斯倫貝謝公司 (SLB) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to Schlumberger earnings conference call.

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

Later we will conduct a question-and-answer session with instructions given at that time.

And in the interest of time, we do ask that you please limit yourself to one question and one follow-up.

(Operator Instructions).

As a reminder this call is being recorded.

I would now like to call over to our host, Mr.

Malcolm Theobald, Vice President of Investor Relations.

Please go ahead.

Thank you, Julie.

Good morning, and welcome to the Schlumberger Limited second quarter 2010 results conference call.

Today's call is being hosted from Paris where the Schlumberger Limited board meeting took place yesterday.

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.

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 will turn the call over to Simon.

Thank you, Malcolm.

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

Second quarter income was $0.68 per share.

Excluding the charges in prior periods, this is an increase of $0.06 sequentially and flat as compared to the same quarter of last year.

During the quarter we began to see the early effects of the deepwater drilling moratorium in the US Gulf of Mexico.

The impact of the moratorium on Oilfield Services resulted in a reduction of Schlumberger's Q2 earnings of approximately $0.02 per share.

We anticipate the moratorium earnings impact for the second half of 2010 to be approximately $0.08 to $0.12 per share.

Turning to the business segments, Oilfield Services second revenue increased 7% sequentially while WesternGeco revenue increased 1%.

The growth in Oilfield Services revenue was largely attributable to a surge in activity and increased pricing in US Land, the post-winter seasonal rebound in Russia and increased activity in Mexico, Central America and the North Sea.

The acquisition of Geoservices during the quarter also added to revenue.

These increases were partially offset by the impact of the spring break-up in Canada, the previously mentioned early effects of the deepwater drilling moratorium in the Gulf of Mexico and reduced activity in the North Africa GeoMarket.

Oilfield Services pretax operating income of $1.07 billion increased 11% compared to the prior quarter while the pretax operating margin increased 75 basis points to 19.8%.

The increase in margin was primarily driven by strong performance in North America.

International margins increased slightly to 22.4%.

By area Oilfield Services sequential pretax operating margin highlights where as follows; In North America, pretax operating margin improved 237 basis points to 10.4%, within North America, US Land margin improved significantly by 15 percentage points as a result of higher activity and pricing for Well Services technologies.

However, this increase was tempered by lower margins in the US Gulf of Mexico from the early effects of the deepwater drilling moratorium and reduced margins in Canada due to spring break-up.

Back in America, margin increased 35 basis points to 17.9%, primarily due to the increased activity in the Mexico/Central America and Argentina/Bolivia/Chili GeoMarkets.

However, as noted in the press release, we anticipate the slowdown of activity in Mexico and we will subsequently have a (inaudible) to the charge in Q3.

CIS Africa margin increased 29 basis points to 18.4% as a positive impact of the seasonal rebound in activity in Russia and a more favorable revenue mix in the North Sea offset the impact of reduced revenue in the West and South Africa and North Africa GeoMarkets.

Middle East Asia margin remains strong at 31.1%.

Sequentially, WesternGeco pretax operating income decreased 31% to $47 million and pretax operating margin slipped 447 basis points to 9.8%, primarily due to a decrease in multi-client saves and lower revenue combined with the startup cost for land.

These decreases were partially offset by improved productivity in marine.

Now turning to Schlumberger as a whole, the effective tax rate was 17.8%.

This was lower than last quarter, primarily due to a more favorable geographic earnings mix in WesternGeco.

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

Net debt was $766 million at the end of the quarter, as compared to $75 million at the end of the first quarter.

We ended the quarter with $3.7 billion of cash and investments on hand and short-term debt of only $719 million.

Significant liquidity events during the quarter included $1 billion related - - relating to the acquisition of Geoservices, $634 million of CapEx, $535 million of stock repurchases and a conversion of $297 million of outstanding debentures into 7.4 million shares of common stock.

During the quarter, we repurchased 8.4 million shares at an average price of $63.33.

We repurchased the maximum number of shares we could under the SEC Safe Harbor provisions in light of the pending merger with Smith.

Oilfield Services CapEx is still expected to reach approximately $2.8 billion for 2010, while WesternGeco CapEx is expected to be approximately $335 million.

And now I turn the conference over to Andrew.

Thank you, Simon.

Good morning, everybody.

Schlumberger's second quarter revenue of $5.94 billion was 6% higher sequentially and 7% higher year-on-year.

Sequential revenue increases recorded in all Oilfield Service areas led by strong performances in both North and Latin America.

Among the technologies sequential revenue growth was strongest in Well Services, primarily due to stronger US Land activity and pricing, increased product sales in the Middle East and a seasonal rebound in Russia.

In North America, surging activity and improved pricing on the US Land GeoMarket more than offset the combined effects of the Canadian spring break-up and the start of the drilling moratorium in the US Gulf of Mexico that began late in the quarter.

In Latin America, Mexico growing in higher activity and stronger integrated product management activity while Brazil continued to see a buildup in offshore exploration activity.

