斯倫貝謝公司 (SLB) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Schlumberger Limited earnings conference call.

At this time all participants are in a listen only mode.

Later we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr.

Malcolm Theobald.

Please go ahead.

Thank you, Greg.

Good morning and welcome to the Schlumberger Limited first quarter 2010 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 results, and his comments on the outlook, Simon will first review the quarter's financial results.

After the prepared statements, we will welcome your questions.

Before we begin with the opening 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 Web site or upon request.

And now, I will turn the call over to Simon.

Thank you, Malcolm.

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

Excluding charges, first quarter income was $0.62 per share.

This is down $0.05 sequentially and down $0.16 compared to the same quarter of last year.

During the quarter we recorded $75 million or $0.06 of charges.

$40 million related to the reduction of future tax reductions relating to our retiree medical plan as a result of the passage during the quarter of the Patient Protection and Affordable Care Act in the US.

We also recorded $35 million of merger-related transaction costs, pertaining to the Smith and Geoservices transactions.

We anticipate that we will continue to incur merger and integration related costs.

These amounts will be most significant in the quarter that the Smith transaction closes, and the quarters immediately following the merger.

We will continue to separately identify these charges for you.

Turning to the business segments, Oilfield Services first quarter revenue decreased 1% sequentially, while WesternGeco revenue decreased 14%.

The sequential decline in both revenue and earnings per share can be primarily attributed to severe winter weather that hampered activity particularly in Russia, combined with the absence of the search of multi client SIS software and other product sales that we experienced in the Q4.

These declines were partially offset by an improved performance in North America.

Oilfield Services pretax operating income of $969 million decreased 4% compared to the prior quarter.

Oilfield Services margins slipped by 46 basis points sequentially to 19% as improvements in North America were offset by a decline in Europe, CIS Africa.

Overall international margins in OFS were 22.3%.

By area, Oilfield Services sequential pretax operating margin highlights were as follows.

North America improved by 594 basis points to 8% primarily due to an increase in activity across the area, supplemented by some pricing improvements for well stimulation services.

Latin America increased by 174 basis points to 17.5% mostly as a result of the more favorable revenue mix in Mexico, Central America, and the effect of the currency devaluation in Venezuela.

Europe, CIS, Africa margin was 18.1%, 353 basis points lower principally due to lower activity in Russia and the North Sea and lower testing services, equipment and SIS software sales.

Finally, Middle East Asia margin declined slightly by 136 basis points to 31% primarily due to less favorable revenue mix in the Arabian Gulf, Qatar and Indonesia geo-markets.

and the absence of the year end artificial lift product and SIS software sales into Q4.

At WesternGeco pretax income of $67 million reflected the decrease in pretax margin of 659 basis points to 14.3%.

This decrease was largely attributable to the excess of the strong year-end multi client sales that we experienced last quarter.

Now, turning to Schlumberger as a whole, the effective tax rate excluding charges was 18.9%.

This was higher than last quarter primarily due to less favorable geographic earnings mix in Oilfield Services.

As you are aware, the EPR is very sense sensitive to the geographic earnings mix and as such we do experience some volatility on a quarterly basis.

Net debt was $75 million at the end of the quarter, as compared to $126 million at the end of Q4.

We ended the quarter with $4.9 billion of cash and investments on hand, and short-term debt of only $934 million.

Significant liquidity events during the quarter, included $337 million of stock repurchases and $444 million of CapEx.

During the quarter, we repurchased 5.3 million shares at an average price of $63.72.

Subsequent to the announcement of the merger with Smith in February, we repurchased the maximum number of shares we could under SEC's Safe Harbor provisions.

During the second quarter, we are projecting a significant increase in our net debt, as a result of the closing of the Geoservices transaction combined with a ramp up in CapEx.

These increase will be offset in part by the expected conversion to equity of our $299 million of convertible debentures during Q2.

Oilfield Services CapEx is now expected to reach approximately $2.8 billion in 2010 while WesternGeco CapEx is still expected to approach $300 million.

And now I turn the conference over the Andrew.

Thank you, Simon, and good morning everyone.

Schlumberger first quarter revenues of $5.1 billion registered a marginal sequential decline as the strong performance in North America, continued strength in the Middle East and Asia offset an overall decline in products and software sales from the high levels of the fourth quarter and a sharp drop in the North Sea and Russia, resulting from lower drilling efficiency and adverse weather conditions.

WesternGeco registered an expected sequential decline in multi client revenue, while marine activity improved slightly with higher vessel utilization.

Looking at the areas in more detail.

In North America, all geo markets saw revenue growth sequentially.

US land grew on increased drilling activity coupled with some pricing improvements that benefited well services technology.

