrew.

Thank you. We will go to the line of Michael LaMotte with JPMorgan. Please go ahead.

Thanks, good morning.

Good morning.

Simon, maybe the first question I can throw your way, and maybe ask you to expand upon how the credit crisis is impacting your business specifically, and maybe some of the things that you are doing differently in light of that, to make sure that Schlumberger doesn't end up with any liquidity pinch?

Michael, as I mentioned in my comment earlier on, we have $4 billion of cash. We have an established credit line committed from the banks although unused, about 2 billion. Our cash flow this last quarter, as you noticed we made almost $1 billion, after spending $1 billion on CapEx.

We never rely too much on the credit market. We did so opportunistic, when we felt that it is more cost effective to borrow than using our cash. So we are going to live off our cash flow like we did before, and we don't see this credit market to be very severe, as far as our needs for cash, because we have a good balance sheet, and we always worked very conservatively.

Now as far as the Receivables are concerned, we haven't experienced any delay in collections. Now this might start to affect us if there are delays for payments by our clients, but we know how to handle this, and we mobilized our entire organization, to make sure that the cash flow continues to come through. So we don't have any immediate concern over the credit market.

And even more specifically, you mentioned Receivables. Any counterparty risk in terms of customer's issues related to their letters of credit, anything coming back your way?

We do reestablish the credit limits on some of the smaller clients, and the relationship was the normal, usual clients are contractual, and we have no issues with it for the time being.

Okay, thanks, Simon. Second question, Andrew, if I can put to you, pricing in the business is in general predicated upon maintaining a perception of scarcity. As we start to talk about lower utilization rates, for everything from rigs to tools, et cetera, we lose some of that scarcity premium.

Can you maybe talk about the mix shift, in terms of revenue growth over the last few years, price versus technology? You have used in the past, an IEA chart showing 70% of the [MP] CapEx as being inflationary. I would assume that Schlumberger doesn't have that kind of price inflation embedded into it's revenue growth over that timeframe, but I would like to get a sense from you in terms of where you feel vulnerable in terms of pricing?

Right. If you go back, I don't have to explain the dynamics of supply and demand on North American pressure pumping, I hope. But if you look more broadly across the segments in which we participate, they are not generally wholly driven by pure supply and demand. Obviously they are to an extent, right?

So if you look across Well Services in North America, we know the answer. Overseas, we have had similar dynamics on the pricing market in Russia for the last two years, supply/demand. If you look at Wireline, Drilling & Measurements, I think that yes, there is particularly in Drilling & Measurements an element of pricing, particularly in 2006, which was purely supply/demand driven, and it was also true to a certain extent for Wireline, though to a lesser extent.

But in the last two years, I would say in those services, it is technology that has driven pricing more than pure supply/demand. Now I have to say as a word of caution, that in tight markets when money is short, our customers tend to use a little bit less technology, and it is up to us to prove that using technology is cost effective for them. But I think that the answer to your question is that the big price sensitivity inflation in the services where we participate, apart from pressure pumping, was really 2005, and particularly 2006.

That is very helpful. Thank you.

Thank you. Our next question comes from Ole Slorer with Morgan Stanley. Please go ahead.

Thank you. Andrew, you highlighted the credit environment, and how certainly your customers are not able to spend the same amount of capital as they otherwise would, but how about some of your competitors, and particularly North America stocked up competitors, in pressure pumping and Wireline and [inaudible] revenue, these little companies entered the market over the past couple of years with huge ambitions and borrowed money. Are you seeing any signs that this is getting shut down now?

To be perfectly honest, no, not yet. I haven't seen any distress signals, Ole. You mean real distress selling type signals, right? I think we are getting more phone calls than we got three months ago. I think we can see some deals that were made that were probably in negative equity territory, and how those will unwind I think is still completely unknown. But there is nothing I would launch yet as to distressed people calling, or sending people around to sell us stuff.

