斯倫貝謝公司 (SLB) 2009 Q3 法說會逐字稿

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

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

Later, there will be a question and answer session and instructions will be given at that time.

(Operator Instructions) As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to the Vice President of Investor Relations, Mr.

Malcolm Theobald.

Please go ahead, sir.

Thank you.

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

Joining me for today's call are Andrew Gould, Chairman and Chief Executive Officer, and Simon Ayat, 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.

After the prepared statements, we will welcome your questions.

However, before we begin with the opening remarks, I would 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.

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

Thank you, Malcolm.

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

Third quarter income was $0.65 per share, excluding the $0.17 of charges we recorded last quarter, this is down $0.03 sequentially and down $0.60 compared to the same quarter of last year.

We continued to place a heavy focus on managing our cost base and have largely completed the head count reductions that we announced last quarter.

Turning to the business segments, oil field services third quarter revenue was flat sequentially, while western geco revenue decreased 17%.

Oil field services pretax operating income of $1 billion was the same as the prior quarter.

Oil field services margins improved slightly by 41 basis points sequentially to 21%.

As improvements in North America and Latin America were partially offset by slight declines in Europe CIS, Africa and the Middle East-Asia.

Overall, international margins in OSS were 24.7%.

By area, oil field services sequential pretax operating margin highlights were as follows.

North America improved by 240 basis points to 3.4% on the increased activity in Canada following the seasonal spring breakup.

This was partially offset by the impact of the decline in activity in US Gulf of Mexico due to operator caution during the hurricane season.

Latin America increased by 70 basis points to 18.3%, primarily as a result of efforts to restructure the cost base in the Venezuela, Trinidad and to Tobago geo market and the increased IPM activity in Mexico/Central America, these improvements were slightly offset by a decrease in Brazil due to startup costs for new contracts.

Europe/CIS/Africa margin was 23.7%, 53 basis points lower than last quarter, primarily due to lower activity levels and a less favorable revenue mix in the North Sea and west and South Africa geo markets.

These decreases were partially offset by the impact of higher revenues in the North Africa Geo market and the more favorable revenue mix in Russia.

Finally, Middle East/Asia fell by just 32 points to 31.7% as the impact of stronger activity in the Arabian Geo market and the favorable revenue mix in Indonesia were offset by effects of lower revenue in the East Asia, Qatar and Gulf Geo markets.

In addition, we have begun to see the effect of price concessions across the area.

At western geco, pretax income of $61 million reflected a decrease in pretax margins of 421 basis points to 13.1%.

This decrease was primarily due to lower multiclient sales.

Now turning to Schlumberger as a whole, the effective tax rate was 19.5%.

This was higher than last quarter excluding charges due to less favorable geographic mix of earnings.

As a reminder, the ETR is very sensitive to the geographic mix of earnings and as such, we may experience volatility on a quarterly basis.

Net debt was $660 million at the end of the quarter, as compared to $990 million at the end of Q2.

This improvement was driven by strong cash flows from operations.

We ended the quarter with $4.9 billion of cash and investments on hand.

In addition, $2.8 billion of committed debt facilities and commercial banks remained unused and were available at the end of September.

This compares to short-term debt of only $1.2 billion, which as a reminder, includes $320 million of our convertible debentures, which are likely to be converted to equity by the end of the second quarter next year.

Significant liquidity events during the quarter included $467 million of CapEx, $363 million of pension funding, and $276 million for acquisitions and minority interest investments.

Additionally, during the quarter, we were able to issue $450 million of notes due in 2013 at an interest rate of 3%.

The proceeds from this issuance will be used to refinance existing debt obligations.

Oil field services CapEx is still expected to approach $1.9 billion in 2009, while western geco is now expected to reach $490 million.

Our balance sheet remains very strong and continues to provide us with tremendous amount of financial flexibility.

And now I turn the conference over to Andrew.

Good morning, everybody.

Oil field services revenue was flat with the second quarter, as increases in both North and South America offset a further decline in the Middle East and Asia.

As a result of this, coupled with the implementation of cost cutting programs early in the year, overall margins increased slightly.

In terms of technology's revenue increases, IPM testing services and well services were primarily offset by revenue declines in completions, drilling and measurements and wire line.

Looking at the areas in detail, activity in North America was unchanged sequentially, but increased revenue in Canada from a muted post spring breakup recovery was offset by decreased revenue in the United States.

In the US Gulf of Mexico revenue was impacted by a slowdown in activity due to operator caution during the hurricane season and by a further decrease in shelf drilling activity as a result of the continued uneconomic natural gas equation.

On land, revenue decreased as an improvement in oil-related activity, was more than offset by pricing erosion in gas-related activity in the early part of the quarter.

Alaska also recorded lower revenue due to a slowdown in activity for seasonal rig maintenance and operator budget constraints.

Sequential growth in Latin America came from the finalization of certain contracts in the Venezuela, Trinidad and Tobago geo market that led to recognition of deferred revenue, in addition to revenue from current quarter activities related to those contracts.