Canada experienced significant growth as a result of the strong winter drilling season particularly for the oil basins in the west.

This led to higher demand for well services, wireline and drilling and measurement services.

US Gulf of Mexico revenue was higher sequentially on increased shelf and deep water activity that resulted in strong demand for drilling and measurements, testing services and wireline technologies.

Alaska revenue grew from seasonally high exploration activity.

In Latin America Mexico, Central America, geo market, revenue decreased sequentially primarily due to weather-related slow downs that affected offshore activity and to delays in the finalization of contracts for SIS and data consulting services activities.

In Venezuela, Trinidad and Tobago, revenue fell from the impact of the devaluation of the Venezuelan currency and from the absence of deferred revenue recognized in the prior quarter.

But these effects were partially offset by increased demand for SIS software.

Revenue in the Brazil and the Peru, Columbia, Ecuador geo markets decreased sequentially, mostly due to lower completions in SIS sales partly offset by an increase in IPM activity.

In the Argentina, Bolivia, Chile geo market, revenue decreased primarily due to lower ISIS software sales.

Revenue in the Europe, CIS and Africa area fell sequentially as a result of a combination of lower sales of testing services equipment and SIS software with the effect of lower pricing and the weakening of local currencies against the US dollar.

Among the geo markets, revenue in the North Sea decreased, resulting from a combination of lower drilling activity that impacted drilling and measurements, delays in project startups that affected testing services and lower well services stimulation activities.

Russia revenue was lower mainly due to the severe winner weather while revenue in the Libya geo market fell on early completion of offshore exploration campaign.

In the Middle East and Asia, revenue was essentially flat, with the previous quarter, as growth in the Australia, Papua New Guinea and East Mediterranean geo markets was offset by lower sales of artificial lift products and SIS software following the surge in the fourth quarter and by lower activity in the Arabian, Gulf, Qatar and Indonesian geo markets.

We gained a number of significant contract wins during the quarter.

In Iraq, BP awarded us, together with our joint venture drilling partner, the Iraq Drilling Company, a number of wells on an integrated services basis.

In Angola, we were awarded a series of six year contracts for wireline logging, tubing-conveyed perforating, well testing, well completions, coil shooting services, and well stimulation and vessels.

In marine seismic, WesternGeco was awarded a number of acquisition service on the Norwegian continental shelf as well as a contract in Brazil, for the region's first multi azimuth survey.

We also announced two significant events during the quarter, the proposed merger with Smith International, and the planned acquisition of Geoservices which closed in about an hour after the time our press release went over the wire this morning.

In the proposed merger with Smith, our complementary products and services will lead to the development of an engineered drilling systems, that optimize all of the components of the drill stream to allow customers to drill more economically in demanding conditions.

What we considered to be a step change in drilling performance and well productivity will come from combining measurement and steering capabilities, with the engineering and design of complete buttonhole assemblies and their various components including the drilling fluid and the drill bit.

The addition of Geoservices mud logging technology to the Schlumberger portfolio will also be an important step in the development of higher performance drilling systems.

The combination of Schlumberger's realtime downhole measurements with Geoservices drilling mud analysis will help customers better identify and react to drilling hazards while the combination of mud logging with Schlumberger formation evaluation measurements will bring a more complete understanding of rock lithology and fluid content.

In addition to Geoservices mud logging technology and expertise, Geoservices footprint, expertise and technology in slick line intervention and field product surveillance will complement existing Schlumberger activities.

I look forward to welcoming both the employees of Smith and Geoservices to Schlumberger.

Our outlook for the remainder of 2010 confirms the optimism we expressed at the beginning of the year.

At WesternGeco, while the second quarter will see increased vessel transits, strong tendering activity in marine is leading the much improvement visibility on the remainder of 2010, and utilization will be higher than originally planned.

However, new capacity entering the market is likely to limit pricing gains until later in the year.

In North America, commitments drilling-to-hold leases, as well as interest in domestic oil plays should sustain current activity levels in the United States through the second quarter while Canada would experience the normal spring break up.

Beyond that the picture is less clear as natural gas prices and the fundamentals of natural gas remain uncertain.

Higher oil prices are leading to tangible evidence that operators are concentrating higher levels of activity than originally planned in international markets.

We reiterate our comments from the last quarter that we see improvements in some offshore markets, mostly the UK sector of the North Sea, Latin America and West Africa as well as on land in Russia.

In order to prepare for this increase in the latter half of 2010 and into 2011 we have increased our CapEx guidance by $400 million, the bulk of which will be aimed at drilling and measurements and high end wireline technology.

Finally, I am on record as saying that I felt international margins would bottom at the end of Q2 2010.

I am pleased to report I was mistaken.