The offshore markets, you highlighted quite a few offshore rigs that are coming into the market. It appears that a lot of these rig projects are relying on a lot of debt and very little equity, and very few of them have gotten funded, have you had any thoughts about how that could develop?

I think both seismic boats, by the way, and drilling rigs, that the people who were financing these at the margin, are not going to build them. Or they won't get built into their shipyard slot gets bought by a serious player.

So on the seismic side again, I certainly see your point there. But in terms of your own revenues, exploration CapEx was meant to be the driver of much of the growth over the next couple of years, historically '98 for example, exploration CapEx was one of the first things to get shut down. Could you discuss a little bit your exposure, and how you see the Seismic business, or the Wireline business evolve over the next 12 to 18 months?

So I think that the Seismic business will undoubtedly be effected, but there are two ways that it can be effected. The first way is that if operators decide to slow programs, in which case it will be moderately effective, moderately effected, not catastrophically, the catastrophic scenario is that they start going into M&A activity.

So if my customers start buying each other, then they shut exploration down all together for a year or so, while they evaluate the portfolios, and they redecide what they are going to exploit and all the rest of it. So yes, there is a risk that exploration revenue in the next year goes much slower.

But I am now going to restate the caveat, and that is that the supply balance is extremely fragile. Nobody knows how deep the drop in demand is going to be, but there is a limit to the drop in demand, unless we have a sort of worldwide depression that is going to last 10 years. And to the extent that Dave Anderson's first question, if they shut down worker activity, non-OPEC production is going to start sliding even faster than it is at the moment.

And to the extent that they shut down exploration now, they are going to increase the reserve replacement problem that they, the customers already have. And I am not just talking about IOCs. I am talking about everybody. So to the extent that they actually shut everything down, which they may well do, the recovery is going to be all the stronger, at the first sign that demand is picking up again.

If oil demand is flat for the next several years. How long do you think it will take until it will be back in balance?

If oil demand is flat, not very long. 18 months, I would say.

18 months, and we are back in barrels. Okay. Thanks for that Andrew.

Thank you. We will go to the line of Bill Herbert with Simmons & Company. Please go ahead.

Thanks. Good morning, Andrew. I was wondering if you could actually specify a little bit more, I mean you talked about workover being the first sort of threshold of activity adjustment. Regionally speaking, what areas should we expect to see the first rates of adjustment, in terms of spending growth to take place internationally?

Well Bill, I hate to do this to you, but I am not going to answer your question directly, because I consider that as almost proprietary information. But it is not regionally. It is the type of customer you need to look at.

Yes.

So that is why North America is such a pure market, is because the customers rely on capital mechanisms to fund activities. So if you look across to the North Sea, there is a whole group of customers in the North Sea now who rely on capital markets to fund activity, and as you know, there were a lot of small companies on the A market in London, that grew up on the basis of funding from capital markets. It is a little bit true in some parts of the Far East, and it is certainly true on the West Coast of Africa today. But beyond that, I really don't want to go into what I, how I think the various NOCs, or big guys are going to react.

Well, let me get this reaction from you. In the current environment where we have had a retrenchment in oil prices, and it is a much less certain macro environment, isn't it reasonable to expect really almost across the board, even from an NOC standpoint, that the sense of urgency just abates a bit at least?

I totally agree with you, but the reading of a sense of urgency will be different in function to the type of customer.

Got you. Next line of inquiry, North America, I mean, I think you have been sort of consistently candid about the fact that we are into Plan A and Plan B world here for a period of years. And in the current environment, given the fact that we have already had such a significant collapse in, for example, pressure pumping pricing, and we have had an adjustment in general lower, with respect to pricing paradigm for North American oil services.

In the event that we get, call it a 200 to 400-rig adjustment in the US, what should we expect with regard to your North American margins? I mean they have already adjusted lower significantly. How much lower can they go from here?

