斯倫貝謝公司 (SLB) 2009 Q1 法說會逐字稿

Welcome to the Schlumberger earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the covers over to your hosts, Chairman and CEO, Mr.

Andrew Gould; Chief Financial Officer, Mr.

Simon Ayat; and Vice President of Investor Relations, Mr.

Malcolm Theobald.

Mr.

Theobald, please go ahead.

Thank you, Greg.

Good morning, and welcome to the Schlumberger Limited first quarter 2009 conference call.

Today's call is being hosted from Dhahran, Saudi Arabia where the Schlumberger Limited Board meeting took place yesterday.

Before we begin with the prepared remarks, I'd like to remind the participants that 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.

Joining me for today's call the from Saudi Arabia are Andrew Gould, Chairman and Chief Executive Officer and Simon Ayat, Chief Financial Officer.

Prior to Andrew's overview of the first quarter and his comments on the outlook, Simon will first review the quarter's financial results.

After the prepared statements, we will welcome your questions.

And now, I'll turn the call over to Simon.

Thank you, Malcolm.

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

First quarter income from continuing operations, excluding charges and credits, was $0.78 per share, down $0.25 sequentially and down $0.28 compared to the same quarter of last year.

We are continuing to focus on managing our cost base.

In this regard, we have largely completed the headcount reduction we announced last quarter.

In order to better match our costs to the lower activity and pricing levels, we will likely have a further reduction over the coming months.

Turning to the business segments.

Oilfields services first quarter revenue fell by 13% sequentially, while the WesternGeco revenue dropped 8%.

Oilfield services generated $1.3 billion in pretax operating income, down $344 million sequentially, with margins declining by 248 basis points to 23.1%.

By area, oilfield services sequential pretax operating margins highlights were as follows.

North America declined by 858 basis points to 13.7%, primarily due to the impact of the rapid and deep reduction in US land and US Gulf of Mexico shelf activity, coupled with heavy pricing pressure.

Latin America improved 168 basis points to 19.7% due to project efficiency gains on IPM projects in Mexico/Central America and a favorable mix of higher margin exploration activity offshore Brazil.

These increases were partially offset by a reduced gain share from an IPM project in Peru/Colombia/Ecuador and the impact of reduced activity in Venezuela/Trinidad & Tobago.

Europe/CIS/Africa was essentially flat at 25.9%.

Higher margin activity in the North Sea and in Nigeria and Gulf of Guinea largely offset the combined impact of lower activity in North Africa, the less favorable revenue mix in west and South Africa and reduced sales at Framo.

Finally, Middle East/Asia was also steady at 33.1%, as a more favorable revenue mix in several geomarkets offset the impact of lower activity overall in the area.

At WesternGeco, pretax income of $55 million reflected a decline in pretax margins of 483 basis points to 9.9%.

This decrease was due to the sharp decline in multiclient revenue, primarily in North America, as customers continued to reduce their discretionary spending.

Now turning to Schlumberger as a whole, the effective tax rate of 21.1% was in line with last quarter after adjusting for the Q4 charges.

The ETR for all of 2009 is still expected to be in the low 20's.

Net debt was $1.5 billion at the end of the quarter, as compared to $1.1 billion at the end of Q4.

This increase is largely seasonal, as we typically experience stronger Q4 cash collections on our receivables and we pay profit sharing and other related benefits in Q1.

We ended the quarter with approximately $4.4 billion of cash and investments on hand.

In addition, $2.1 billion of committed debt facilities with commercial banks remained unused and were available at the end of March.

This compares to short term debt of only $1.6 billion, reflecting the continued strength of our balance sheet and leaving us with more than enough liquidity to meet all corporate and operational requirements.

In addition, during the quarter, we established a EUR3 billion medium term note program, which provides for the issuance of various types of debt instruments, such as fixed or floating rate notes in euro or US dollar or other foreign currencies.

In March, we issued EUR1 billion of 4.5% notes, due 2014 under this program.

The issuance of these notes was extremely well received.

The proceeds from these notes will be used to refinance existing debt obligation and for general corporate purposes and will even further increase Schlumberger's financial flexibility.

Other significant liquidity events during the quarter included $273 million of pension funding and $748 million of CapEx.

Given the current economic environment, we have temporarily suspended our stock buyback activity.

Oilfield services CapEx is expected to approach $2 billion in 2009.

While WesternGeco is expected to reach $600 million, which includes $270 million relating to the construction of seismic vessels.

And now, I'll turn the conference over to Andrew.

Thank you, Simon and good morning or good afternoon everybody.

Schlumberger first quarter revenue declined sequentially, as activity continued to weaken around the globe in response to reduced customer spending, as the global economic recession reduced demand for both oil and natural gas.

The rate of decline in revenue at oilfield services accelerated considerably compared to the fourth quarter, largely due to the precipitous drop in North America natural gas rig count.