Revenue also going to Mexico/Central America geo market from the startup of the AGG 3 contract and from increased activity on other IPM contracts.

Europe, CIS and Africa was flat with the second quarter, with a combination of positive currency movements across the area, higher testing services product sales in North Africa, and stronger IPM activity in Nigeria and the Gulf of Guinea, was offset by a number of factors.

These included lower revenue in western southern Africa from reduced activity that primarily effected well services, a decrease in the North Sea from lower rig count and pricing that mostly impacted drilling and measurement services, and a fall in revenue in Libya on reduced amount for testing services and oil services technology, as well as for completion products.

The North Sea revenue also decreased as a result of an incident in the Norwegian sector that resulted in a stimulation vessel being out of action for most of the quarter.

The vessel restarted operations in mid-September.

As I mentioned earlier, revenue fell sequentially in the Middle East and Asia.

In East Asia, completion of several expiration-related campaigns led to lower demand for wire line testing services and well services.

In Qatar, revenue decreased primarily due to the completion of several large offshore development projects that resulted in reduced demand for oil technologies.

In the gulf Geo market, revenue fell on lower rig count that led to a decrease in drilling and measurements and wire line services.

The East Mediterranean revenue dropped as a result of lower land activity that reduced demand for well services technology.

However, these decreases were partially offset by an increase in the Arabian Geo market revenue on strong gas-related activity that resulted in higher demand for well services and testing services.

Weaker pricing also contributed to lower revenue.

At western geco, sequential revenue declines were due to lower multi client revenues in the quarter and the rollover of marine contracts from high priced legacy backlog into newer lower priced activity.

The combination resulted in lower revenue and margins.

Recent contract awards demonstrate the value of Schlumberger's technology leadership and operational differentiation.

These included an award in Denmark for most oil and gas for open hole wire line under high pressure, high temperature conditions.

In Russia for Arctic gas for a series of services north of the Arctic Circle.

In West Africa for sub-sea completion installations, particularly in Equatorial Guinea and in the North Sea for Apache for electrical submersible pump systems based on previous excellent service delivery.

Two events during the quarter also demonstrated our continuing investment to support operations in growing regions.

First, in Saudi Arabia, we announced the opening of a new reservoir completions manufacturing center in the Damam industrial city.

Representing an investment of $25 million, the center houses a team of design and manufacturing engineers specialized in the production of downhole reservoir completions equipment.

The center also provides a collaborative environment in which joint oil company and Schlumberger teams can develop and manufacture completion solutions for application across Saudi Arabia and the greater Middle East.

The new center represents a further step in our infrastructure in the area, which includes the (inaudible) research center opened in 2006 and the new oil field services base in Iran commissioned in November 2008.

Second, we also announced the signing of a joint cooperation agreement with the university (inaudible) Rio de Janeiro to build a key international research center on the university's campus.

The center will focus on research and development activities in deep water presalt environments with emphasis on the development of geo science software for the expiration and production center, new technologies to meet reservoir challenges in presalt environments and the creation of a geophysical processing and interpretation center of excellence covering time lapse, seismic and complying to electromagnetic and seismic measurements.

Our outlook for the remainder of 2009 assumes a continued modest recovery in North American gas drilling, but no significant improvement in service pricing.

Overseas, while rig activity is stabilizing, seasonal factors, together with pricing concessions made in the first half of the year that are still being implemented, leave some risk of further small revenue declines.

Western geco's improvement will depend on the level of fourth quarter multiclient sales.

Looking further, we said in our second quarter outlook the shape of the economic recovery beyond 2009 and the subsequent recovery in oil and gas demand remained the determining factors for future activity increases.

Since then, indications of inventory rebuilding across many industries, together with help from government stimuli have helped to strengthen demand for both oil and gas.

While uncertainties remain, notably the transition from current stimuli to industrial and consumer demand and the extent to which their recovery will be limited by high unemployment, the demand for oil and gas will increase somewhat over the coming months.

As a result, we see continuing stabilization of activity around the world.

However, this will not be uniform across either geographies or for services by commodity type.

We consider that world gas markets are oversupplied and will remain so for sometime, absent a strong recovery in industrial demand.

Both new LNG capacity coming onstream, as well as ample storage and pent-up supply in North America will serve to keep prices and activity low.

In North America, we feel the current slight recovery in drilling to be fragile and not likely to significantly improve service activity and pricing until late 2010.

For oil, the current robust price will lead operators to maintain their spending levels and this, coupled with the lowering of their cost structures, may produce some modest increases in activity.

We see continued strength in deep water areas and some increases in selected land markets.

We also feel that a more robust commodity price will lead to some increase in seismic activity, although new marine capacity will continue to depress pricing.

The worst, providing the economy continues to show signs of recovery, is behind us.

And I'll now hand the call over to Malcolm.

Thank you, Andrew.