International margins appear to have bottomed and are likely to resume positive trend from now on absent any exceptional circumstances.

Thank you very much and I will now hand the call back to Greg.

(Operator Instructions).

Our first question will come from the line of Mr.

Dan Pickering of Tudor, Pickering and Holt.

Please go ahead.

Good morning, guys.

Andrew, earlier in the year you did express optimism but then dialed the numbers back a little bit for 2010 indicating that maybe the street got a little too optimistic.

Do we interpret your uptick in outlook to mean that 2010 numbers may now have some upside room?

And can you talk a little bit about exactly what you're seeing that gives you the increased confidence over the past month or two?

Firstly, I feel pretty comfortable with the overall consensus where it is now, Dan.

And secondly, we are seeing clearer signs of increases in activity in the North Sea.

You can count them.

And similarly, we are seeing the results of some of the exploration campaigns in Latin America which are leading to very high quality revenue for us, particularly in wireline and testing.

And similarly, I have always thought that some of the idle rig slots in West Africa would get picked up if the oil price was higher than people were planning and that's exactly what seems to be happening.

So, it is just confirmation that's come through in the last three months of what I was alluding to in January.

Okay.

So you are seeing some concrete examples it sounds like.

Yes.

Okay.

I know that you're transitioning your role a little bit at Schlumberger.

The Company has done about $10 billion in acquisitions here in the first quarter, one closed, one yet to close.

Do you think the acquisition side slows down a little bit, Andrew, or does the focus change in terms of the things you look at?

Can you maybe walk us through what you are going to be working on the next year or two?

So firstly, apart from niche technology or opportunities we can't say no to, yes we have shut down or, if you like, severely restrained the acquisition pipeline.

And Paal Kibsgaard will be running the day-to-day operations as COO, and I will be taking care of the integration of Geoservices and Smith as well as, obviously, helping when he needs help.

So that's basically how we're splitting the roles for the next couple of years, Dan.

Okay.

Thank you very much.

Our next question will come from the line of Mike Urban of Deutsche Bank.

Please go ahead.

Thanks.

Good morning.

Wanted to talk about Russia a little bit.

Obviously some weather issues there.

But it seems to me there has been a bit of a disconnect in the markets.

A lot of the stuff, especially in the mature basins, your spending down a lot there hasn't recovered much.

But yet, we are still seeing a lot of the forecasts out there for production growth.

I was wondering if you can reconcile those two things and what you see in terms of activity levels, and is there a need to ramp up there significantly going forward?

I think that last year, they were able to sustain and increase their production largely because they got a lot of help from [Vancore] and one other field, I can't remember the name of.

But this year, if they want to maintain their production at current levels they are going to have to go back to work in western Siberia.

And tendering activity would indicate to us that they do have the intention to do that.

As well for us, we will have an even stronger year in Sakhalin than we did last year.

But the big shift from last year is that we think there will be a lot more drilling in western Siberia in order to sustain their production, Michael.

Okay.

And then shifting to Iraq, as you noted, some nice contract awards there, and there's again some conflicting trends there.

There's a need to ramp up quickly in a number of cases but also still some uncertainty there surrounding the status of the government.

So, just wanted your thoughts on the what the trajectory looks like there.

Do you expect additional awards or are we just going to be executing on what's already out there?

You mean for the oil companies?

For the oil companies and then what it means from a service standpoint.

I think it is highly unlikely that there's anymore licensing rounds or contract rounds for the oil companies.

I think that the future is more likely now to be with the Iraqi national oil companies.

I don't think that the oil companies will hesitate to spend on the first phase of the activity in Iraq just because at this point in time there's no stable government.

I do think that two or three years down the road, if they don't have a satisfactory judicial fiscal and political atmosphere, they will hesitate before they go into the very large spending that will be required for the new development because actually they're spending for the rehabilitation of existing fields.

In terms of a budget for the size of companies we are looking at it is not huge.

So I think that activity will, as has been advertised, will go ahead, Michael.

Okay.

So, any delta from here would be from the NOC there?

Yes.

All right.

Thank you.

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

Please go ahead.

Good morning.

Andrew, wanted to just come back to the macro team again here and flesh it out maybe a little bit more.

Obviously in reference to Dan's question, some tangible evidence that you are now seeing that gives you the confidence now.

Increased your CapEx which underscores your conviction that the market cycle is starting to turn.

And probably turn in Schlumberger's favor.

I was wondering if you might give us insights as to how you see the cycle evolving and how it will, in your view, accelerate in the international markets.

And if you can give us some maybe benchmarks and comparisons to prior cycle periods.

Is it going to be a faster acceleration, in line, maybe a little slower?

If you can give us any color that would be great.