It is a very difficult question to answer like that, Bill, but there is obviously, in 500, you said 500-rig drop?

No, I mean pick a number. 500 is fine, but anywhere from 200 to 400 rigs, relative to the recent peak.

Well, actually they are going to drop quite a lot, I don't know exactly how much, because then you get all the people that Ole was just talking trying to work for the banks.

Yes.

So I mean I don't want to give you a number, because I don't know. But you probably have to look back at our results. Do you remember what they went to in '99, 2000, Simon?

No, I don't recall exactly.

Quite--

Well, the cost of operation is going to go down as well.

Yes, but I mean I guess the difference is this, though. We have already had an adjustment here from your North American margins compressing from, call it north of 30% to in the low 20s. A lot of that came from pricing and I am just, clearly absorption is going to get hurt with regard to an activity adjustment, some pricing as well. But I guess how much, how severe will the rate of margin compression be, in the event of a fairly meaningful pullback from this point forward?

I can't say more. It will still be severe, and I don't know how much.

Okay. Thank you very much.

Thank you. Our next question's from Alan Laws with Merrill Lynch. Please go ahead.

Good morning. My question has to do with the Latin America region. Lat Am has sort of been a strength for many in the sector. It is a big IPM area. You noted in your release and talked about it, the rising costs in the area, and you insinuated in your recent comments that peers have been bidding aggressively in these areas in their IPM.

First, could you talk about the sources of the inflation, and then comment on the rising price competitiveness for IPM work, relative to the cost issues? Actually maybe throw into that also, sorry to layer it on, the financial needs or the ability to finance of the companies in the areas, what the stepdown in growth expectations from the Lat Am region overall might be?

Well, I think the stepdown due to lack of funding is going to be balanced against the production performance of many customers in that area, which means that they really cannot afford the stepdown a great deal. I think that the inflation in the area is everything. It is materials particularly, as well as wages, and that is going, that will abate. I mean it is quite obvious it is going to abate in some of the larger items right now, particularly in materials. Wages, I am not so sure.

And I don't really want to comment any further than I have done in the past on the entry of other competitors into the IPM business in Latin America. Their pricing is one thing. It is really, whether or not that affects the pricing of the overall IPM market depends how they perform.

Are margins headed back towards the teens, though, in that region, given all this mix of factors?

No, you must separate Mexico from everything else. If you are trying to use the read across from the IPM bidding of competitors to overall margins in the region, no. I mean also the other thing that is going to be necessary, is very necessary if you want to expand an IPM, is a very strong balance sheet, because there is a lot of upfront investment.

Okay. All right, sure. And unrelated follow-up, and I won't layer on a bunch of details to this one. Just in the Middle East, you noticed a change in mix.

Yes.

And I just wondered if going forward are we seeing a change in activity overall in the Middle East, that it is going to move towards this?

No, don't read across from this month. This quarter's decline of 85 basis points, whatever it was. We have this every other quarter. It is just a shift in mix. We have no signs today, I am not ruling out that we may have them in the next six months, but we have no signs today of a major shift in mix.

Okay, great. Thank you very much. Appreciate it.

Thank you. The next question comes from the line of Jim Crandell with Barclays Capital. Please go ahead.

Good morning.

Good morning, Jim.

Could you talk about, Andrew, opportunities for Schlumberger in the current credit crisis, and under your possible scenario of exploration revenue going much lower, we see widespread mergers in the oil industry, do you think this would lead to material consolation in the Oil Service sector?

I don't think that an M&A amongst our customers would necessarily lead to a consolidation in the Oilfield Services sector. It is correct, I think, to assume that some of the startup, or recent fleet formed marine seismic companies will get merged into other marine seismic companies, because they won't be able to survive at the size they are in a down market. But I don't think that necessarily reads that consolidation amongst our large customers and a drop in exploration spend, means that the rest of the industry will feel the need to consolidate.

Okay.