We will now open the call for questions.

Great, thank you, sir.

(Operator Instructions) Our first question comes from the line of Bill Herbert with Simmons & Company.

Please proceed.

Thanks.

Good morning.

Andrew, if you could provide us with some perspective if you will on two markets, one, Mexico, and clearly a lot being discussed in the press, and in a period of let's say contemplation with regard to what do you think the likely path -- takes with regard to -- overall activity in 2010?

And then secondly, with regard to Cikampek, what do you think the likely path Pemex takes with regard to Cikampek and overall activity in 2010?

And then secondly with regard to Russia, what are your expectations there going forward?

Let me answer the Russia first, because that's easier.

We think there will be a fairly substantial increase in feet drilled, which is the measure we use to judge activity in Russia.

And fairly substantial means what?

High double-digit, from 10% onwards.

Okay, thank you.

And -- but pricing will mean that the activity, the actual revenue translation of that will probably be about half.

Okay.

Now, in terms of Mexico, you -- everyone has read as much as I've read about the questions that are being asked by the new national hydrocarbon authority and by the congress.

Yes.

So I think there is absolutely no doubt that Pemex will come with a revised strategy for Cikampek I do not know what that strategy will be, and if I did, I don't think I would be at liberty to say so on this call.

But I think that one should assume that when there's that amount of noise, and as you probably know, Bill, there are articles every day in the Mexican press about this.

Yes.

Pemex will have to look at their strategy.

Okay.

And then secondly, with regard to seismic, you're waxing a bit more optimistic with activity, and sensibly so, given what's happening with oil prices.

Can you elaborate a little bit in terms of what you're hearing from your customers, tenders that you're seeing, and does your modestly improved outlook for seismic encompass both contract and multiclient?

So the answer to the last part is yes.

Okay.

Contract and multiclient.

What we're seeing in contract is the fact that, as you know, operators compile large portfolios of new licenses during the last four or five years, and there are people who are wanting to do contract seismic because they have commitments and people who want to do contract seismic because they think they can take opportunity of much lower pricing to obtain seismic vessels or crews.

And in terms of multiclient, it's always a poker game until the end of the year, but I agree with you that higher prices should give a fairly satisfactory level of spend on multiclient.

Okay, and I will slip one quick one in here.

Equity income was up pretty sharply quarter on quarter.

Do we know what drove that?

Simon?

The equity income, we have two things in that line.

We have the net interest expense and then equity from the minority shareholder.

And this is just the usual thing.

No, I'm not, I'm not really -- I don't have the detail for the quarter to quarter.

I'll look to -- through it and probably by the end of the call we can give you color on it.

Good, thank you very much.

Great, thank you.

And our next question comes from the line of Dan Boyd with Goldman Sachs.

Please go ahead.

Hi, good morning.

Good morning, Dan.

Andrew, can you talk about the mix this quarter, especially in the Middle East and Asia, where the mix seemed to have gone against you with less exploration, as well as the completion of a few offshore contracts.

Yet margins actually held up pretty well.

What does this say about margins going forward?

And as the mix potentially improves?

Well, if I can deal with the mix question first, Dan, our position in Middle East,/Asia in exploration and development means that when rigs go down, we suffer disproportionately perhaps compared to a lot of our competitors because of our presence in exploration and offshore development.

And in terms of pricing, the Middle East has done a fantastic job of pulling in their costs.

So, despite the sort of fairly substantial drop in offshore rig count that they have had, particularly for offshore development in Qatar, they have done a really good job of managing their cost base.

Okay, but I would assume that the outlook for margins here is more positive than it was last quarter?

It will depend to some extent on how the rig mix evolves, but generally it should be, it should going forward be, start to be a bit better, the rig mix, okay?

Okay.

Just one follow-up, and it's related to the last time you talked, last call you said $70 oil at the end of the year was a threshold that E&Ps were looking for to take their budgets higher, were now at 80.

So could you give some guess at what you would expect international spending to be up next year, and what markets you might expect to be the strongest?

Well, that's a long question.

But let me deal with the first part, okay.

So the first part, don't forget, it's not the spot price of oil that encourages my customers to change their spending.

It's the notion that an increase in the price has reached some level of stability.

So last quarter I talked about 70 to 75.

And I think today most of my customers are still budgeting slightly below that.

And I think that if they gained confidence in probably in the first half of next year, that this price is sustainable, then they will increase spending.

But today I think the increases we're seeing are in activity, based on their capacity to obtain more activity at lower prices within their existing budgets.

Yes, obviously $80 oil will eventually, if it stays at $80 will eventually lead them to increase their budgets.

I don't think they are ready to make that call yet.

And I'll leave the other one, if I may, Dan.

Okay, thanks.

I appreciate it.

I'll turn it back over.

Thank you, and our next question comes from the line of Alan Laws with BMO Capital Markets.

Please go ahead.

Good morning.

Yes, good morning, Alan.