Outside North America, low activity in Russia and the fall of many local currencies against the US dollar remain the principal causes of weakness.

Looking at the areas in more detail and starting with North America.

The US land geomarket market recorded a significant decrease in sequential revenue, as low natural gas prices and a lack of available credit for some customers resulted in a rapid and deep reduction in activity that was coupled with heavy pricing pressure.

Offshore, revenue in the US Gulf of Mexico geomarket fell through weak shelf drilling activity and associated pricing erosion, although expected deepwater projects began operations much as expected.

In Canada, revenue fell as winter drilling activity was unusually low and the spring break up came unusually early.

These decreases, however, were partially offset by high seasonal exploration-related activity in Alaska.

In Latin America, the Venezuela/Trinidad & Tobago geomarkets saw the sharpest sequential revenue decrease, as a result of lower activity related demand for drilling and measurements, well services and wireline technologies, coupled with reduced IPM activity.

In Peru/Colombia/Ecuador, revenue fell following the year end sales in the prior quarter of their SIS Software and artificial lift products, while the Argentina/Bolivia/Chile geomarket decreased on lower activity-related demand for wireline, drilling and measurements and well services.

Area revenue was also reduced by 2% due to the weakening of local currencies against the US dollar.

These decreases, however, were partially offset by increased revenue into Mexico/Central America geomarket due to efficiency gains on IPM projects.

And in the Brazil geomarket, as a result of robust demand for high technology, drilling and measurements and wireline services on offshore operations, where IOC activity grew as originally scheduled.

Within Europe/Africa/CIS, the weakening of local currencies against the US dollar, primarily in Russia and the North Sea, reduced area revenue by 5%.

In addition, Russia experienced a sharp drop in revenue as a result of seasonal weather related slowdowns, further reductions in customer activity and heavy pricing pressure.

Revenue for the North Africa geomarket was down due to lower demand for well services technologies and software products, while the Caspian geomarket experienced reduced demand for well services, drilling and measurements and wireline, as customer activity slowed.

Weaker thermal revenue also contributed to the sequential decline in the area.

These decreases were partially offset by improved activity in Nigeria and the Gulf of Guinea that resulted in increased demand for wireline services.

Lastly, in the Middle East and Asia area, sequential revenue fell, primarily due to reduced customer activity in the Arabian, Brunei/Malaysia/Philippines, Thailand/Vietnam and East Mediterranean geomarkets, in addition to seasonal weather related slowdowns in China/Japan/Korea geomarket.

These declines in activity mainly affected demand for well testing, wireline and drilling and measurement services.

At WesternGeco the rate of sequential revenue declined slow to 8%, as continued weakness in North American multiclient revenue was partially offset by improved marine, with the start of several new proprietary contracts.

Data processing also recorded a sequential decrease across all areas, except Latin America.

While land was down due to completion of projects in the Middle East.

Overall, backlog decreased by $319 million to $1.5 billion, partly due to delayed contract awards pending the results of licensing rounds in several countries.

Looking at Schlumberger as a whole, we have already taken action to right size our operations, without diminishing our capacity to react to market changes.

Our operating cost base has decline sequentially by more than $450 million due to prompt action on all variable cost categories and to the effects of favorable exchange rate movements.

Recent economic forecasts have yet to show any positive trends in GDP stabilization or growth, with the major forecasting agencies lowering their demand expectations accordingly.

Our visibility on 2009 has, therefore, not materially changed from the end of the fourth quarter.

We do not see any significant recovery in North American gas drilling before 2010.

Overseas, while activity declines will be limited, customers are actively seeking and are obtaining price relief to improve the economics of current projects.

At the same time, exploration expenditures are being deferred in favor of projects that produce immediate cash flow.

We are encouraged to see offshore deepwater activity resisting fairly well to the current budget cuts.

As we indicated on our fourth quarter comments, longer term, we remain convinced that any demand recovery for oil will need to be accompanied by increased investment to offset decline in the aging production base.

Okay, Greg.

Thank you, Andrew.

We will now turn the call over for questions.

(Operator Instructions).

Your first question comes from the line of Michael LaMotte from JPMorgan.

Please go ahead.

Thanks, good morning or good evening.

Maybe I'll start with just the general commentary.

Deepwater, as you said, is sort of the one thing that still looks good.

Do you see any green shoots anywhere other than deepwater?

We're definitely decelerating but any signs of growth anywhere?

Are you talking about the oil and gas business, Michael?

Well, I'm just talking about your business, Saudi gas, there have been sort of pockets of growth, Algeria.

Can you talk about -- because your overall tone just sort of seems to be that the market as a whole is decelerating still.

This is a market that's contracting and I'm just trying to sort of see where the signs of recovery and life might be.

Well, there are always pockets that are different.

But if you ask for a global judgment, yes, it's still decelerating.