And in terms of us, as I said in the Analyst Meeting in Houston in the Q&A, in this market, in terms of what we might do and not do, we will be more opportunistic than we have been perhaps in the last two or three years.

Okay, and one follow-up is that if activity in North America holds in relatively well here in the fourth quarter, do the discussions with the US customers on one-year contract renewals, are they materially changed by the drop in natural gas prices and the credit crisis?

Well, our customers are probably smart enough to know that if activity is going to go down, they should delay their retendering until they think that they can see what activity is going to be. But actually I haven't any signs of that yet, Jim. I am just saying what I think they would probably do.

Okay, and one last question. Can you give us your thoughts on the Russian market? And I noted one of the big customers announced 0.5 billion to $1 billion cut in their budget year for '09.

Which one was that, Jim?

BP-TMK.

Yes, I wouldn't make a read across to the whole industry from that. But in Russia, we will have the same problem with small customers as we have in the United States, exactly the same. And the large ones, I don't know how all of them are going to react yet, but I very much doubt given Russia's current production profile, that they will go in for massive cuts straight away.

Okay. Thank you.

Thank you. The next question is from Robin Shoemaker with Citigroup. Please go ahead.

Thank you. Andrew, I know you don't want to talk about areas of the world where you expect to slow down, and that is proprietary and so forth. But in the past two downturns that you have lived through, the North Sea has been one as a high cost area that usually leads the way, and I just wondered if you would comment on what you are seeing in that market?

The only thing we have seen in that market so far is some very small startup companies or small new players, who needed to call their credit lines have been delayed. That is the only thing we have seen so far, Robin.

Okay. Let me just ask one other question unrelated. Is there any inclination of the Board to reconsider the share buyback program, in light of what has transpired with your stock price, and where you have been buying stock? And also, if you could comment on the outlook for capital spending in '09?

Well, so I think that on the buyback, we will honor our commitment to not allow share creep, but until credit markets settle down, and we have a clearer view of where we are going in '09, I don't think we will be doing much more than that.

And in terms of the CapEx for 2009, it is too early to say for all the reasons I have outlined to other callers, but obviously we are looking at, as we have a 6 to 9-month cycle, we are basically talking about the CapEx in the second half 2009, and we will be looking at that very closely over the next couple of months.

Okay, thank you.

Thank you. Our next question comes from the line of Doug Becker with Banc of America. Please go ahead. Mr. Becker, your line is open. Okay.

We will move on to the line of Mike Urban with Deutsche Bank. Please go ahead.

Thanks, good morning.

Good morning.

Andrew, wanted to clarify some of your comments. On one hand you said that the credit crisis and the credit issues are primarily a North American issue so far, and then you did go on to say that overall, you are anticipating a slowing in the rate of increase. Was that a Q4 versus '09 comment, or I was just wondering if you could clarify that.

Let me be totally clear. It is clear that the North America credit situation will have an effect on Q4. Not a huge effect, but an effect, nonetheless. When I talked about the credit crisis worldwide in '09, all I was saying is that, it is going to have an effect, but we don't know what it is yet.

Okay.

In fact, the credit crisis, I think by the time we get to '09 is going to be far less of a factor than what actually has happened to oil demand because of the general economy.

Got you. That is helpful. And then unrelated follow-up, you addressed the cost inflation issues in Latin America, but more broadly, as things perhaps slow down a bit, and certainly we have seen commodity prices come in, would you expect your costs, and the cost inflation to come in a little bit globally?

Yes, absolutely.

Okay.

I think that it is going to be true for our customers. It is going to be true for us, that a lot of the sort of really excessive inflation that we had is going to abate.

Okay, great. Thank you.

We will go back to the line of Doug Becker with Banc of America. Please go ahead.

Sorry about that. Sorry about that. Andrew, I don't want to get too focused on semantics, because I know you choose your words very carefully. Does your comment regarding the slowing rate of increase in customer spending, imply that you still expect spending to be higher in 2009 versus 2008, as we sit here today?