I think there is a bit of a difference between this cycle and the 2004, 2008 cycle in that 2004, 008 we had a huge amount of natural gas projects going on overseas, but that are not going to be going on this time around.

We had the whole Qatar LNG ramp up, we had Yemen, we had other stuff in Africa.

While there will be some of that this time around, I don't think it is going to be anything like the volume of what we had between 2004 and 2008.

So this cycle is going to be far more, in my opinion, related to oil outside the United States.

Even inside the United States.

And there I think that if you look at the latest demand figures from the non ROECD world, you look at the flattening of the demand drop in the OECD world and you look at the potential call in on OPEC, I don't see any reason for the price of oil to decline very far from where it is today, in which case gradually confidence is going to grow to bring in a lot more of these particularly offshore projects that we all know that our customers have lined up.

And on land it is going to increase all of the activity and production enhancements.

So I think that absent the double dip in the developing world or a huge double dip in the OECD that the oil cycle is probably going to -- I hate to say this again -- be stronger for longer.

But the gas cycle is going to be very much affected by the amount of LNG that has just been put onstream and of course by the advent of shale gas or unconventional gas in the United States.

In terms of our CapEx, what is very satisfactory is these deep water rigs are starting up on time.

The start ups we anticipated in Q1 have gone on time and pretty flawlessly, which means we are getting more deep water activity earlier than we thought, and if that carries through that means we had to accelerate the CapEx curve.

In connection with that and how the cycle may be evolving in Schlumberger's position, there seems to be a line of thought in the marketplace that Schlumberger is losing share in some certain geographic markets, and some product lines.

And I understand this Angola project that you referenced in your press release today, I think there's some element of significance that may be worth mentioning.

So I was wondering if you can just talk about your view of Schlumberger's market share position both from a geographic market and from a technology standpoint, and would you generally agree with the view out there that Schlumberger is at risk from the competition.

So let me deal with Angola first.

The whole Angola thing that has been announced by us and others is a renewal, it is not new work.

It is a major, major renewal.

And in that renewal, we have renewed segments we already had working there and we have added segments that were not working there before.

I is very difficult to believe your own people on market share data but we constantly look for where we have lost market share and we constantly fail to find it.

I can only think of one major piece of market share we have lost in the last two years.

And then I go through the Speers data, and the Speers data, if you look at Q4 '09 over Q4 '08 says we've increased our market share more than our principal competitors, so I'm sorry, I don't see it.

It begs the question, the one area you think you lost share, where would that be?

It was one big contract and I am not going to rub my poor people's nose in it.

It was one big contract we lost.

Okay, Andrew, thank you.

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

Thank you very much.

Welcome back into the camp of more bullish people again, Andrew.

It is good to have you back.

It is nice to be back, but you know, prudence has always been my watchword in these things, Ole.

Absolutely.

And we hope you of course stick with that.

On the jack up side we're seeing big tender activities in North Sea, West Africa, Middle East, the broad base as opposed to some of what you're talking to.

But, we are not really seeing much in the deep water market in terms of a kick off of increased tender and contract.

So can you give us a little bit of a view on how you see the exploration side turn more into a development drilling kind of kick off, both in West Africa and in select deep water markets in Asia?

Can you give us a little color on what you are seeing there?

Firstly, the deep water program that have been announced and rigs have been contracted for are happening, and as I mentioned earlier they seem to be happening on time, which is unusual.

Secondly, I think that the operators generally will make sure that deep water rig rates come down a bit and once they have done that they will do some exploration.

They hate paying top dollar for exploration rigs.

So in fact I think an adjustment down similar to what we have seen recently in the big deep water rigs or even in the second or third generation rig that can do an exploration well in deep water is very positive for us.

Are you sensing this is now coming back, has there been any kind of rate or change in your customer inquiry levels as of late?

For that market?

Yes.

Only really in West Africa where, as I said earlier, there were some semis that had idle slots and those idle slots are getting filled with an exploration well here or there.

On exploration, again, on the seismic market, you mentioned that you saw a firmer tone into the back end of the year.

Could you elaborate a little bit?

Is this you're realizing higher prices, is it leading edge, are you expecting to bid at firmer prices?

I think the answer is that are utilization for 2010 is pretty much wrapped up and therefore we are expecting to bid higher, but whether we will be successful or not is another question.

One more question.

Pricing on renewals, if you can reprice your international work, for example, this Angolan contract, this rolling over and renewing, could you give us a little bit of a feel for how rollover pricing has changed compared to, let's say, three months go?

Are we back in positive territory again?

No, I don't think so.

I don't there's been any change in large tenders in international pricing in the last three months.

I'm not exactly sure when this was bid but with the evaluation process and the award process it was probably bid early last year.