And as we all know, the overseas cycle takes 12 to 18 months to work itself out, which is why I commented that I don't have a great deal of clearer vision than I had at the beginning of the year.

Okay.

So, yes, there are always pockets of resistance.

So, there's gas in the Middle East, there's Brazil, there's Australia.

There are little pockets of resistance all around the globe.

But I think the pockets of resistance today are more linked to the commitment to long-term projects that customers have taken, which is more expensive for them to stop or slow than to continue.

And are those pockets of resistance feeling pressure from the general slow down in terms of pricing and competitiveness on those contracts, et cetera?

Well, I think that on large projects, where not only the operator but also the service company has a considerable investment in conducting smooth operations, the tendency is for the operator to want to renegotiate price rather retender and disturb the whole operation.

So, yes.

Are all the majors and large independents and some of the NOC's aggressive on asking the service industry to reduce price?

Absolutely.

And as I said in my commentary, it is better for all parties to negotiate rather than to run to retender.

And then lastly, on the deepwater side, if -- there was some uncertainty on past calls about what the growth versus net rig additions would be.

Do you have any thoughts there in terms of capital occasion pulling equipment from idled rigs and putting them on the new rigs?

I'm generally referencing the CapEx down 10%.

Sure.

So there is a lot of CapEx associated with deepwater that you cannot pulling from other rigs.

For example, the cables, the capstans that are used in deepwater there, are unique to deepwater and some of the units are unique to deepwater.

But to the extent that we can pull tools from other theaters where the activity is declining and put them on deepwater rigs, absolutely, we're doing that.

Okay.

Is that part of the --?

As far as the CapEx, I wouldn't say the whole amount but some of the CapEx savings will be due to rationalization across different parts of the world.

Okay.

Thanks, Andrew.

Your next question comes from the line of Kurt Hallead from RBC Capital Markets.

Please go ahead.

Hi, Andrew.

Hi, Kurt.

I was wondering if you might be able to give us some range of magnitude of the pricing relief that your customers are asking for in the international markets?

And just in context, could you also give us some general sense on what product lines are most vulnerable and which may be least vulnerable?

Well, I think the best way I can say this because I don't want to give you a number, is that it is much less than some of our dear customers are announcing.

Some of the announcements they've made as objectives, they are not achieving, in terms of price reduction from the service industry.

I would say that anything to do with deepwater probably has the most capacity to resist.

Anything to do with bulk land markets has the least capacity to resist.

And jack-ups would be somewhere in between.

And on your service lines related to working with jack-ups, is that what you mean?

Well, I'm saying all service lines.

I'm not going to distinguish between one service line or another because the pressure is fairly general.

What I'm going to distinguish is type of activity.

So I'm saying that in deepwater, you have -- there is more capacity to resist.

On land, big bulk land operations, lots of lands rigs, lots of competition, there's much less capacity to resist.

And jack-ups and third-generation semis would come somewhere in between.

Okay.

And my follow up would be that, you had a phenomenal performance, I would say, in Europe, Russia and Africa in the quarter.

And I was curious as to how much of that was related to activity or business vis-a-vis how much of that could be contributed to the cost cutting efforts that you've already referenced?

In activity, I think that the serious decline was obviously Russia.

The rest held up probably slightly better than even we expected, particularly in the North Sea and West Africa.

And the capacity to offset Russia, obviously, largely came through pretty prompt action in last quarter of last year on cost reduction.

So, the mix of all of that?

Yes, mix was good and the cost cutting or cost reduction efforts took place early.

And I just want to clarify one last thing, one of the first comments made on cost cutting.

The cost reductions that we see, you saw $450 million in the quarter.

Did I hear you guys right in saying you expect to see a similar impact as we move into the second quarter?

I'm going to let Simon answer that question, Kurt.

So, Kurt, basically the $450 million represent mostly variable costs.

There is a lot of cost associated with the revenue drop that naturally disappears, like costs of product.

We had some favorable exchange gains but this has not much impact on the bottom line because we -- a similar amount also was dropped in the revenue.

So what we're going to see going forward, is the impact on the reduction in headcount that, as I mentioned, it's almost completed, the first wave that we announced.

So you will see a cost reduction, although it will be from a different nature than the one that you have -- we have already seen in the first quarter.

This is mostly variable element and the fixed costs will take a little bit longer to adjust to.

Okay, great.

Thank you very much.

Your next question comes from the line of Ole Slorer from Morgan Stanley.

Please go ahead.

Thank you very much.

Andrew, your last point in your opening statement, I wondered whether you could elaborate a little bit more on your views with respect to a global oil supply response to this very steep slowdown that we have seen in global activity?

Something you talked about before and I think if anything, this slowdown seems to have been steeper than what anybody could have imagined or maybe not.

But could you give us some kind of clarification on what you see there?