As we sit here today, though I could be proved completely wrong in a week's time, that is what I meant, yes.

Okay.

But it is so dynamic that in two week's time it could be completely different.

Fair enough. CapEx guidance was lowered ever so modestly for Oilfield as well as WesternGeco. Don't want to read too much into it, but was that a function of the outlook that you see, or just the timing of the projects that are in the queue?

I would say it is our capacity to deliver, coupled with a little bit of prudence, and actually we are probably, this year what we are doing is just slipping some of it into next year, because as we are on a 6 to 9 month cycle, we know what we are going to get, it is just a question of when you get it.

Fair enough. Thank you.

Thank you. Our next question's from Pierre Connor with Capital One. Please go ahead.

Good morning, gentlemen.

Good morning.

Andrew, my question on Marine Seismic, you mentioned that your customers could slow down there if there were significantly prolonged decline in prices. Amongst that backdrop, recap your vessel delivery schedule from here, and what of that is currently contracted as it is delivered? Maybe what is your variability on change in the delivery, for instance, of some of the eastern ECO vessels?

Well, next year we get two vessels in Q1, and then a vessel a quarter for the rest of the year. We are not anticipating any issues getting, some of them have contracts already. We don't yet see that getting the others contracts is a problem, and I think it will be difficult to delay shipyard delivery, but it would be possible to, if the market gets really bad towards the end of next year to mothball them, rather than market them. We will probably in fact mothball all vessels, and put the new ones into service.

Okay. On the Multiclient sales, nice increase there in this quarter, but obviously most of us are concerned about what the future holds.

Right.

You mentioned a large North American sale. Is that the majority of the sequential increase?

No, it is not the majority, but it is a very large chunk. We quite deliberately mentioned that to put you on notice, Pierre, that was one very large chunk in it, but it is not the majority.

Understand. Is there a component of library sales that are somewhat on a continuous basis, somebody that has a contract for a certain amount of sales regularly, or is it really completely variable?

Yes, there are continuous, a number of customers who have continuing Multiclient sales across a period of time. But don't forget, there's always this year end Christmas shopping spree that takes place in the last five or six days of the year every year. And it is almost impossible to guess, or to know how much that is really going to be.

Understand. And then kind of unrelated, but if I could, on some of these issues of what is contracted for the future, you addressed right on the first question right off the bat for the international, what about on the pressure pumping horsepower that is currently contracted for what duration for next year?

In North America specifically?

Yes.

I don't know. I would probably imagine that about something like half is contracted now through the middle of next year. But in this market, it is so dynamic that I could be completely wrong, Pierre.

And I understand contracted at price, but obviously activity depends on the customer.

Yes.

I understand. Thank you, gentlemen.

Your next question is from Charles Minervino, Goldman Sachs. Please go ahead.

Good morning. Most of my questions were answered, so I just wanted to touch on one topic. You highlighted the establishment of a seismic data bank in Saudi to explore for natural gas. I was just wondering if you can give us some color on that, maybe time tables on when you think there could be some drilling activity out there for natural gas, or when some projects could be planned? Is that something we can be looking forward to as a potential positive offset down the road?

Yes, I think that, so we didn't discuss this in the context of, I have discussed this in the past, so I am quite happy to discuss it now, but while I don't think you should relate it to the establishment of a national data bank in Saudi, it is true that the gas programs in the Middle East, Saudi Arabia, UAE, Oman, part of Kuwait, are very likely not to be effected by this, because they are for domestic usage, and in many cases to be substituted in the place of oil that is currently used domestically. So I think the gas programs will be much less effected.

Can you remind us on the time tables for those? Is that an '09 event--

Some is, some aren't, Oman is starting now, the work, Saudi is probably '09, and the UAE, a lot of the UAE work is probably '09 as well.

Okay. Thank you.