In Europe/CIS/Africa, the effects of a strong post-winter rebound in Russia and improved activity in the North Sea drove revenue growth, although these effects were partially offset by lower activity in North Africa and lower exploration services in West Africa.

In Middle East Asia, most GeoMarkets saw higher activity with strong demand for Wireline services boosted by higher sales of Well Services products and Artificial Lift Equipment.

In the Middle East, Integrated Project Management Services diversified further while our presence increased in Iraq and preparations began to fund this first well in the [Ramida] Field were the first of the three rigs planned.

The second and third rigs will follow and we see continued increases in Iraq activity throughout the rest of the year.

The WesternGeco revenue is sequentially flat, with strong increases in Marine and Data Processing were insufficient to overcome the effect of reduced multi-client activity, mainly in North America, following the traditionally strong first quarter sales, and in Land, following the completion of a contract in the Middle East.

New Technologies continued to contribute to the overall performance, particularly in Well Services, while a number of new contract awards underpinned future - - progress.

In particular, I would mention the award by Petro Gas of two new stimulation vessels that represent the return of Schlumberger to the Brazilian vessel stimulation marketplace after a long absence.

In a similar move in Mexico, an award of a vessel from Pemex will give us a strong presence in the country's offshore stimulation market.

Looking forward to the remainder of the year, we see a continued slow build of activity in the second half in most parts of the world.

US Land, Brazil, the North Sea, Russia, the Middle East and Asia will be areas of continued strength.

This will be partially offset by reductions in IPM activity in Mexico in both Chicontepec and Burgos.

In the deepwater Gulf of Mexico, we are not planning for any resumption of drilling activity this year.

In deepwater activity elsewhere, we have not seen, nor do we expect to see, any significant delays or program reductions as a result of the US Gulf of Mexico drilling moratorium.

Internationally, operators, contractors and regular have stepped up maintenance of key well equipment and procedures, but have not restricted actual drilling activities.

The outlook for WesternGeco will be governed by the Multiclient market in the Gulf of Mexico which remains uncertain at this time.

At Schlumberger we began a program three years ago called Excellence in Execution.

This program was designed to create a step change in the service, quality and efficiency we provide, and in deepwater was aimed at enabling our customers to reduce the risk and cost of their deepwater operations.

The program in addition to equipment and procedure improvements provides the competency certification of all our personnel involved in deepwater operations.

We are encouraged by the results, as well as our customers' acceptance of this multi-year initiative.

We believe that the contribution of deepwater discoveries has been and will remain very significant to future hydrocarbon production.

We therefore welcome the current efforts to better understand and control the risks associated with these types of operations.

While additional control and oversight will undoubtedly add cost, we expect this will be offset in the long run by improvements in operating procedures and technology.

The recovery and world demand for oil has been reasonably robust and current fuel costs for the coming year remain consistent with slowly increasing levels of exploration and production activities.

Natural gas economics remain more challenging, the supply of both LNG and unconventional gas in the US would appear to continue to outstrip the demand recovery.

Overall, therefore, we see the current trend of a slow, but sure recovery in activity is likely to continue without change until we have a clearer view of the sustainability of the recovery in the world economy.

Finally, with an update on our proposed merger with Smith International, our view has not changed that the merger will close in the third quarter of this year.

The closing remains subject to clearance by the US Department of Justice, clearance by the European Commission, approval by Smith International stockholders and the satisfaction of labor of other closing conditions.

I would only add that the annual meeting of the Smith International stockholders has been announced for August 24.

I will now turn the call back to Judy.

Thank you.

(Operator Instructions).

As a reminder, please limit yourself to one question and one follow-up.

With that we'll go to the line of Kurt Hallead with RBC Capital Markets.

Please go ahead.

Hi.

Good morning.

Hi, Kurt.

My initial question here is given the recent changes and the moratorium in the Gulf of Mexico and a lot of the regulation and other types of concerns, does this at all alter your - - it doesn't sound like it, but I'd like to hear it again.

Does this alter your viewpoint of the deepwater growth prospects, does it alter your strategy on how you're going to try and attack that market?

- - I think the first thing to say is that - - in the last three years, somewhere between 40% and 50% of the new field discoveries have been in deepwater.

Deepwater production - - has been scheduled to become 10 million-barrels a day by 2015, so that's - - approaching 10% of world supply, and it's a bigger supply than almost any country apart from three.

So I think it's highly unlikely that apart from some delays caused by proper caution and control, that there is any significant reduction in deepwater activity anywhere.

And I find it extremely interesting that both Norway and the UK have permitted some of the deepest water wells they've ever drilled since the Gulf of Mexico moratorium was put on.

So I don't think this is going to significantly slow deepwater in the medium- to long-term.

I do think that the issue of spill response is something the industry has to address and I was pleased to see what the majors put out yesterday.

And in terms of ourselves, I feel extremely comfortable because, as I pointed out in the press release, we've made a huge effort to understand the risks of what we do in deepwater and to specifically train our people to be aware of those risks and to react to them.