And how you see it relative to what you thought half a year ago?

Well actually,

I'm still very much in the mood that I was in at Howard Weil, really.

That is that we need to see a stabilization of demand before the supply decline is really going to bite.

And to me, it's more of the timing of the stabilization of demand and even if there is a slight increase in demand, that is going to tip the scales, rather than the decline in supply.

Now obviously, if the decline in supply goes on long enough beyond the end of this year and all the rest of it, that's going to start having a material impact.

But we really, really need to see the stabilization of demand, I think, to get to the situation where it's likely to tip.

So, this with the GDP seem to have turned positive, [at least globally,] should that be at least somewhat constructive --?

Sorry, I missed that, Ole.

With GDP [of nations] having started to turn positively again, at least not the same free fall as we've been through over the past six months, that could be --?

Yes, the timing is going -- I think that the oil industry as a whole, service providers and our customers, will be making a judgment in the third quarter.

And that judgment will be very material to what our activity is likely to be in 2010.

And that judgment will be made on the basis of how they see GDP progression at that point in time and what the oil price is at that point in time.

So with that, Andrew, other -- any positions in any major markets where you are concerned about Schlumberger's shape?

And also, elaborate a little bit on a lot of technologies mentioned again in your press release, whether there are any new trends?

And what these things could mean relative to the volume you see in business, the mix and overall pricing trends?

How is it all going to shape out?

Do you have anything on the --?

There are always, out of the 30-odd geomarkets, there are always one or two that we're worrying about but they're not -- none of them are really something that -- we worry but we're not in any way losing sleep over it.

In terms of technology, as I've said before, we have divided our portfolio into three.

There is first, the technology to match competitive threat that we will introduce as and when it is ready.

Secondly, there is technology to reduce customer costs, which we will introduce when it's ready.

And thirdly, there is some technology that we consider; this is not the right market to introduce it into because you will be introducing it at a lower level of pricing.

And therefore, we will take the time to perfect that and bring it back to the market when we see activity starting to increase again.

Thank you very much.

Your next question comes from the line of Alan Laws from Bank of America.

Please go ahead.

Good morning.

Let's see, I've got a lot of questions here.

I'll start with this one.

Your margins were better than your peers.

You attribute a lot of the margin preservation to mix.

I was wondering, how much has to do with established footprint and market share position?

Essentially, are you kind of the last to feel any pain in most of the markets, other than maybe North America?

Actually, given our size I think we're the first to be attacked.

So, I don't think you can attribute it to that.

It is true that our footprint helps in these circumstances but I am afraid -- I have to compliment the management team, we made the decision that we were going to have to cut costs in October last year and they have done an excellent job.

Do you still see this as a typical cycle?

And do you think that the pace of margin compression with your backdrop that you laid out there is going to be smooth or do you think it's going to be choppy?

Actually, I don't have any reason today, not to think that this is not like any other Eastern Hemisphere cycle.

So, let's leave aside North America.

Eastern Hemisphere cycles typically take about 18 months to rollover.

And if you consider that this cycle started in Q4 of last year, then if it follows the pattern of all the previous cycles, it will rollover in Q2 of next year.

Now, there are always factors that can influence that one way or the other, positively or negatively.

Negatively would be that the recession deepens.

Positively, would be, what Ole just mentioned, that supply starts to rollover sooner than you think.

But I don't have, we don't have -- in fact I was discussing this with [Shakib] just before we came on the call, we don't have any reason to believe this is not going to be a normal cycle.

Excellent.

All right.

My follow up, I'm going to cheat here a bit and make it unrelated.

But I'll ask this s on a deepwater side follow up because of the impact of the Brazilian exploration seemed to have on your related mix and your results.

And with a general shift away from exploration that you've mentioned in the last few releases, can you comment on decline in your kind of revenue or profitability expectations versus what you may have been anticipating last fall?

Really, what I'm really trying to get at here is, what the incremental exploration means for Schlumberger in a normal market if --?

Well, I think it's a good question, Alan.

And I think that -- obviously, I don't have to describe the effect on seismic to you.

Sure.

It's dramatic.

And in terms of the other high-end measurement services that we perform, principally wireline and testing, obviously, any reduction in exploration is unfavorable to their revenue mix.

So but it's not dramatic at the level of the Company.

It makes our margin performance more difficult and it's generally unfavorable.

Okay.

That's Good.

I'll turn it back.

Thank you very much.

Your next question comes from the line of Geoff Kieburtz from Weeden & Company.

Please go ahead.

Thanks very much.

Andrew, as several people have commented, margins in Eastern Hemisphere held up extraordinarily well but your outlook comment emphasized the degree to which customers are getting price relief.

I'm just having a little difficulty reconciling the strength of the margins and this comment that customers are getting price relief.

Is there something about the first quarter that held up margins better than you would expect to be sustained or is this just a timing issue?