Thank you. We will go to the line of Geoff Kieburtz with Weeden, please go ahead.

Thanks, good morning. Andrew, earlier in the call, you said this is not 1998. Could you elaborate on what you meant by that?

Well, I meant by that that there is a really positive factor, and there is quite a negative factor. So the quite negative factor is we don't know how far demand is going to drop, and obviously the economic crisis is much more widely spread than it was in 1998, where basically it came out of Thailand, or the Far East or Asia. So we don't know how far demand is going to drop. That is the slightly negative unknown.

The positive is that the supply situation is much, much worse than it was in 1998. I am very serious when I say that a decrease in exploration and production spending at this point is going to accelerate non-OPEC decline, which means that as soon as demand flattens or turns around, the price of oil is going to go right back up again.

Okay, and I guess you, I think with Ole you gave an answer in terms of 18 months we would be back in balance, if and that was, what conditions do you see oil--?

I am saying that demand would stabilize some time in the first half of next year.

Okay. If demand stabilizes in the first half of next year, 18 months, you would expect to see a rebalancing, and I guess you mean upward direction--?

You would see a tightening in supply/demand, which would change the momentum of the price.

Okay. If we had a scenario like the early '80s where actually we had three consecutive years of declining oil consumption cumulatively, something more than, well, roughly 10%? I mean would that be, I mean do you see the supply situation being so fragile that we could get back into balance even in the context of that kind of demand decline?

No I don't, but then I think I must point out the differences between now and the early '80s. And the first is the level of interest rates. In other words, at the moment we don't have a desire to control inflation through interest rates in the world system, and probably it is a good thing.

The second thing is that the capacity for oil substitution in the developed economies in the early 1980s was huge, so a lot of that drop in the use of oil in the early 1980s or the mid-1980s was the substitution of other sources of power generation for oil. And today that just doesn't exist.

Okay.

Or it exists only to a much lower extent.

And my last question, you may or may not be willing to answer it, but what would you put the probabilities at that Schlumberger's earnings in '09 are lower than they are in '08?

Firstly, I don't know how to answer it, and I am not going to, Geoff.

Okay, all right. Thank you.

Thank you. We will go to the line of Brad Handler with Credit Suisse. Please go ahead.

Thanks, good morning. Just a couple of maybe sort of smaller picture follow-ups, I guess. Can you comment on perhaps, I don't know how to ask it exactly, but comment on Multiclient interests versus contract interests within WesternGeco, if that is somehow effected by all of the events that we are sort of thinking about currently?

Well, I think one has to have a clear policy on Multiclient. Our library is actually very small, and we have had a very strong discipline of not shooting Multiclient unless the cost of it is prefunded to a certain percentage. And the danger with a seismic company in the downturn, is that people will shoot Multiclient just to keep the boats active.

And I think that it is incumbent on us to be extremely disciplined and not do too much of that, it is not really a question of just expanding the library for the sake of expanding the library. It is only expanding the library where you are sure you have a definite customer interest in what you are doing.

Is it relative to your efforts to shift your library I guess, in your customer's interest in shifting the library to rich azimuth, does that impact how much you expect to do in '09, do you expect that trend will remain fairly stable?

All indications at the moment are that, but it is early days, but all indications are that the '09 trend remains, for proprietary seismic remains pretty positive at the moment. And a lot of that is to do with wide azimuth, or rich azimuth, as you say.

Thank you. Can I jump in? Am I still on?

You are.

Thank you, thank you. Just an unrelated follow-up, please. You have helped us in the past by thinking about third party content in IPM, sort of on a quarterly basis.

Yes.

Can you comment on what the fourth quarter outlook is?

Simon?

Well, business remains the same. We are about 40 to 50%. As a matter of fact, this quarter because of what we mentioned of the startup for Burgos 7, it was a bit higher, meaning towards the 50%.