So, - - I, after a brief pause in the Gulf of Mexico, I don't see any reason to change our strategy in deepwater, Kurt.

Okay.

And then my follow-up question is along the lines of Smith.

It sounds like things there are clearly progressing very well, maybe even ahead of your initial expectations.

I don't want to put words in your mouth.

What do you - - it doesn't appear to me like the street is really giving you any credit or paying much attention to what Smith may bring to the overall organization.

I was wondering if you share that view and, if so, what do you think we're all missing?

Well, I don't know whether the street understands or appreciates what it will bring to Schlumberger or not.

But I mean I like to do things sometimes by anecdotal example.

So we presented the Smith strategy to our Board of Directors on Tuesday and they all came out very excited.

And on Wednesday morning, I got an e-mail from the manager of one of the countries in the Middle East where under the current new rig assignments, six rigs have been taken away from our competitors and given to us on the basis that we drill faster, and that was without Smith.

So I'm extremely bullish on what Smith is going to do for us once we start to integrate the different drilling services they have with the - - drilling services that we have.

Would you like to offer up what country that was?

No.

Okay.

Country what?

What country it was?

The what?

No, I'm afraid I wouldn't, Kurt.

No.

Okay.

I thought I'd try.

Thank you so much.

Thank you.

Our next question comes from Ole Slorer with Morgan Stanley.

Please go ahead.

Thank you very much.

Andrew, you had a strong performance in North America and then we look at your margins and compare them with other companies that have reported so far and there is clearly a big gap.

And I mean that just, of course, has to do with some of your mix.

But you seem to put in place in the organization, can you just outline the road map to getting your North American business to kind of close the gap in some way of your peers?

I think that perhaps the thing to say is that the improvement in our US Land margins in Q2 was purely through activity and pricing and without any effects of the reorganization, though a lot of the reorganization work was taking place.

And, therefore, I would remind everybody that we said that we would take a restructuring charge associated with North America in Q3 and that is still the - - still the intention, though it won't be very large.

But the effects of the restructuring will only start to flow through to the margins in the third and fourth quarters and, therefore, we continue to expect to see, outside the constraints of activity and pricing, improvements in our cost structure and efficiency in North America through the balance of the year.

Okay.

Historically, or not historically, but you previously alluded to the fact that there must be smarter ways of doing shale and unconventional than brute horsepower.

Could you update us to your latest thoughts there and whether any new technology has anyway of playing into your strategy in North America?

So I think we are much closer - - I'm not going to announce what we're doing over the sound waves, Ole, but I think we're much closer to understanding the technology set that we think is appropriate to improving the - - our capacity to predict the productivity of shale from measurements.

And if we do that, this is not going to happen this year, it's going to take a little time, if we can do that, then eventually it will start to change the technology set that is used to produce shale.

But it's not this year, Ole, but I think we are much closer to defining what we think that technology set will be.

We shouldn't expect you to for that reason to go and massively increase your capacity or horsepower, for example?

No.

Okay.

Second question would be on the Middle East, impressive margins.

You're building up in Iraq.

Could you - - as Iraq gets going and you get beyond the start-up costs, will Iraq be accretive or dilutive to your Middle East margins?

It's going to be negative to our Middle East margins overall in 2010 and I think it will balance out in 2011.

Are you already taking substantial start-up costs there?

We are taking start-up costs.

I wouldn't call them huge.

Okay.

Well, thank you very much.

They're in - - we haven't identified them, but they are in the margin in Q2.

Thank you very much.

Thank you.

Our next question comes from the line of Jim Crandell with Barclays Capital.

Please go ahead.

Good morning, Andrew.

Good morning, Jim.

My first question is about your seismic business.

Can you talk about first the outlook for the Multiclient business over the rest of the year?

I can only give you the known/unknowns, Jim.

So the first question is, is the moratorium extended beyond six months?

I don't think so, but we don't know yet.

We have been granted a seismic permit since the moratorium came on to keep a boat working.

The big question is going to be whether the March 2011 Eastern Gulf or Central Gulf lease sale takes place or gets postponed.

And I could see a very good case for the new BOE actually postponing it.

There are two next year, the other one being in August.

If it's just a postponement, then it will be a postponement of revenue rather than a cancellation.

We honestly don't know whether or not the moratorium in the traditional round of Multiclient service at the end of the year is going to have a positive or negative effect.

If the future of exploration drilling in the Gulf is still very uncertain in November, it's going to have a negative affect.

If the rules have become clearer, then - - maybe some of our customers will be tempted to buy some data with some of the budget they haven't used for other things.

But today, it's almost impossible to say which way that will go.

We don't see any - - we have not seen any signs or we don't have any indication that third-party marine activity in the Gulf is going to be any different.

But on Multiclient, until the situation on the future of exploration drilling becomes clearer, it's extremely difficult to predict what's going to happen, Jim.

And if we saw the negative outcome in the Gulf of Mexico persist into 2011, would you be markedly more cautious on your outlook for better pricing in the vessel business for 2011 as I think you articulated last quarter?