I think that timing issue is a good way to describe it, Jeff.

We started cutting costs in Q4.

The customer started negotiating with us in Q1.

And therefore, a lot of the price concessions that we have given will flow through in the subsequent quarters.

And given that you had, it sounds like, a one quarter head start on the cost cutting side, how do you feel about your chances of being able to preserve these margins as the pricing rolls in but then the cost benefits also are coming -- are being realized?

I think that to repeat Q1's performance will be extremely difficult.

And just on the cost cutting side, Simon made a comment about the second quarter and I wasn't quite sure I got it correctly.

Is there another rounds of headcount reductions planned for the --?

Yes, I mentioned it at Howard Weil but basically, we said that we think that over the coming months, there will be an equivalent to the initial number, which was 5,000, which will take place.

But this will be much less noticeable because it will be spread all over the world.

Got you.

In other words, the first one was very much North America.

The second one will still be North America but a lot of it will be spread around the world.

So, it won't be quite so noticeable, if you like.

Thank you very much.

Your next question comes from the line of Jim Crandell from Barclays.

Please go ahead.

Good morning, Andrew.

Good morning, Jim.

What would be your best guess as to when you would see the bottom in Eastern Hemisphere revenues and margins by quarter?

Well, I think assuming the economy stages some form of recovery towards the end of this year.

then this will be, as I mentioned earlier, a classic cycle, that is likely to be in the first half of next year.

Okay.

For both revenues and margins?

Certainly, as revenues pick up, if our cost base has been cut the way we think it's being cut, then the first few quarters it will flow through nicely.

Can you talk to the overall profit outlook for WesternGeco from here?

Well, I said in Q1 that they would be profitable.

And they will have positive cash flow.

I don't think I can change my outlook, Jim.

The huge uncertainty is, as always, going to be multiclient in the second half of the year.

And we really, we have quite a good feel for overseas multiclient but North America multiclient is going to be an unknown until the last minute.

Okay.

Last question, Andrew.

Do you think that the world is moving increasingly on land toward an IPM model?

And do you think, having a fleet of land rigs is going to be essentially toward being a leading participant in that market?

Well, I think over time, that package drilling is going to become far more common all around the world.

And I'm deliberately saying package drilling and not IPM And the issue with land rigs is they're very nice when the market is strong and they're awful when the market is weak.

So, we still don't think that it is, in all cases, essentially to own land rigs to participate in package drilling projects.

But you do expect that package drilling projects will continue to grow as a percentage of all the land business outside North America?

Over time, if you look at the well density per square kilometer or square mile or whatever you want in North America and you compare it to overseas and you say the US industry is 40 years ahead of the rest, over time if you want to recover oil you have to drill.

So, there's going to be more holes drilled.

And therefore, yes, I do.

Okay.

Thank you.

Your next question comes from the line of Dan Pickering from Tudor, Pickering, Holt.

Please go ahead.

Good morning.

Simon, could you talk a little bit about the working capital draw in the quarter?

A pretty big number, is that just a Q4 good collection, give some of it back in Q1 or is there something else going on there?

And what should we expect for the rest of the year on working capital?

So normally, Q1 we do deteriorate in working capital as comparing to Q4.

In the Q4, we have, as we do every year, good collections.

There are certain customers that do pay a bit of cash on locations.

And if you looked back at Q4, we performed extremely well on receivables, which should reverse the situation in the Q1.

The other item it the payment of the incentive bonuses and the profit sharing that takes place in Q1.

So, if you add these two, it's almost 70% to 80% of the deterioration in working capital.

So we were -- we did expect it to be at this level as a matter of fact.

Okay.

So, it was in line with your expectations?

It did, yes.

All right.

Thank you.

Then, Andrew, as we look at the -- at Schlumberger in its entirety, as you look through the rest of the year, international margins outperformed our estimate this quarter.

North America in line.

You got all sorts of mix and pricing issues going on.

How do you think about the magnitude of margin compression for Schlumberger as a whole as we move through 2009?

Are we going to be able to hold margins steadily?

I don't think overseas we're going to be -- North America I just don't know.

And overseas I don't, as I -- we had a timing, where we cut costs before we renegotiated price.

So, I don't think we can hold Q1 margins through the rest of the year.

Okay.

So the decrementals that you've talked about, generally, in the international markets, you haven't really changed your expectation there.

It's just the timing is a little different.

It's just the timing, yes.

Okay.

And last thing related to that, would simply be, given what you've said, it sounds to me like North America doesn't get better until 2010.

International is mid-2010.

Can Schlumberger make more money in 2010 than 2009?

I haven't even thought about that.

It's too early to the tell, Dan.

It's too early to the tell.

All right.

Thank you.

It doesn't seem logical.

So it really depends on the strength of what the economic recovery.

Let's hope for GDP.

Thank you.