Okay.

Okay.

Is it expected at this point to be bidding higher prices and prices rolling off or are you still in negative territory, if you are looking forward from here?

If we look forward from here I think for specific high end technology we will be looking to push price.

Thank you very much, Andrew.

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

Please go ahead.

Thanks, good morning.

Andrew, along those lines here, I was curious as to whether you could provide us with a road map, if you will, for international margins.

You said they have troughed in Q1 but what I am looking for is how you see them evolving second half of 2010 and next year, and really talking about the interplay between volume, mix and price.

What I am trying to reference here is back in '06 and '07 we were generating 40% incremental margins.

How long do you think before we get back to that, and what will it take to get back to that?

Firstly I think that for the balance of this year, there are two elements of price that will dominate and they are firstly volume and mix.

Volume is better utilization of equipment, and mix is a shift toward, the big shift toward deep water and offshore, that is taking place at the moment.

I think that the other thing that will happen in this year, but this depends, $80 oil, our customers will loosen the purse strings on using the high end technology that in the downturn the engineers were told they were not allowed to buy or they should go easy on because it was expensive.

So it is a difference between a cheap bottle of wine and feeling you can afford a good bottle of wine.

So we think we'll see a little bit of that, not a lot.

But I don't think we will get real pricing traction until we start to have volume issues, in other words that people start to move into equipment shortages, and I don't think there's any way that could happen this year.

Next year, in certain segments, particularly drilling and measurements, if the level of drilling stays where it is, you will start to see operators wanting to tie up equipment, and therefore, that gives you some demand pull pricing power.

But I don't think it's this year, I think it is next year.

Do you think it is unreasonable to expect us getting back to those really flush incremental margins some time next year?

There has to be demand, so it really does depend on the level of activity, and I can't see that yet.

Because we really really get pricing power when our customers are desperate to have the equipment.

In fact, in the 2005 cycle, one of the things that provoked that was a huge sucking of equipment into Saudi Arabia.

That frightened operators elsewhere.

If Iraq went very very fast (which personally I don't believe), that also could suck in fairly large amounts of equipment.

So you don't see it yet for 2010 yet you are not necessarily running it out for next year.

Not ruling it out but I am not going to call it, Bill.

Thanks a lot.

Your next question comes from the line of David Anderson from JPMorgan.

Please go ahead.

Good morning.

A question on WesternGeco, I don't think a choppy recovery will surprise anyone.

And taking into account your remarks on pricing.

I was wondering if you can just compare for me how this business is positioned now to where it was in '02, '03.

It seems to me that with multi client de-emphasized, there should be a much quicker uptake in margins and with your limited capital requirements going forward, maybe you should be hitting mid cycle returns at a much earlier stage than in the past cycle.

Am I right on that?

Firstly, I think on multi client, you're right.

In other words, our library is extremely healthy.

And to the extent that activity remains robust, particularly in the Gulf of Mexico and West Africa, then library sales will probably go faster than they did in the last cycle, and a lot of that will be to do with technology because we have made major strides.

The industry and us have made major strides in the quality of multi client over the last four or five years.

But in marine, there is something like 14 or 15 treaty boats that are either new or can come back into the market fairly shortly.

So that is what is going to, if you like, slow pricing uptick in marine seismic, whereas last time around the boats were not in the build cycle and therefore the excess capacity got sucked up faster.

You are quite right to point out the Eastern Echo deal means that we will not be in the market for building or huge CapEx commitments for our marine fleet in the next few years.

Okay.

On just a different subject, on your last call it sounded like you were focusing a little bit more on the emerging shales in North America but more recently E&P has been taking up a lot of headlines, lot of talk about a shift into unconventional oil.

Just wondering if this changes your thinking at all in this market.

Should we be looking for Schlumberger to perhaps be more aggressive going after this business and what's your sense of service intensity of the oil versus the gas plays?

I think my competitors have commented that they're very similar, and I think they're right.

I do think, and please don't ask me why because I'm not going to say, we do have certain technologies that in these unconsolidated oil plays are quite advantageous.

Obviously we will be introducing those probably later this year.

It's adaptation of other technology that we have and it's not hydraulic fracturing.

But we think that we probably have some tools that can make a difference.

Interesting.

Thank you.

Your next question comes from the line of Angie Sedita of UBS.

Please go ahead.

Good morning, Andrew.

Take another stab at the international margins, you peaked in 2007, 2008 about 28% to 30% margins.

Today, at 22%.

Do you think that we will return to those peak margins or potentially go beyond, and is that a 2013 event or could it actually be earlier?

And finally, do you think that the increase in IPM risks on those margins and return them to those levels?