So the good news in the vessel business is that - - is that despite the Gulf of Mexico, the capacity is still being absorbed.

And you are quite right to point out that the question will be - - once the capacity is absorbed, if there is no big shooting market, acquisition market in the Gulf of Mexico, will pricing move ahead in 2011?

And I have to say that I - - if that is the case, I doubt there would be much pricing leverage.

Okay.

And one final question, Andrew, has your view on whether divestitures will be required as a result of the Smith acquisition changed since you announced the acquisition?

I can't comment on that, Jim.

Okay.

And lastly, do you see yourself having a presence in the Gulf of Mexico stimulation business in the intermediate to longer term?

It's not high on our priorities.

Okay.

Got you.

Thank you.

Thank you.

Our next question is from Daniel Boyd with Goldman Sachs & Company.

Please go ahead.

Hi, thanks.

Andrew, just a question on the margins in Europe/CIS/Africa.

It sounds like from your comments that mix played a part in pretty - - almost flattish margins sequentially.

How should we think about margins over the next couple of quarters?

Always tough to predict mix, but should we see a nice - - step-up there as sort of mix normalizes, so to speak?

There are some issues in the mix that we can predict and some that we can't.

So the one that we can predict, for example, is that in Q2, a lot of the rigs, the offshore rigs were on completion and not drilling.

And when this happens, the revenue swings in favor of our competitors rather than us and when they're on drilling, it swings in our favor.

So - - logically they should swing back to drilling in Q3, which will help.

And the exploration success - - a lot of the prospects that were being drilled in the second quarter were fairly marginal, quite deliberately fairly marginal on the part of our customers.

And the question is if they swing back to more really prospective exploration in Q3, will that improve the mix or not, but that one's extremely difficult to predict.

And North Africa, I think we will probably not see much improvement.

Okay.

And then just one - - one follow-up on North America and US Land has come up quite a bit in terms of long-term contracts, I guess especially for stimulation equipment.

Are you seeing those and what are your thoughts on - - Schlumberger participating in signing long-term contracts?

Well, yes, we're seeing - - customers making inquiries.

But as my peers pointed out, - - long-term contracts don't really mean very much in North America, so we're not in a hurry to sign them at this point.

Okay.

And similar to that, are you also of the thought process that you don't want margins or returns to get too attractive in North America to prevent potential overcapacity building again?

I think that - - the argument that we all have to be conscious of is the argument that what is the correct return on the capital for pressure pumping and not to let pricing go to the point where the return on capital is so high that it's going to attract a lot of competition, yes, I - - yes.

Okay.

I'll turn it over.

Thank you.

Thank you.

The next question is from Bill Herbert with Simmons & Company.

Please go ahead.

Thanks.

Good morning.

Andrew, with regard to your international growth prospects or international prospects in general, you mentioned sort of a steady improvement from this point forward with most regions partially offset by what's going on in Mexico.

Relative to your perspective of the Q1 - - or on the Q1 call, which regions internationally are likely to show a more restrained rate of growth relative to what you thought was the case a quarter ago other than Mexico?

I think that we would say that Latin America - - the rest of Latin America, sorry.

So ECA, I would say that we think the offshore market has slipped by one-quarter.

Okay.

So the improvement that we thought we would have in Q2 will come in Q3, et cetera, et cetera, which means that all in all my view of ECA for the year probably hasn't changed very much.

If it has - - if it has, it's a slight, negative bias, but basically because of North Africa, not West Africa.

Yes.

And the - - on the other hand, if I had to change my bias for MEA, for Middle East/Asia, it would be slightly more positive than it was at the end of Q1.

Okay.

But skewed towards the end of the year.

Okay.

So really net-net other than Mexico, on balance, no real change from what you thought was the case in Q1?

Not really, no.

Okay.

A little bit of a shift - - shift away from Africa towards Asia, but apart from that, not really.

And, of course, Mexico is worse than we thought at the end of Q1, but apart from that, no.

You mentioned economic uncertainty with regard to perhaps tempering customer appetites a bit.

We know it's early, but as you look into 2011, do you hazard a guess with providing us with a framework for international growth?

- - I still think the international growth for oil stems very much off GDP, so, - - if you look at the latest forecast, they're talking about a 4.3 instead of 4.7 for 2011.

If that turns out to be the case, I think the oil price will be very healthy and international oil will be good in 2011.

If the GDP growth rate slips back, then - - it will affect it consequentially.

Okay.

Next subject here is Gulf of Mexico and I know that this is a tough question to ask, but just a conceptual one.

We had a 30 rig floater market before the spill, likely growing to 40 to 45 rigs.

Now we've had - - had the spill and the likely results are going to be increased costs, increased regulation and generally speaking at a given commodity price, probably lower rates of return for the industry in general, the AP industry, in deepwater Gulf of Mexico, mid-size and large independents getting marginalized and really probably becoming the exclusive province of the super major.

You went from a 30 rig market which was the second largest market in the world likely going to, I don't know, something smaller going forward based upon the return profile getting impaired.