Your next question comes from the line of Bill Herbert from Simmons & Company.

Please go ahead.

Thanks, good morning.

Andrew, forging ahead here with regard to international margins again.

Recognizing that, again, you have [profit statements] here that pricing concessions are going to roll through the income statement, that margins are going to decline.

Assuming a relatively stagnant drilling environment in which international, as a whole, isn't going down significantly.

And you do witness some kind of stabilization, if you will, by midpoint of next year; Do we witness a similar margin path international that we witnessed in the late 90's in terms of magnitude?

In terms of the magnitude of the decline, I really don't know, Bill, I haven't thought about that a lot.

I'm trying to think --.

For example, we went from 20% to 10%, I think, assuming my model is right but --?

I'm going to be uncharacteristically optimistic here and say that; given the importance of offshore; given a much broader presence than at that time, particularly in Russia; and given the service mix we have today; I would be amazed if it went that low.

Not that low, what I'm -- that was a question as well but how about degree, in terms of rate of change?

I don't think the rate of change will vastly vary from previous cycles.

Okay.

Fine.

These guys are almost done.

Right?

And then, we are talking about national oil company tenders rolling over, which takes 12 to 18 months.

Yes, got it.

Second question, we lost money in WesternGeco in 2003.

Do you foresee being able to make money at WesternGeco through this adjustment period?

And if you do envision making money during the entirety of this adjustment period, what adjustments are you making in order to do that?

So, let me deal with the last part first.

Okay?

So, we are cutting costs in WesternGeco, particularly variable costs around the last vessels and the land crews, proactively.

And we will actually layoff some vessels, not very many but we will lay some off.

There are plenty of differences between now and 2003.

The first is, 2003 was still quite shortly after we had merged Western Geophysical with Geco-Prakla.

And that the height of that, we had 28 boats and we gradually worked off those boats.

So, we were much more exposed then, than we are now in the marine market.

The second thing is and is this is going to be a question for the whole seismic industry not just for WesternGeco.

In 2000, in that period, everybody went out and shopped multiclient or speculative seismic on the basis of being able to borrow from the banks.

Now hopefully, this time around, the banks will have a good sense not to lend everybody the money to go and choose a lot of speculative seismic, which will encourage a much faster reduction of the marine fleet than we had in that cycle, Bill.

Right.

The other thing is, we had inherited a huge combined library from Western Geophysical and Geco-Prakla.

And today, our library is tiny.

The balance sheet value is $289 million, whereas I think, Simon, it was well over $1 billion.

No?

Close to $1 billion, yes

Close to $1 billion last time around.

But we are very hopeful that we will be able to make money through the cycle.

Okay.

And last one for me.

Given the strength of your balance sheet and given your past sort of proclamations that oil prices were to contract by a sufficient magnitude that you would be opportunistic from an M&A standpoint.

How savory is the environment now, with regard to acquisitions?

Are seller expectations reasonable or is the environment pretty sort of inflexible and you're not optimistic about doing something?

There are certain markets where we have made acquisitions in the past.

For example, Russia.

The state of credit markets is aspirations much more reasonable than they were even a couple months ago.

I think it will take time to work through the system in other places.

For example, in North America, I suspect that it's going to take another quarter or so before people really realize -- feel a little choked.

So, I would say expectations are adapting themselves.

They're not all there yet.

Okay.

Thank you very much.

And you next question comes from the line of Mike Urban from Deutsche Bank.

Please go ahead.

Thanks, good morning.

In Russia, specifically, a market that has hurt you of late, there's some view that that market is at least bottoming out.

One, would you agree with that?

And two, if so, is it going to stay at low levels for some period of time or is there any hope of a recovery there in the relatively near term?

I would agree that the Russian oil companies, because of the devaluation of the ruble against the dollar, have made huge ruble profits and will over the next few months.

I also think that the decline in Russian production is now becoming a recognized fact.

And without being in any way certain, because there are a lot of uncertainties still to be resolved, it is not impossible that towards the end of the year we see some mild recovery in western Siberian activity.

Okay.

That would be great, certainly relative to where the market has been.

Even this year, there's a lot of seasonal related effect in the first quarter Russia revenues.

Yes, absolutely.

And then, more a broad question.

And I have been kind of polling folks on this one, so interested in your view.

Does the level of the oil price matter so much as the stability?

So, at $50 oil in 2008 costs, maybe not but with costs coming down the way they are and if you have even stability at these levels, does that change the outlook of your customers just more from a confidence standpoint?

Well, obviously yes, it does change the confidence of the customers.

But I still think that, given the nature of many of the projects that our customers want to undertake, even with the cost reductions, $50 oil is going to be tough.

Okay.

That's all for me.

Thank you.

Thank you, Mike.

Your next question comes from the line of Bill Sanchez from Howard Weil.

Please go ahead.

Thanks.