Firstly, the comment I would make which is, if you like, an indication of the relative mildness of the cycle overseas, is that for our margins to only from 28% to 22% -- do you remember what they dropped to, Simon, in 1998, 2001 internationally?

In the teens.

In the teens, probably in the mid teens.

It is pretty remarkable situation.

But how fast it can go back, Angie, really does depend on how fast activity accelerates, and that's still a judgment, I'm afraid, on the general economy.

There's no doubt that oil drilling is going to be very solid, but how fast it is going to go is going to depend very much on the general economy.

So can we get back there one day?

Yes, I'm absolutely convinced we can.

But please don't ask me to say it is 2013 or 2014, I don't know.

All right.

To follow along that, as far as talking specifically about Iraq, how much time do you think will pass before you get to margins that you are happy with there?

And do you need scale as far as the number of rigs operating in the region to reach those margins?

And do you have any concerns so far on how your competition is bidding in the region?

I don't think the first phase in Iraq, in other words the rehabilitation of the existing fields, and just the drilling of wells in known locations, is necessarily going to produce for anybody the sort of margins that they like.

And also, we are all going to have set up costs.

It will bel pass through but nonetheless it will affect the margins you see.

Security costs, for example.

And have I seen any irrational bidding behavior?

So far no, I haven't actually.

We obviously don't know what other people bid, but given the pricing we have been using, I don't think we've seen totally irrational behavior so far.

Do you think it is scale or time that pushes you?

Scale in Iraq is difficult.

I think it's going to go project by project.

For example, you do not want to build out infrastructure in advance of work because every time you build a new piece of infrastructure it adds to your security risk and your security costs.

Every time you have a new base, you have to have more security and it costs you more.

So I think people will build out or certainly we will build out project by project.

All right.

Fair enough.

Finally, along with the scale, do you want to give us your thoughts on Mexico, the incentive contracts, and do you think that over time we could go back to the recent height as far as activity levels we saw in 2009 or will that take some time, or just lack of clarity so far?

Everyone, our lab is started like everybody else's.

We, in fact, have had a group in Mexico City studying this problem for the last two years, so we have some ideas.

And actually I think it will be quite a long time, at least a couple years, before Pemex is in a position to judge whether or not the production potential justifies the scale of drilling program they previously had.

So I think it will be a couple years before we know that and in the meantime, yes, they will drill but I don't think they will drilling on anything like the scale they were drilling before.

Great.

Thank you.

Your next question comes from the line of Alan Laws from BMO Capital Markets.

Good morning.

First question is we haven't really talked too much about North American.

You are more bullish on international, and that seems very logical.

Less visibility in North America because of the gas situation.

But could you talk to the profitability levels in this market?

If the recounts, say, flattens, can North America reach a reasonable profitability level for Schlumberger?

Yes.

At this level of rigs, when we've completed the various initiatives we have on the way to improve our utilization and improve our decision making, I think we can reach a level of profitability that will satisfy us.

But we are already a little way into that process so far.

Therefore the improvement we got in Q1 was a good job on the part of the people who were involved.

Is this part of the geo market reassessment and cost initiative you talked about last time?

It's not really a cost initiative.

It is more of a question of management and control over the levels which we had to decentralize and which we're busy centralizing in different basins.

On international you noted Saudi as a driver or catalyst in the last cycle.

Two parts here, is the Saudi market going to be less important in this coming cycle?

And maybe is there another market like Saudi that is going to be that kind of driver of profitability or the one that really makes everything move this cycle?

I don't think that anyone else in the world is going to build out on a scale that Saudi built out between 2005 and 2009.

Saudi will remain a very very important market not just for oil but also because they have very ambitious plans in gas and very ambitious plans in exploration.

I don't see another market that is capable of ramping up as fast as Saudi did.

That sounds good.

Appreciate it.

Your next question comes from the line of Geoff Kieburtz from Weeden & Company, please go ahead.

Just a couple of clean up questions.

On the international margins, Andrew, you said that first quarter is the bottom.

Would that statement apply individually to the three regions?

No, I think I want to say it applies globally because you can always have a mix effect that will uptick or downtick a particular region in a particular quarter.

With that in mind, do you think those downticks could drive the margins in any one of the regions below what they were in the first quarter?

It doesn't look that way.

You're not talking about North America; right?

International.

On North America, in regards to these management initiatives, where would you say you are in the implementation?

It sounds like your review is finished and you're in the implementation stages, is that correct?

I would say that we are more than a third but less than half way into the implementation.

Okay.

And I don't know if you can answer this but in a steady state activity environment, what kind of margin improvement are you targeting with these initiatives?

I don't think I am going to discuss that.

Okay.

And last question, in regards to your earlier comments about Mexico not getting back to the level of drilling activity,.