Don't know what that number is, 15, 20 rigs, but looking more like Norway as opposed to the Gulf of Mexico.

You've conveyed a sense of no real change in strategy, but I'm just curious as to your Gulf of Mexico footprint and cost structure - - as you look out - - over the next couple of years, what should we expect to see?

Actually, I think that the issue that you - - the issue you're raising is not the issue, the additional cost?

Okay.

I think the issue that you're raising, which is the very real issue that our customers will have a great deal of difficulty coming to terms with is what is the ultimate liability going to be.

Right.

People who own leases in the Gulf of Mexico because that's the thing that will limit the number of operators, it's not the cost.

Yes.

And so - - we actually have transferred out something like 200 people to US Land and to other places.

And we have loaned 250-odd very skilled engineers, operators, maintenance technicians to other deepwater theaters around the world.

So we have actually retained the potential to come back if and when we are asked to come back.

And - - some of this has been in close cooperation with our customers who don't want that potential destroyed.

I agree with you that the rig is not going - - the market is not going to be the 45 rigs that people were talking about as little as four or five months ago.

I don't know that it's going to be 15 to 20 because I don't think you are going to be able to define that until you actually know how the liability is going to be defined.

There is a risk that you quite rightly point out, that this becomes limited to the super majors and perhaps people with national government backing.

But I think it's a little too early to assume that.

So for the moment - - we've - - we are doing our best to get the Gulf of Mexico to breakeven by lending out people and equipment.

That's going to be very tough in Q3.

And then after that, we'll look and see how it looks afterwards.

Now, in the longer term, I think that people will adapt their deepwater programs to other theaters where perhaps they feel they have a more clement, regulatory climate in which to drill.

I don't know if you looked at the Financial Times yesterday, but there was a very good summary of all the reactions so far around the world in different regulatory bodies to this.

And there isn't one yet that has taken - - and obviously, they don't have the emotion or the problem that the US does, has taken such a firm stand against deepwater and I very much doubt they will.

Okay.

Great.

And Simon, if I could slip just one last one in here.

Could you share with us what the margin improvement was in US Land quarter-on-quarter in the second quarter?

From the first quarter to the second quarter was 15 percentage points.

US Land?

US Land improved by 15 percentage points.

Right.

Okay.

Wow.

All right.

Thanks very much.

Thank you.

Our next question comes from the line of Dan Pickering with Tudor Pickering & Holt.

Please go ahead.

Good morning.

Good morning, Dan.

Andrew, with a lot of moving parts in North America, I heard you talk about taking charge, reorganization, et cetera.

I guess I'm just curious, Gulf of Mexico is going to have a full quarter of impact.

I assume that means third quarter margins will be down relative to second.

And then I'm thinking about how we bounce back from that given cost cuts, et cetera.

Do you think you exit the year, in other words, Q4 margins are kind of in line with this Q2 level or even better?

Or is it going to be tough to get back to these levels by the year end?

So I mean the moving parts that we have, Dan, I mean I have very little - - I have no doubt that US Land margins will continue to improve provided the rig count holds up.

Canada will undoubtedly improve from now on because Canada - - Q2 is their spring break-up.

So the unknown is at what stage can we get the Gulf of Mexico to the point where it's not dilutive to the overall US margin and in Q3 it will be dilutive, there's no doubt about it.

We haven't had enough time to do all the transfers, loans, moving of equipment that is necessary to get the Gulf of Mexico to - - close to breakeven.

So I think you can assume that in Q3, there is a possibility that the effect of the Gulf of Mexico on the other moving parts is to slightly dilute the margin compared to Q2, slightly.

But in Q4, I have no doubt that it will rebound and I think that it will be - - unless something dramatic happens in the Gulf.

And that it will be above the levels - - we'll exit the year above the levels we've shown so far this year.

Right.

That's very helpful.

Thank you.

And then as we think about the seismic business, can you remind us again of how much the Gulf of Mexico represents of Multiclient sales and - - if we think about Q3 and given what's going on in the Gulf of Mexico.

I mean is that going to be a breakeven business overall, seismic in the third quarter, or should it be better than that?

I think it will be - - it won't - - it will be slightly better than breakeven, Dan, but below Q2, partly because of transits and partly because, as you point out, lower Multiclient.

Okay.

Thanks.

And overall margins for Schlumberger, your thought had been in the Q1 call that Schlumberger margins were going to make a fairly steady upward progression through the year.

I mean given all the moving parts, again, Andrew, you see them better than we do, obviously, do we - - do we manage to continue that, do you reiterate that (inaudible-static)?

If we leave seismic out of it as we just discussed that, so X seismic, the two things that have changed since I made the statement in Q1 is, number one, North - - Gulf of Mexico and, number two, the fairly dramatic reduction that's being announced in activity in Mexico.

If you extrapolate those two things - - sorry, if you extract those two things, I don't change my statement from Q1.

Fantastic.

Thank you.

Thank you.

The next question comes from David Anderson with JPMorgan.

Please go ahead.

Thank you.

I just want to ask you a question about Russia.