The very first question I have is sort of a follow-up to what you've already been asked, but I see a number of projects were completed in your Middle East/Asia region.

I also wanted to get your thoughts on the recent reactivation of 7 of the 35 halted OPEC projects and how this might impact the sector of suddenly all of them plus maybe other NOC projects around the world were green lighted in 2010.

Would this be--?

Sorry 7 of 35 what projects, Alan?

I missed it, sorry.

Of the OPEC projects delayed at the beginning of this year have been re-greenlighted.

In oil or gas?

I think they are across the board.

They weren't specific in their release.

I mean, the sustained, or if you like the moving forward of projects in Middle East OPEC for gas we're seeing very clearly.

And for oil, no, I haven't seen any major reactivation of a major project so far.

But obviously, if prices get sustained at these levels, some members of OPEC, and I think -- it's very important to say some, will increase their activity.

But not the people who have large surface capacity.

Okay.

Follow-up question, that would be how comfortable do you think the world should be with OPEC 6 million barrels spare capacity?

Comfortable in what sense, Alan, sorry?

Comfortable in it actually existing or it being under a level of decline while sitting there?

I think that the capacity in the countries where it exists is not going to be subject to an extremely fast decline.

The decline is more in other places than in the places where they have the surface capacity.

That's what I meant in terms of it being the cushion.

I think the cushion is fairly intact but that doesn't mean that reduced investment in other places will not eat into the overall production capacity of OPEC.

Okay, and the other follow-up I had was on the seismic side.

Most people think of seismic as kind of rising in late cycle.

And given the state of oil and gas resources and demand and not sure -- we ended kind of on a demand side, not on a supply side.

I was wondering if you could provide some thoughts on the timing and magnitude of a seismic recovery if we kind of grind higher from here?

Well, I think that the seismic activity is even more sensitive to the absolute level of the oil price than the rest of oil field services, because, seismic is, particularly exploration seismic is a cash expense.

Doesn't bring any income.

So I would say the strength of the recovery in seismic is really going to depend very much on the absolute level of the oil price going forward, but as I said earlier, the capacity of the seismic industry to capitalize on that is going to be somewhat limited for a period of time by the new marine capacity that's coming into the market.

Excellent.

I appreciate it.

Thank you.

I'll turn it back.

Our next question comes from Dan Pickering with Tudor Pickering Holt.

Please go ahead.

Good morning, Dan.

Andrew, obviously a lot of moving pieces.

If we just would assume that as we step forward into Q1, Q4 and Q1 that revenues were flat, I'm trying to understand the cost-cutting impact.

I know we're not doing more, but is there still some follow-on impact to be felt from the cost cuts that you've done already and kind of could you help us quantify that?

I actually think that the impact of cost cutting in the next six months could be outweighed by the concessions we've made in price.

Actually, the balance is so fine, Dan, I don't know which way it's going to go.

Okay.

So it sounds like basically from here, margins would be pretty flattish, if activity was flattish.

That's what we're hoping for, but as I say, it's very difficult across the spread of Schlumberger, particularly in the Eastern hemisphere, to judge whether or not the pricing concessions we have made are going to outweigh the cost cutting that we're doing and today I would be a little bit pessimistic on that, that price would overrule cost to a certain extent.

That kind of plays into your discussion around potentially a little bit of further margin erosion?

Yes, yes.

Okay.

Second question, you are -- you're cash flowing significant amount down here kind of on the bottom, if you will, and help us understand next year, maybe direction of your CapEx budget, and are there any other big requirements for cash next year?

I mean we've funded a bunch of pension this quarter.

Are there any other big lumps of money we need to spend next year?

No, I think that you will see CapEx increase fairly substantially next year, if only because the number of deep water rigs coming on is higher next year than it is this year.

But I don't think we have -- we actually -- we have made pension contributions this year of around about $1 billion.

I don't think we'll be doing that again next year.

No, to confirm, as we said earlier in the year, we, we dedicated a big part of our cash flow to refund our pensions and we did so.

We don't have that kind of an expense next year.

Okay.

For clarification, Andrew, you said that your CapEx will be up a bunch next year because of deep water?

Schlumberger's CapEx will be up, yes.

So the $1.9 billion in oil field CapEx will go higher?

I think so, yes.

Okay, thank you.

Thanks, and our next question comes from the line of Kurt Hallead with RBC Capital Markets.

Please go ahead.

Good morning.

Good morning, Kurt.

Andrew, give you kind of an open-ended question and let you kind of run with it.

Over the past year, I think a lot of us were trying to benchmark the downturn relative to prior cycle periods and here we are in the early stages of stabilization.

Wonder if you can give us your perspective on how you would benchmark recovery, maybe in the context of coming off the lows of '99 or 2001?

And if you can give us some breakdown between how you think it might play out internationally in that context, as well as in North America?

So first I think that everyone needs to understand that the, -- the state of the general economy in this downturn is much worse even than it was in '86, and bears no comparison to '99 or 2001.