Okay. So the outlook for the fourth quarter remains higher than, remains in that 40 to 50% band, which is higher than it has been in some quarters in '08, I think. Is that right?

Correct.

Okay. Thanks.

Thank you. We will go to the line of Stephen Gengaro with Jefferies & Company. Please go ahead.

Thanks, good morning. Two seismic follow-ups. The first, is your sense that more conservative accounting standards kind of across the board will help kind of overshooting a Multiclient in this cycle?

I don't know how to answer that, Stephen. I know at WesternGeco we have extremely strong guidelines in place, not just on the accounting, but on the approval of the prefunding, in order to even start one. Other companies, I don't know whether there has been a big change in the way they account for Multiclient.

Okay. It seems like they have. And then as a follow-up, can you give us a sense for your expectations, if you have any, for Multiclient investment in '09?

I don't think we have them, we haven't completed the planning cycle, so I would give you a wrong answer if I answered, Steve.

Okay, thank you.

Thank you. We will go to the line of Ole Slorer with Morgan Stanley. Please go ahead.

Thanks. Actually Geoff did a good job of following up on that question. That is fine, Andrew.

Okay. Thank you, Ole.

Thank you. We will go to the line of Michael LaMotte with JPMorgan. Please go ahead.

Thanks. If I could ask a quick question on M&A opportunities outside of North America, if the change in operating environment increases the opportunity set?

Yes, it does, Michael. But as you know, there are not nearly so many, particularly for Schlumberger, targets outside North America that are very attractive. Yes, attractive from a company strategy standpoint I am saying, not from your price standpoint. But, yes, there are, but far less than in the US.

Well, I think, okay, if we look at distressed assets, probably the bigger market is still the US. If we look at maybe technology, sort of niche opportunities that are in need of capital, would they be more outside?

Yes. I would say they could be either in or out.

Okay. Thanks.

Thank you. And our final question for today comes from the line of Ben Dell with Sanford Bernstein. Please go ahead.

Hi, guys. Just a couple of quick questions. Andrew, given the low level of visibility you seem to have on 2009 EPS and cash per share, and the fact that we have down oil and gas prices, and a weak credit market. Do you not think it is prudent here to be cutting CapEx more aggressively, and the expectations that the environment could possibly worsen further?

As I have said on several occasions this morning, we have a six to nine-month cycle. So basically that means, out of the 6 to 9 months 80% of that has already been ordered, and therefore we are not in a phase yet, where our needs are so low that we start to cancel that. But beyond that, we have not finalized a plan. But yes, obviously, we are taking into account what we think the activity scenario is likely to be.

Again, just on the last macro question, you talked about the 1980s. In the '80s, one of the things we have seen is that the supply really turned up when the rigs and capacity turned up. And we have seen in the gas market recently supply growth turn up, and the land rigs turn up, and the service capacity stand up. Do you think there is a genuine risk here that we get to 2009, 2010, and we have significantly more supply growth than most of us have estimated, because that is when the capacity for services and rigs actually hits?

In oil?

Yes.

You are assuming that people keep spending.

Well, I am assuming that margins drop and volume improves.

That is possible, but it is a long, long way from stabilizing. In other words, the run-up we had in the last five years has been so inflationary, that in fact if you relate the amount spent to the number of wells drilled, the activity increase has not been that huge. Now to the extent that prices dropped, and that the customers spend more and activity increases, yes, but you are really talking about beyond 2010.

Okay, great. Thank you.

All right. On behalf of the Schlumberger management team, I would like to thank you for participating in today's call. Julie will now provide the closing comments.

Thank you. Ladies and gentlemen, this conference will be available for replay after 10:30 a.m. today through Midnight, November 17, 2008. You may access the AT&T Teleconference replay system at any time, by dialing 1-800-475-6701, and entering the access code 958246. International participants, dial 320-365-3844. Those numbers again are 1-800-475-6701, and international, dial 320-365-3844, and enter the access code 958246.

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