Russian activity has picked up pretty good this year even beyond the seasonal recovery.

In light of your very large position over there, I just want to get your sense of the sustainability of this market in the next 12 months?

And how concerned are you about the new taxes that are being put in place there?

It seems to be focused entirely on natural gas, so I guess a sense of your oil/gas mix over there will be very helpful?

We don't have a big gas presence in Russia, except in the very high end, so I don't think that will have a dramatic effect.

You're quite right that the seasonal rebound in Russia was very strong and that we think that that will continue through the balance of the summer.

And the question always becomes - - what is the seasonal affect of the winter going to be like next year.

And as to the situation for oil with tax, I think you - - we just need to watch what happens to the overall level of Russian production.

And that will very much govern what happens next year.

Okay.

And a different subject going out of Brazil.

Last quarter's call you had talked about a giant sucking sound that came out of the Middle East last cycle that drove earnings growth and you weren't sure where it was going to come from this time.

In your release today, you highlighted a couple of new stimulations that you are putting in there.

And it just would seem to me that over the next five years with the deepwater activity down in Brazil, that could very well be where that sucking sound comes from this cycle?

Do you view it that way?

How long do you think that takes to play out?

Or are kind of the competitive dynamics different here that makes us a different market from the Middle East in terms of Schlumberger?

No, I don't think the competitive dynamics is different.

What is different is the speed of the ramp up.

In other words, in MEA, in Middle East, the Saudi ramp-up took place over an incredibly short period of time.

They basically ramped up three huge projects in the space of three years.

There's no way that in an offshore development like Brazil, they can possibly ramp-up at the same speed.

And, therefore, while you're quite right that the market is going to go on increasing and going very fast, it will never create - - I don't think it will create the sucking effect that Saudi Arabia created when they went into their big development projects.

Okay.

And just one last quick question on WesternGeco.

I think you guys are projecting somewhere around 50 3D vessels to be in the global market by the end of the year and maybe a dozen or so on the sidelines.

How many of those were you projecting to be in the Gulf of Mexico?

And how should we be thinking about if you have - - if we don't get another lease sale in the next 12 months, which who knows, but if you get three or four, five vessels leaving the market, won't that throw the whole global seismic market into disarray?

I don't know the answer to your question as to the precise number of the new vessels we projected going to the gulf.

But touring WesternGeco this morning, certainly on the basis of the vessel count, they know between now and the end of the year, they are not concerned about utilization.

Okay.

But 2011, wild card?

2011, - - it's just impossible - -

Yes.

- - to know until we have clarity on future exploration activity in the Gulf of Mexico.

Thank you.

Thank you.

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

Please go ahead.

Hi, guys.

Hello, Alan.

Let me see what I have here.

Let me ask you about the North American market here.

Maybe I'm reading into this, but you're tone on the US Land seems less pessimistic than it has maybe in the past.

Is that a function of your restructuring or changes in your view of the fundamentals and/or maybe demand dynamics?

Are you seeing any evidence of investment being swung onshore from the Gulf at this point?

I mean the answer to that is no, we haven't - - I haven't seen any major move in investment on shore.

There may well be some, particularly with the independents.

My view of the fundamentals of gas, I'm sorry, is I'm still puzzled because gas supply is still out stripping the recovery and demand.

And - - the question is - - I hear all these reasons why people are drilling.

The question is how long is that going to last?

And the only assumption I've made, Alan, is it's going to last for the rest of this year.

Beyond that, I'm not making any predictions.

Okay.

So you're - - essentially you're going to take the high level of activity and pocket that and then see what happens - -

Exactly.

All right.

We're not going to sneeze at it.

Absolutely.

I understand.

The other thing, last quarter you mentioned a decline in deepwater rig rates as a potential catalyst for exploration spending.

With kind of recent events, it seems that this may accelerate.

Is it too early to expect to see any signs of increased demand for seismic beyond 2010?

Can you comment maybe, I guess, on how do you think the cycle for seismic might unfold over the next 18 months?

I don't think that lower rig rates will affect seismic.

What I do - - because I most - - most of our customers, particularly the big ones overseas have portfolios that will allow them to generate exploration drilling prospects without shooting additional seismic.

I think the question is at what stage will they be tempted by lower rig rates to increase exploration programs.

And I don't think you'll see much of that in 2010, but if the oil price is decent and the rig rates are low, you may well see something of that in 2011.

What's the well oil price to incite the incremental seismic?

Does that need to be 80 or is 70 enough?

I think it's bouncing towards 80 instead of bouncing all the time towards 70, Alan.

Okay.

That's all I have.

I appreciate the answers.

Thank you.

Thank you.

And our next question comes from Michael [LaMotte] with Guggenheim.

Please go ahead.

Michael?

Yes.

Good morning.

Welcome back.

Thank you very much, Andrew.

Quick question on the Middle East.

It's been interesting to watch the rig count come down and Saudi come back.

As you pointed out, they were a big driver of growth in that region in the previous cycle.

What are we seeing in terms of mix shift that's allowing the revenues and margins to hold up?