Andrew, just a follow-up question on the pricing concessions.

Is this strictly something that you're only offering or giving up on the traditional delivery of your services?

Or are you seeing your clients wanting price relief on the existing IPM contracts you've signed, even though those are turnkey in nature?

I don't think we have seen any requests for price relief on an IPM project, Bill.

Okay.

And so.

And my colleagues are confirming that to me.

We have not.

And there's no -- is there an expectation for that here as we move through the year or no?

No.

I think that however the scope of the amount of IPM work that's going to be available could well be affected by budget cuts in some of the customers who use IPM.

Okay.

And just one follow up as it relates to Latin America.

Another quarter, really no start up costs impacting margins.

Just curious, as we move through '09 and the incremental Chicontepec award gets started, do we expect to see some margin pressure as a result of start ups?

Or are we pretty much entrenched there and we shouldn't expect to see anything detrimental to margins?

I think our footprint in Chicontepec now is sufficiently material that we can start the next ATG without any significant start up costs.

There maybe some of the unusual mobilization of rigs, that sort of thing.

But apart from that, no.

Okay.

Thank you, Andrew.

Your next question comes from the line of Brad Handler from Credit Suisse.

Please go ahead.

Thanks, good morning or good evening.

Can we come back to WesternGeco please and would you help us with a little bit more of some quarterly outlook?

So, for example, first question, if there's typically some seasonal weakness in the second quarter as boats transit north, is that something that we can expect to see again this year?

Yes, I think so, yes.

I'm not quite sure it will have such a dramatic effect as it did last year but we'll certainly see it again.

That makes sense.

But there's boats in transit for some summer work in the North Sea and that's --?

Yes.

And one of the things, which I've said before, I'll repeat it now because it's useful for everyone to know is; During the time that the fleet was flat out, we postponed dry docking boats, which the classification societies will let you do for a certain period of time.

But however, now that we'e in a different market, we are going to do the dry docks that are required for the certification of the boats.

So, it is transit and dry docking.

Hello?

I'm there and I'm just jotting it down.

Thank you.

Last quarter, you mentioned $1 billion in backlog in WesternGeco, expected to work off in '09.

$1.8 billion.

I think that was total and if my notes were -- I was looking back and it was $1 billion that you thought would be worked off in '09.

Right?

Probably, yes.

Sorry, total backlog was $1.8 billion, yes.

Okay.

So, is there any change to that 1 billion?

No, not really.

Okay.

So, nothing --?

Not apart from the part that was eaten up in Q1.

Right.

But there's no delays of projects per se.

No, we haven't seen -- we have some pressure but we've not seen any radical cancellations or requests for major price relief.

What we are seeing is customers are pushing surveys out.

In other words, the backlog may last longer than we originally thought.

But 2010, the remainder of that backlog might stretch out even longer.

It might stretch out a bit, yes.

Okay.

That's helpful.

And this last one, sticking within WesternGeco.

You mentioned a commercial project for coil shooting, which sounds interesting and we're aware of that technology a bit.

It's interesting you mentioned three technology categories and this one might have been considered in that third one, where pricing would not have -- you might have waited for a different market, just to take advantage of a tightness in boats.

Because you're actually loosening up supply effectively.

Right?

So it's an observation but if there's any color you can give us in coil shooting --?

Well, I think the color I have to give you is that we had already performed extensive field tests with customers of coil shooting, it would have been perhaps very difficult for us to take it off the market now.

That makes sense.

But is it an unfortunate truism that it's -- you do effectively add some capacity back into the market by --?

No, because we reduce the number of boats that are required to wide-azimuth or full-azimuth in shooting, yes but we are not giving away coil shooting.

That makes sense.

Okay.

All right.

Thanks very much, guys.

Your next question comes from the line of Michael LaMotte from J.P.

Morgan.

Please go ahead.

Thanks, I was able to squeeze back in.

A couple quick ones, Andrew.

Care to weigh in on Iraq and possible opportunities that may emerge over the next six to 12 months?

Well, I've been in the Middle East for the last eight days and everyone agrees that Iraq is going to happen but nobody I've met can agree on the exact timing.

So, we will be in a state of preparedness on the basis that we think something will happen in 2010 but what's going to happen and with whom, we really don't have a good view today, Michael.

Okay.

Thank you.

Your next question comes from the line of Pierre Conner from Capital One.

Please go ahead.

Hello, Andrew.

If we get back to Latin America, if we could.

A lot of moving parts on the margin issues.

You mentioned mix and offshore activity Brazil, which should be a positive, efficiency gains from rolling off the start-ups on some of your IPM.

But then, we have additional IPM start-ups and so, good performance in the quarter on margins.

And I know that you've kind of addressed this a little bit but the additional IPM start-ups, will those be -- will those tend to take margins down sequentially, as you have more past due in there?