And therefore, there is this underlying question that everybody needs to ask themselves about the month.

And if you remember, if you look back, the collapse in 1986 was due to a huge collapse in the demand for oil in the years before 1986.

So, there is this underlying question, which is still fundamental to the oil and gas business, is what is happening to demand?

And we have seen some encouraging signs, but we're not out of, we're not back into high demand growth.

And in fact, if you looked at presentations I've made recently or people are making recently, the assumption on world GDP is absolutely fundamental to where demand is going to go.

And if it's 3% or 4% or 5%, the amount of demand for oil, particularly is going to be substantially different.

So that's the first thing.

The second thing is that unlike 1986 for oil, there is an overhang of 6 million or 7 million barrels, whatever it, is but it is nothing like the overhang that existed in 1986 and as you know, the ability of the industry to renew the production base is a lot less flexible than it was in 1986.

So in terms of the need to sustain activity, the -- any growth in demand, coupled with a relatively modest overhang of production will mean that the -- it will -- the demand will act as an accelerator on investment.

So, that's why I made all these remarks in my comments about the level of the general investment.

So for oil, there is a fundamental difference in the economy and there's a fundamental difference in the supply situation.

Now, for gas, I think we're in a new world.

I'm not -- I do not know how this world is going to work out.

Why are we in a new world?

We're in a new world firstly because there's a huge amount of LNG that's coming onstream and secondly, because we have unlocked a new source of domestic gas production in the United States, which means that , we can turn the taps on gas very fast.

And I think that it is significant and it's really interesting to watch how this is going to play out, but the ratio of gas to oil prices has not been so wide for the last 10 years.

And this can have all sorts of implications on demand, but it can also have all sorts of implications on investment because don't forget in Europe gas prices are indexed to oil.

Sorry that's a very rambling answer, but, you asked for

So in overall context of some of the things you put here, seems like there has been -- I don't want to put words in your mouth, but it seems like there's been a pretty significant shift in tone because think of our call in the second quarter, there was some concerns about rig activity actually in international markets declining through parts of 2010.

Now, if I understand and interpret your comments correctly, looks like international rig count looks like it's going to stabilize here in the fourth quarter, with the potential improvement going out into next year.

Let me repeat what I said to the previous question.

We are -- I don't think our customers have seen this high an oil price stable for long enough for them to change their investment plans yet.

But if it stays stable at these higher levels for the next six months, they will change their plans.

And they will change them quickly enough to effect the 2010--?

Back end of 2010, yes.

Okay, thanks.

Thanks, Andrew.

Great, thank you.

And our next question comes from the line of Geoff Kieburtz with Weeden, please go ahead.

A couple follow-ups to prior questions.

You described your thoughts about margins over the next six months.

Can you push it out to the next 15 months?

What happens afterwards?

Do you think costs measurements -- I mean I understand just from what you've said, the activity levels are a little bit unclear, but are you still thinking international margins come down by some multiple 100 basis points?

We never said they would.

Okay.

The only thing I said was that we didn't see the same levels of declines as other companies have been putting out.

Okay.

Perhaps misunderstood your comments.

And I repeat that, Geoff.

Okay, all right.

So generally speaking, margins look kind of teetering on the edge, maybe down a little bit, maybe up a little bit, and that -- you would apply that to throughout 2010?

At the moment, yes.

Okay, all right.

On the cycle question, again, maybe I misremember here, but I recall you sometime ago speculating about the cycles in the industry may be changing and becoming shorter and sharper.

Did I misremember, or--?

No, you're absolutely correct, and I think that's exactly what's, what we are about -- we may well experience, provided demand holds up for oil.

Right.

I think the equation has changed for gas, partly because LNG and partly because of the capacity of the industry to unlock unconventional sources of gas.

On the cycle question, should we be prepared for those kind of violent cycles to repeat themselves, in your mind?

Well, it's going to depend on the economy, Geoff.

Okay.

Really, the sensitivity of oil demand to 1% of oil GDP is huge.

So it really depends at what point economic growth accelerates, and to what extent it accelerates.

And one of the factors that has changed in the last quarter which is giving us all a bit more confidence is that GDP revisions for 2010, and even 2009 have been consistently upwards.

Right.

Since July.

And what is the significance to Schlumberger of your view that natural gas markets are structurally oversupplied?

That I think North American gas activity will recover to a certain extent at some stage, but the sanctioning of large new LNG developments overseas is likely to go a bit slower than maybe we thought a year ago.

Okay.

A lot of them will get done anyway because they, we're talking 25-year projects.

But there may be some hesitation to sanction some of them until there is a clearer view on gas.

Now, if demand for gas evolves, as all the forecasting agencies says it will, this surplus gets reabsorbed by about 2013 or 2014.

This is good or bad for Schlumberger?

It's -- I mean it's, it's anything that reduces activity is not good for Schlumberger.

Okay.

But I would say it's reasonably neutral.