Exploration and deep gas development - - deep and toxic gas development.

In Saudi and UAE?

Saudi, UAE, Kuwait, to a lesser extent in Amman, it's tight, it's not particularly toxic.

And then, actually, exploration has been good in the Far - - it was very good in the Far East in Q1, slightly weaker in Q2, but we expect a rebound in the second half of the year.

The reason for the question, I think, is we talk about - - gas, the global market, obviously LNG creating looseness in the international market and we know what's going on in the US.

There are pockets where you have countries that are short gas and short power in particular, as you pointed out - - Saudi being one.

And when they - - when they produce domestic gas, it's normally to substitute oil, so it releases oil for export.

Right.

Not in Saudi, obviously, but in other countries.

Okay.

If I think about India, there's another market that's very short power and looking to develop gas.

It's just the country has not been talked about much in the last couple of quarters.

I'm just wondering, excuse me, if you could speak to what's going on in that market?

I mean I think it's a fairly steady, long - - long exploration process that's taking place offshore.

And, actually, there is some interesting work going on in onshore in gas particularly, even from working shale gas.

So, yes, the interest - - of India in gas is rising, Michael.

But apart from the offshore development, I don't think there's anything major yet that they are putting into development.

Okay.

Is it something that maybe we could see step up in the next 12 months or is it further out, do you think?

I think it's probably - - I think there's a lot of work to be done before they know exactly what they want to do, so - -

Okay.

Last one for me, if - - switching to US Land, you've mentioned, I think, on the Smith conference call that we would be moving towards drilling geologically as opposed to geometrically.

I heard anecdotes - -

Drilling and completing.

Drilling and completing, all right.

I've heard anecdotes that some of these bigger fracs and closely - - close proximity wells, that you're getting fluid invasion from one or the other and sort of problems with sort of just getting bigger and louder, so to speak with the frac.

I'm wondering if that kind of trend is actually going to be an accelerant to exactly what you're talking about - - drilling geologically?

I can't speak to fluid invasion.

I don't know all about.

I'll find out, but I don't know as I speak.

What I can speak to is in these large fracs, percentage of perforations that actually produce is quite low.

And obviously the more perfs you frac, the more water you use.

And, therefore, if you can devise a method under which you only compete with perforations, you're pretty sure you're going to produce, you'll use less water.

And hopefully, you'll have a more productive well.

But I think this is - - I would reemphasize that this isn't gold.

I don't think we're there yet.

Okay.

Thanks, Andrew.

Thank you.

Next question is from Andrew [Sudito] with UBS.

Please go ahead.

Good morning.

Good morning.

Andrew, given your comments that certainly this recovery is driven by oil activity versus oil and gas, do you believe it's going to be more difficult or take longer before we can push for pricing as it simply will become longer before capacity becomes tight?

Are you talking - - you're talking overseas, I assume?

International, right.

Yes, it's obviously the slower the rig count climbs, the longer it's going to take.

But it's going to be, I think, more selective by service rather than the general sort of shortage that occurred in 2005, 2006.

Okay.

So - - it's going to depend very much on the nature of activity, as exploration is development, et cetera.

And that's where you think the product lines or specific regions, where do you believe we could potentially see pricing gains first?

Well, I still think that the first signs of shortage, or not shortage, but the first signs of our ability to look at pricing because of type of capacity is going to be in drilling tools, probably.

But I mean it's still early days.

It's too early to start, to start really knowing.

That's more my feeling than any tangible evidence.

And certain regions over others?

Well, I think it will occur offshore before it occurs on land, put it that way.

Okay.

Fair enough.

And then when you think about international margins, 2008 you were 29%, today we're at 22%.

When you think about 2011, is it fair, do you assume a slow and steady recovery, that we would be in the mid-20s or is higher or lower possible?

Like I said in answer to an earlier question, an $80 oil price would stimulate considerable activity for oil in 2011.

And if that's the case, then - - I don't think, and I've said this before, I don't think we'll get back to the 2008 margins if only because of the mix and the speed with which activity is climbing.

But certainly we will have another margin improvement.

Okay.

Then finally, when you think about international growth in 2011, as far as year-over-year growth, what are your thoughts there as far as percentage or range?

I'm not going to start giving numbers on 2011 international growth in July 2010.

It's way too early.

Your crystal ball is not that good?

No.

All right.

Thanks so much.

Thank you.

Next question is from Geoff Kieburtz with Weeden & Company.

Please go ahead.

Thanks very much.

Andrew, in responding to an earlier question you seemed to sort of, I think I took the message that your view about the kind of multi-period outlook say has not really changed since the first quarter with the exception of the Gulf of Mexico and Mexico.

Yes.

On the CapEx side, it seems like your - - through the first half spending considerably below the run rate that - - your full year outlook - - would suggest.

What's going on there?

Why is that?

We always do, Geoff.

Okay.

Second half is always stronger.

Okay.

So it's nothing new.

It's pretty - - pretty much par for what happens every year because the field wants their CapEx earlier and manufacturing does their best, but they can't necessarily deliver it.