Sorry, Chicontepec.

Okay.

That was my question, that was specific to Chicontepec.

Okay, thank you.

Your next question comes from the line of Robin Shoemaker from Citi.

Please go ahead.

Thanks a lot.

Andrew, just to finish that question, we can look back and see over the last years that Schlumberger's margins in North America have been almost exactly comparable to its peers, and for the fourth quarter and the first quarter, it clearly was below.

So, it sounds like you believe that with the initiatives you are taking you will be back very much in line with the other multi service companies in North America.

I would be very disappointed if our people in North America didn't have at least that ambition.

The only thing I would say is that with one of our competitors we have a comparable mix.

With the other one we don't yet but they will shortly.

The mix effect can affect what the overall margin is for each company.

When we finished, closed the Smith transaction and when Baker closed the BJ transaction, we have to relook at the whole margin landscape.

I see.

Okay.

Just on the deep water market, where you had a favorable comment about the timing of the deep water rig startups, if we think about all of the rigs that are under construction today, and the timing that we can see that they're scheduled for delivery, it certainly looks like 2012 would be the first really full year.

What is the order of magnitude of that increase in deep water drilling 2010 versus '11?

The bulk of the rigs really seem to be mostly coming in 2011.

Yes.

I don't have the numbers in front of me, Robin, but certainly, a '10 is much bigger than '09, and then again '11 is much bigger than '10.

And actually '12 I haven't even looked at.

Because when a rig comes into the market, if you take the number of rigs that people have announced are coming into the market in any one year, you basically have to divided it in two because they arrive, average, halfway through the year.

So this year we get the full effect of the rigs that came into the market in '09 and half the effect of '10 and next year we get the cumulative '09 and '10 and half of '11.

So you're probably quite right, but '12 will be the high point of deep water activity.

Okay.

Thank you.

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

Please go ahead.

Good morning, Andrew.

As it relates to Latin America and the margin performance being surprisingly good, unlike your peers you didn't identify specifically the Venezuela devaluation as a nonrecurring item.

I'm just curious as to what kind of impact that had negatively to the quarter, and what kind of add back we can expect in the results in Latin America.

I will let Simon discuss the Venezuela valuation and if you want more granularity on the rest of it I will talk about it afterwards.

So let me take this in two parts.

First, why we didn't see any impact on the devaluation.

We obviously have an impact on the devaluation.

The reason it was not apparent is because in Venezuelan we do take a very prudent approach within the rules to our accounting.

We anticipated this kind of devaluation.

And we have deferred certain gains from exchange that we experienced during '09, to be ready for this eventuality.

It did take place and we covered it from within the balance sheet.

Now as far as the impact on the business, obviously the revenue drops because we have a bolivar is a portion of our revenue, but on the cost side it has a positive impact because the costs reduced given the new rates and as a result was slightly positive impact on the margin overall in Venezuela.

So this is basically the story.

I would say the other element that helped us is that a lot of the adjustment of our costs based in Mexico took place in '09 as well.

That has been a big difference for you, you don't feel like you're carrying additional costs that some may be doing as they await what happens in Mexico in terms of spending, .

We don't own the rigs, very many of them anyway.

My follow up would be, Simon, a question for you You mentioned limits on the first quarter share repurchases here under Safe Harbor.

I'm just wondering if there's any limits that we should think about on share repurchases either in the second quarter or until the Smith acquisition is closed.

Simon is going to answer this too.

There are certain rules we have to follow.

We continue to buy now under the Safe Harbor rule.

As soon as the proxy is mailed to the shareholders of Smith, there is a blackout period that we have to respect, until the shareholders vote on the transaction.

Then we will be free to buy without limits except the normal limit for buybacks.

So there is a period of time, we hope it will not be too long, between the mailing of the proxy to the shareholders and the voting on the transaction.

We should probably still expect, Simon, that you are buying back enough stock to offset any dilution as a whole for that company, is that fair?

Dilution from the employee program, yes.

The Smith transaction, we can't really look at that until, as Simon says, the Smith shareholders have voted.

But the rate we are buying at, it's bigger than the dilution from the stock-based compensation program.

Okay.

Thank you both.

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

Good morning, Andrew.

I note, as Bill did, performance in Latin America is very good on the margin side in particular.

So with that, my question is actually around Europe, Africa margins, which might have been a little bit lower although we were alerted as to the weather impacts.

What's the progression from here, with the recovery of some of those transitory issues on weather in the North Sea, weather in Russia?

And you've mentioned some specific contract awards in Russia.

But when do we get back to 2Q 3Q '09 margins in that region?

Q3 '09?

Yes.

How much was that, Simon?

Do you have it in front of you, Pierre?