Okay.

Thanks very much.

Great, thank you.

And our next question comes from the line of Jim Crandall with Barclays.

Please go ahead.

Good morning.

Yes, Jim.

Andrew, my questions are about Iraq and two-part.

Number one, are you happy where you are today in terms of your on the ground presence and infrastructure, given how you see the business unfolding?

And secondly, about Iraq.

I know we may differ on this, but if there were to be several multihundred million dollar orders in Iraq next year, would Schlumberger be equipped to service them?

Well, we, as I said before, we are currently putting an infrastructure in place.

I'm very happy with the progress of putting the infrastructure in place, and if several multihundred million dollar bids emerge, we would be in a position to answer them, yes.

Okay.

Secondly, Andrew, I think it was one of your competitors on their call talked about how competitive the Brazilian market had become.

Compared with other international markets, how do you see the sort of erosion in pricing on tenders in Brazil?

And how do you see it going from here?

We haven't -- I don't think we've noticed any significant difference in the level of competition in Brazil compared to anywhere else.

I think, the Brazilians are extremely good at procurement, so I'm sure the pressure will continue.

But I don't think it's any more competitive than any other major offshore market, Jim.

Okay.

Are you talking about something specific or?

No, I was just talking I think in regards to a conference call by a company that earlier had been done.

I think they were talking in general that they thought that tenders had had become more competitive out there and just wondering what you had observed relative to that.

No, I think -- I don't think we've seen any dramatic increase in the level of competitiveness.

Brazil's always been extremely competitive.

And obviously with the current interest there is in the country, it is.

I don't think it's something exceptional.

Okay, and Andrew, now that the Inteliserve deal has been completed with National Oilwell, could you give your views on what you think the commercial potential is of that technology and how quickly it will unfold?

Well, I think the first commercial potential of it is for it to arrive at the same level as reliability, as mud pulse telemetry which it -- almost there but not quite.

And the second is going to be much longer term.

It's the capacity to develop new measurements in stream, particularly for drilling operation, that will profit from the fact that you have not simply an uplink that's very fast, but perhaps even more important, a downlink that's very fast.

Because when we transmit commands today by mud pulse telemetry it takes a long time to get to the tool because they have to go all the way down the mud column.

But I wouldn't look for a substantial revenue effect in the first couple of years.

I mean it strikes me, Andrew, and tell me if you disagree, but this strikes me as over intermediate to longer term time horizon, as something that could be hugely significant for Schlumberger.

Otherwise we would not have gone into the joint venture, but yes, the capacity to communicate at those speeds and the capacity to extend the range of what our senses can do because you have this high bandwidth not only at the bottom of the hole, but also all the way up the hole could be, could be a very significant development.

Great.

Okay, thank you.

Great, thanks.

And our next question then comes from the line of Ole Slorer from Morgan Stanley.

Please go ahead.

Thank you.

Andrew, you mentioned pricing pressure in seismic.

I presume you refer to contract seismic.

Are you offering any kind of discounts at the moment on multiclients?

No, nothing significant I don't think.

I mean, discounts in multiclient depend on two things.

They firstly depend on which part of the library you are trying to market, if it's very old, totally amortized part of the library that you already saw 15 times, you may be prepared to discount it.

If it's a new high value wire survey that you've spent a lot of money doing advanced processing on, you're unlikely to discount it, and you're successful, depending on whether you shot the server in the right place.

The overlay of EM into multiclient library, do you think that's going to be much impact on pricing emergence on multiclient relative to your competitors?

Well, I certainly think that some of the images we can produce and are producing in some places through overlaying not just EM, but EM and other measurements on our multiclient library give the value of the data a huge uplift.

Are you able to overlay all the data with EM and then get an uplift in the value, is that--?

No, it depends.

We will do that selectively where we think the market will, will buy it.

And then second question on exploration just amongst your customers in general, most discretionary part of the budget, do you get a sense that the people have been underspending in the first half of the year relative to the full year exploration budgets?

I think so.

I mean we have seen a very clear pickup in the number of inquiries or the number of requests to tender.

So obviously I think the purse strings have been let loose a little bit.

As we move towards the end of this year and the beginning of next year.

Okay.

Interesting to see what it can do in the fourth quarter there, but thank you very much.

Thank you.

Great, thank you.

And our next question then comes from the line of Mike Urban with Deutsche Bank.

Please go ahead.

Thanks, good morning.

Couple of mentions of Venezuela in the press release here this morning.

I guess you also said you've gotten the cost structure in line, but also looked like a couple of instances of activity including I guess the quote, close cooperation with Petavesa, what's the general outlook in that market?

It's been quiet for obvious reasons for a while.

Are you seeing a pickup there?

Are you wading back in?

Is Petavesa wading back into the market and most importantly, are you getting paid for it?

So I would say that the progress we've made on receivables is extremely satisfactory.

I think Petavesa is coming back into the market for services gradually.