So, let me deal with the margin question on IPM.

When projects are stable, margin improvement comes through performance.

And in Mexico, that means how many wells you deliver to PEMEX and PEMEX accepts per month.

It's a cycle.

Right?

So we, Q1, we did a lot better than Q4.

Probably because we were doing better in Burgos.

I suspect that -- and in the south, by the way.

As I said before, I don't anticipate large start up costs in Chicontepec.

And the only question in Chicontepec, is going to be; How quickly we can get to the same level of efficiency as we have in the current contract?

And then, in the rest of Latin America, we have lower activity in Peru/Colombia/Ecuador and Venezuela/Trinidad & Tobago.

Higher in Brazil.

Lower in Argentina.

It's a complete mix.

But the dominating factors upwards are Mexico and Brazil.

And the dominating factors downwards were Peru/Colombia/Ecuador and Venezuela/Trinidad & Tobago.

Okay.

And so, I think you answered the question.

The mix in Brazil, the improvement in that mix, should continue and there should be continued growth in -- I'm talking about even --?

Certainly, as long as I see IOC exploration continues, the mix should continue to improve.

Okay.

My follow-up is unrelated.

But relative to consolidation opportunities in North America and it seems like in this up cycle, we're muted on margin expansion through competition, particularly in pressure pumping.

But what is your appetite?

You mentioned a couple of quarters for some people to see a choke point.

So what is your appetite for consolidation for the sake of consolidation versus for technology gains, North America specifically?

We have never been -- we've not been and I don't think we would be doing acquisitions purely to consolidate market share.

There has to be something more to it.

We will, as I've said, before be opportunistic.

Okay.

Even with a different complexion of the growth this time from the expansion of all the other players, it still is your strategy?

Yes.

Okay.

Great.

Thank you, Andrew.

Next we'll go to the line of Robin Shoemaker from Citigroup.

Please go ahead.

Thank you.

Andrew, in comments you made at a recent conference, one of the areas that you cited as not economic at current oil prices is ultra deepwater.

And I wanted to ask you what, specifically -- where you make that cut off in terms of deepwater and ultra deepwater?

And what kind of oil price is required to make the ultra deepwater play more economic?

Well actually, I think that ultra deepwater is probably north of 8,000-foot of water or something like that.

Deep, 10,000.

So really, big, huge stuff where the rigs are very expensive.

And actually, I think that the oil price we need is, obviously, to make the projects economic but it's also to derisk the projects.

Because obviously, risk is much higher when you're doing that sort of work.

So, I think we are going to have to get back to the $70 to see a big resurgence of things like ultra deepwater or very remote Arctic for example.

Okay.

so just, you mentioned heavy oil, enhanced oil recovery, ultra deepwater, not profitable at current levels.

In the overall sense, how critical are all of those areas to Schlumberger's ultimate rebound from --?

Well, I think ultra deepwater, for us, would be icing on the cake.

I think enhanced oil recovery was a growth business and therefore, at the moment, doesn't play a big part in what we do but could play a big part in the future.

So to the extent that it restarted, it would provide a growth opportunity.

And heavy oil depends.

If it flows, we have a role to play.

If it doesn't flow naturally, then our role is somewhat reduced.

So heavy oil not being -- I think needing prices way north of where -- $70, particularly in Canada.

It's likely to take quite some considerable time but it does not have a huge effect on us.

And then in Russia, is this another factor in the slow or recovery that you expect there?

Is this mostly that kind of activity?

I'm talking about enhanced recovery.

I'm sorry.

Yes, the Russian -- sorry, when I said EOR, I was thinking more in terms of CO2 floods.

So, just the production enhancement type of activity in Russia, we think, will come back quite fast, eventually.

Okay.

Thank you.

And your final question today comes from the line of Dan Boyd from Goldman Sachs.

Please go ahead.

Thanks.

Andrew, I'd like to just follow up really quickly on North America and with margins.

I recognize there's a lot of uncertainty out there but could you just add some comments on the expectations for further margin declines?

And once their rig counts and activity flatten out, would you expect margins to flatten out out and potentially pick up as cost saving roll through or would you expect there to be a further decline at that time?

So firstly, I think that everyone is going to have a really rough time, in the second quarter, with North America margins, just on the basis of very, very low activity.

And actually, I think that cost reduction will allow the industry and will allow us to stabilize North America margins.

But it's going to take either removal of capacity or a fairly substantial increase in the rig count to give -- to move pricing power back the other way.

But you would expect a bottoming of margins in 2Q or potentially 3Q and then, they should be on the upward move in 4Q?

I don't think what's going to happen in North America this year.

And I will not know and I don't think I'll have any idea until we see some improvement in industrial demand for gas.

Okay.

Thanks.

On behalf of the Schlumberger management team, I would like to thank you for participating in today's call.

Greg will now provide the closing comments.

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