So CapEx is always higher in the second half than the first half.

Is there any sense that supply chains are starting to become constrained?

Generally, no.

There are one or two specific bottlenecks that occur because they're very specialized, but they're not really very - - they're not something that stops us progressing.

Okay.

And you had bumped up your WesternGeco CapEx a little bit, it seems a little bit inconsistent with the tone you've been talking about in the business.

It's marginal, I think.

Not a big deal.

Okay.

And small question, the equity earnings dropped sequentially in the quarter.

- - why shouldn't we think that's an indication of what's happening at MI?

Well, Geoff, - - the equity line in Schlumberger it's a mix of several items.

There is a bit of impact coming from the deepwater moratorium, I think, on some of our investments, not necessarily on the MI, but it is - - it's a mix.

You will always see a bit of a fluctuation.

Okay.

And finally, could you give us any guidance?

You mentioned in the release that Geoservices did impact revenues somewhat in the quarter.

Can you give us any idea of magnitude and/or - - regions that were impacted?

So, Geoff, it's one month (inaudible) the month of June.

Yes.

We account for Geoservices on a one-month lag, so it's a one-month only that was reported in the - - in the second quarter.

It's very marginal and it is spread over most of the areas outside North America, more outside North America than North America and it's a very marginal.

Great, thank you.

It's one-month only.

Yes.

Okay.

Thank you.

Thank you.

Next question is from Bill Sanchez with Howard Weil.

Please go ahead.

Good morning, Andrew.

Good morning, Bill.

Andrew, you've talked a lot about your expectations in the deepwater as it relates to the Gulf of Mexico incident and the impact on activity internationally.

I was just curious if you could talk a little bit about with people and equipment now making those moves internationally in some cases if they're not going to US Land.

Can you just talk about the pricing environment and whether or not that's gotten more competitive, even if activity stays similar in your mind, but activity - - or pricing gets more competitive?

So in deepwater, we have not seen and I do not expect to see on existing contracts any request to revise our pricing because more service capacity has become available.

I think that people are going to stick with their contracts and worry more about service, quality and risk than they do about pricing.

As to new bids, we haven't actually submitted very many since this happened, Bill, but I can't give you an intelligent answer.

Yes, obviously, pricing will, on new bids, probably suffer a bit.

To reiterate, I think anyone drilling in deepwater these days is not going to want to take risks.

Do you expect a list of the contracts, the service contracts you'll bid on in deepwater offshore markets to be similar, Andrew, as a result of this?

Or do you think guys will look for shorter as they want to see what the impacts of maybe additional capacity could mean longer-term to the market?

I think that in this year, if there is any, rebidding of rigs programs that bid, they are likely to be short-term.

And that we'll only see a return to the longer-term commitments next year.

Okay.

One follow-up, could you, as far as the restructuring is concerned, do you think we're done by the end of the third quarter on that?

And I guess there was a comment made earlier about you didn't see any benefit in your 2Q margins from the restructuring.

I'm just curious if you can give us an idea structurally going forward what kind of basis point margin improvement do you think you can get in your US onshore or your North America as a whole as a result of this restructuring?

Is that something you can quantify for us?

We think that we'll be highly competitive with our competitors by the time we finish, at equal mix.

Is third quarter pretty much the conclusion of this?

Do you think you're done by that point, Andrew?

No, I think we - - I think a lot will have been achieved by the end of the third quarter, but I think as I originally said, it's 2011.

Okay.

All right.

Thank you.

Thank you.

We have time for another question.

That comes from the line of Robin Shoemaker with Citibank.

Please go ahead.

Thank you.

Andrew, I wanted to just get your thoughts about the IPM business.

Presumably when Mexico rebounds that market, as it inevitably will, that will play an important role.

But is there any change to your thinking about the IPM business model internationally in terms of the very strong outlook you had and today?

No, I think that the only change in the outlook we have for IPM is that, it's twofold, actually.

First is that the balance, the portfolio is becoming much more balanced between Latin America and the rest of the world because it was originally very highly concentrated in Latin America.

And secondly, that there are two types of well construction contracts evolving, partly because of Iraq.

One of which is the Mexico one, which, as you know, is very much lump sum, performance-based, not necessarily the most attractive.

And the ones in Iraq, which I think will be much more disciplined and more of the execution contracts rather than risk contracts.

Okay.

Are there any, as some national oil companies become increasingly more technologically capable and sophisticated.

Do you see IPM becoming less important in those countries, or more?

The long-term objective of IPM from the very beginning was not to drill wells, it was to assist in the management of material production.

And the business case for assisting the management of material production for an oil company, national or otherwise, is that they don't have enough internal capacity to do everything they want to do.

And we have seen encouraging signs that shift is beginning to take place.

So - - over the long-term, while well construction, I think, will always remain a part of it, packaged well construction, we think that the long-term future is in the management or assisting in the management of material production.

Okay.

All right.

Thank you.

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

Julie will now provide the closing comments.

Thank you.

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