I don't think it will have a startling effect in 2009 and probably more than a lot of markets, it will be extremely sensitive to what the oil prices, as we go forward.

But certainly, yes, there's more interest to Venezuela that we've seen for sometime.

And then I guess the other market that's been troublesome in Latin America has been Argentina.

Any, any signs of progress there?

Not a great -- not from our standpoint, not a great deal, no.

Okay.

That's all for me.

My other questions were answered.

Thanks.

Thank you.

And we have a question from the line of Mark Brown with Pritchard Capital.

Please go ahead.

Just in terms of fracturing in North America, do you have any comments on where you see pricing going and where you see capacity going overall?

Well, I think that as we've said in our press release, that pricing has probably buttoned late in the third quarter.

I don't think we'll see any substantial increase until the second half of next year, and I don't -- a lot of the capacity I think will overhang the market for another year and a half or so, but, this, these large fracks eat up capacity fairly fast, and actually increase the cost of maintaining the equipment fairly dramatically.

So, there is a possibility, though it's only a possibility that we actually work down the backlog of pumps or frack equipment, perhaps faster than we've done in previous upturns, but I still think any significant tightening of the market is towards the end of next year.

Okay, and in North America, one of the few markets where you don't have the largest market share for oil field services in general, and at the same time your commentary is somewhat guarded in terms of the speed of a recovery.

Is this a market that you see yourself focusing on in terms of taking advantage of the high service intensity going forward?

I don't think we have any plans, inclination, desire or anything else to decrease our position in North America.

On the contrary, I think that if woe were able to do it at a reasonable capital cost, we would increase it, because it's an extremely important market in the way that both technology and operational capacity develops and we would always want to be a player.

Okay.

My final question is on the regulations that have been proposed on fracturing and the ingredients used.

What is your opinion on what the probability of those regulations getting put in place and could you comment on your coming out to propose a proactive disclosure of the chemicals used in fracturing?

Well, I think that like everything else that surrounds this sort of issue, where there is a public concern which reaches the regulators, then eventually some form of regulation is going to emerge.

And therefore, it seemed to us very important to be part of the discussion rather than to, if you like, not cooperate in the, in the process of establishing what a regulation might be.

Now, what the final form of it will take, I actually don't think we know yet.

But I'm pretty sure that there will be some form of new regulation in order to satisfy the authorities and the public's desire to know that what is being done is safe.

And that seems to me a perfectly natural thing to want.

Thank you very much.

Thanks.

And our next question then comes from the line of Robin Schumacher with Citigroup.

Please go ahead.

Thank you.

Andrew, I was wondering one simple question, on the $276 million of acquisition spending in the third quarter, was there anything other than Inteliserve of significance there?.

No, that would have been very small.

There were a couple things, but they were very small.

Minority interest, small ones.

Okay, very small.

Then shifting to North America again, one further question.

In terms of the prospects for recovery and pricing, we all know if the rig count increases, there's really no magic level of the rig count at which you start to have pricing power.

But if you're sized today for the market in North America and the rig count begins to increase, activity picks up and you have to go and hire and begin to incur some expenses in meeting that higher level of demand, is there a potential to get pricing improvement at that point, or are we in your view -- is it further out until we get to a substantially higher level of activity in North America?

Well, I think it depends very much on what type of activity it is, if it's a continuation of what we've seen in Haynesville, for example, where actually this type of service and the complexity and the intensity is quite high, then I think pricing will react quite fast because there will be a limited field of players that the customers will want to use.

If it's just general spread across the board, then it will obviously take much longer.

And your expectation is the type of recovery, would it focus most likely on these high service intensive shale plays like the Haynesville and Marcellus?

Yes, I do.

I think that's -- because I think that's where the highest initial production index is coming and will continue to come, and until gas prices get much higher, you're not going to have a return to the shelf in the Gulf of Mexico and things like that.

Right, right.

All right, thank you.

Thanks, and our next question comes from the line of Pierre Conner with Capital One Southcoast please go ahead.

Good morning, Andrew.

Good morning.

Andrew, I wanted to just ask a little bit more about Latin American margins.

Was there material impact of recognizing that deferred revenue on the margins in the quarter?

No.

Okay.

So further, and kind of like Jeff, I may have misheard, but I know we were kind of thinking that as IPM revenues grew, that because of the pass-through component, it would put some pressure on the margin in that area, so are we in a position where the incremental activity spread across is expanding margins?

That's what happened in Latin America in this quarter, yes.

So your expectation there, while your comments earlier about pricing remain, that even if you were to see an increase, that is not going to negatively impact the margins?

No.

All right.

Thank you.

But I would remind you of what I said, that we don't know what Pemex is going to do at this stage of the game.

Pemex is by far the largest IPM customer in South America, not the only one, but the largest.

Okay.

Shifting to seismic and, the comments of potentially commodity prices driving incremental activity, but mixing that with the incremental capacity in marine, are we going to -- we might get activity, but would you push out any -- now just contract, not multiclient, and that swings the number, what is your commentary on margin on contract?