In the low to mid-20s.

I think we'll get back to the low 20s fairly quickly.

The trouble with Russian weather, is not only do you have your equipment doing nothing but you also have to pay to use it.

So the cost effect of minus 35 temperature days is huge.

So, aside the activity, just the equipment working normally makes a huge difference to the margin.

So there's a big piece, and then the North Sea, as well, some recovery.

The North Sea efficiency will improve in the second quarter, and in fact our stimulation boat was drydocked for 18 days as well in Q1.

Okay.

The rest was answered, thank you.

Your next question comes from the line of Dan Boyd from Goldman Sachs.

Please go ahead.

Hi.

Thanks.

Andrew, I wanted to follow up on North America, and the reshuffling process you have going on there.

You've actually grown in line with peers sequentially, your incremental margins are in line with peers, as well, but I assume you're carrying some extra costs associated with this.

And I know you don't like to break that out but are we talking about additional costs in the $20 million to $30 million range, that at some point through the year will fade?

No I don't think you should think of it as incremental costs.

There is still costs we have in North America we need to eliminate.

It's idle facilities, things like that.

That will take place over the balance of the year.

So there is incremental costs associated with the reorganization or the restructuring, whatever you want to call it, but it really is fairly marginal.

It's a group of people.

I wouldn't take it as something that's just going to disappear but that group of people is working at getting the whole cost base down.

So we should measure the success of this reshuffling as higher incremental margins to allow you to catch up to peers over the course of the next four quarters.

Yes.

Okay.

Thank you.

Your next question comes from the line of Brad Handler from Credit Suisse, please go ahead.

A couple of unrelated questions.

First, just to follow up on the North America market.

In the assessments you have made to date are there changes to your capital commitment that you expect in North America?

One of the effects of what we are doing should be much higher equipment utilization and therefore the revenue dollar per hydraulic horsepower, or whatever you want tao use as a measure, should increase and therefore ultimately the amount of CapEx we'll need to cover what we do compared to what Schlumberger did in the past will probably go down.

So the additional $400 million, it does not sound like is being directed.

No I was very clear.

The additional $400 million is drilling and measurements and high end wireline.

It is not pressure pumping.

No, that was clear.

Okay.

That's helpful.

And then the unrelated follow up, can you tell us how much of the percentage of revenues is coming from deep water today and maybe how you expect that to evolve over the next couple years given what all we have talked about with deep water.

We haven't disclosed that.

I don't think we want to at this point in time.

It is a substantial portion and it obviously has a very high growth factor.

Sure.

That's why I figured I would probe.

How about if I ask it a little more generally just in terms of offshore as a percentage, offshore revenues as a percentage of total?

It is not 50%, but I would say it is somewhere between 30% and 40%.

Okay.

Very good.

Thanks, guys.

Appreciate it.

Your next question comes from the line of Waqar Syed from Macquarie Capital.

I just wanted to get a sense from you about the outlook for Venezuela and what does the payment schedule look like now .

I would describe the payment schedule as thoroughly under control, and very good understanding between ourselves and (inaudible) to what is necessary.

The activity actually I think will pick up slightly this year, particularly for us given the amount of success they've had with gas.

So I think Venezuela will finally have a slightly better year this year than it did last year.

And secondly do you see any recurring expenses from the healthcare bill?

No, no.

Basically it was a write off of some deferred tax asset.

So you are not going to see this as ongoing, no.

It is a one-time.

Okay.

Thank you very much.

Your final question today comes from the line of Kevin Simpson from Miller Tabak.

Please go ahead.

Thank you for getting me in.

I just wanted to get a clarification, Andrew on those deep water comments you made earlier, in response to Robin's question.

You said peak in 2012 but I assume you meant based off of the equipment we know has already been ordered and is being built now rather than an actual peak in the market.

A peak on what we know is going to come to the market, yes, not anything that gets launched now.

And it assumes there's a very high utilization rate for deep water rigs, as well.

One other unrelated follow up as well, in Russia, you were talking about a little more of a swing to western from eastern Siberia.

Would that imply that margins, while they recover nicely, may not be as high on the individual works since it is less, would it be smaller fields and so a little more competitive?

No, I think that, while you're quite correct to point out that western Siberia margins are not as high as eastern Siberia or Sakhalin, the sheer volume will compensate for that.

You don't think some of these expansions of your competitors trying to be like you guys, will limit upside pricing power, or limit pricing power?

No.

Thank you.

Prior to closing the call I would like to mention that the Schlumberger second quarter 2010 earnings conference call will be held on Friday, July 23rd at 9 AM US Eastern time.

I would like to thank you for participating in today's call and Greg will provide the closing comments.

Thank you, ladies and gentlemen.

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