Further out?

Higher utilization will help margin, even from where it is now, given the fact that, the extent to which prices have declined.

But obviously we don't have the same leverage effect that we had when we were at full capacity or when marine seismic was at full capacity.

So there would be some effect, but actually I think for a period of time fairly minimal.

Yes.

And would you give us the same kind of perspective on western geco CapEx?

I think earlier we were talking about substantial CapEx that was more oil field services I suppose.

What's directionally 2010?

Well, don't forget, we're still commissioning some eastern eco boats.

So I mean I don't know yet, but I'm going to guess that it will be flat with 2009.

Okay, great.

Thank you very much.

Great, thank you.

And our next question comes from the line of Brad Handler with Credit Suisse.

Please go ahead.

Thanks, good morning.

Good morning.

I guess we're -- a few of us were trying to tease you out a little on the margin, on the margin guess for North America, so maybe I'll just ask that directly.

Your -- perhaps if you're expecting a little bit of favorable mix just in terms of the exposure to the shale plays and presumably you're taking share there, is it reasonable in your, in your outlook to think that you are looking for some decent incremental margins and some margins to continue--?

Well, I think the -- you have to remember that the -- our presence in the Gulf of Mexico deep water is extremely significant to our margin performance in North America.

And to the extent that we had the hurricane precautionary measures in the third quarter, the volume of work in the Gulf of Mexico declined considerably, and all things being equal is likely to increase considerably in the fourth quarter, so that can have a positive effect on the overall North American margin and on land, we think we saw the bottom.

On the other hand, we think the recovery in Canada is going to be fairly limited to what it's been in the past, but if you're asking the question, overall, yes, we would say there would be some improvement in margins in North America going forward.

But in volume terms, don't forget US land is by far the largest volume and therefore, until that pricing moves, they are not going to be hugely significant.

That makes sense, but I guess you, again, whether we define it as just working the Haynesville or perhaps you're optimistic about product mix, that helps the US land outlook, too, right?

Yes.

Okay.

One follow-up on Latin America, then, you referenced start-up costs in Brazil.

Can you sort of help us calibrate how significant that is, presumably the outlook for the fourth quarter?

It's quite significant, because if you remember we announced in our second quarter press release that we have been awarded an IPM contract to manage initially two and later four semi submersibles for a Brazilian company called OGX, so mobilizing semis and startups on that size of project is quite a significant number.

That makes sense.

Sounds like that may actually be going to five rigs?

I -- you've heard that before me.

I don't know that yet.

Okay, right, but in terms of our thinking about the fourth quarter margin and it's reasonable to assume that there's a bit of pressure that's been relieved in North America that way.

Absent any immediate reaction in Mexico, yes.

Okay, makes sense.

Thank you very much.

Thank you.

And our last question this morning comes from the line of [James Carroll] with [Lumis Sales].

Please go ahead.

Thank you.

Just two brief questions, Andrew.

Two years ago I think at the last analyst meeting, you talked about a couple new products an in situ fluid analyzer and in situ coring tool.

The coring tool had a unique advantage over existing technology in that it would do quick turnaround of full size cores, ready for lab measurement.

I'm curious as to, we haven't heard anything about it at all.

Can you give us a little update on what's going on there?

So I can tell you that the in situ fluid tool is doing extremely well.

And the coring tool is still in field tests.

Okay.

Still in field test.

And the last question, can you just give us some idea about the speed and likelihood of North American shale, drilling and completion technology as it relates to reservoir characterization and enhancement, moving into the international markets.

Where might it go?

How soon might it go there?

So I mean I think that's quite a complex answer, Jim.

First, it will go there, but secondly, it is no accident that the shale gas was first exploited in Texas and Louisiana, because in order to do that, you need a huge amount of oil field service infrastructure.

And in a lot of places in the world, that infrastructure just doesn't exist, which obviously has cost implications for the initial period in which you produce that shale gas.

The second thing is, if you look at a Google map of Dallas/Fort Worth and you look at the well density, there are a lot of places in the world, for example, in Germany would be a good example, where that just would not be permitted.

So there are going to have to be some modification of the exploitation method for it to really fit into a lot of other places around the world.

If I can give you one example of a place where there's no infrastructure, Pakistan has a huge amount of shale gas, but, there is not the infrastructure in Pakistan to exploit it today.

So my view is it will happen.

It will be more expensive, and it will probably take a little bit longer than most people, than a lot of people seem to be prognosticating at this point in time.

Thank you.

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

Let me clarify the equity position in the quarter.

So--.

This is a question from Bill Herbert earlier on, so the net equity did improve quarter on quarter.

It is really across the board from the different affiliated company, investments that we have.

But notably the Arabian Drilling Company, which is a drilling joint venture we have in Saudi Arabia.

I just wanted to clarify.

Okay.

Thank you very much.

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