斯倫貝謝公司 (SLB) 2010 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Schlumberger Limited third quarter 2010 results 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, Malcolm Theobald.

Please go ahead.

Thank you, Greg.

Good morning, and welcome to the Schlumberger Limited third 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, 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 nonGAAP financial measures.

A detailed disclaimer and other important information are included in the FAQ document, which is available on our website or upon request.

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

Thank you, Malcolm.

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

Third quarter earnings per share, excluding charges and credits, was $0.70 per share.

This is an increase of $0.02 sequentially, and $0.05 compared to the same quarter of last year.

During the quarter, we recorded $0.30 of restructuring and merger-related charges, and a $0.98 gain on our investment in M-I SWACO.

These items are more fully described in our earnings press release.

As a reminder, we will continue to incur merger and integration-related charges during the next few quarters.

The third quarter results include one month of activity relating to the merger with Smith.

This transaction was dilutive to our Q3 results by just under $0.02 per share, and it's estimated to be dilutive to our Q4 earnings by approximately $0.05 per share.

We issued 176 million shares in the Smith transaction, and due to the timing of the close, only one-third of these shares are included in our weighted average diluted shares outstanding for Q3.

The full 176 million shares will be reflected in our Q4 EPS calculation.

During the quarter, we continued to feel the effect of the deep water drilling moratorium in the US Gulf of Mexico.

We estimate that the moratorium resulted in a reduction of our Q3 earnings of approximately $0.02 to $0.03 per share.

The earnings effect of the moratorium in Q4 is estimated to be approximately $0.04 to $0.05 per share.

Turning to the business segments.

Oilfield Services third quarter revenue increased 2% sequentially, while WesternGeco revenue increased 1%.

The legacy Smith businesses contributed $810 million in revenue to the quarter.

The growth in Oilfield Services revenue was largely attributable to the continued strong activity and increased pricing in US land, as well as the impact of three months of GeoServices activity in Q3 as compared to one month in the prior quarter.

These increases were partially offset by a reduced IPM activity in the Mexico/Central America GeoMarket, and the full quarter's effect of the deepwater drilling moratorium in the Gulf of Mexico.

Oilfield Services pretax operating income of $1.1 billion increased 3% compared to the prior quarter, while pretax operating margin increased 15 basis points to 19.9%.

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

International margins were down slightly to 21.4%, primarily due to the decline in activity in Mexico/Central America.

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

North America pretax operating margin improved 704 basis points to 17.4%.

US land margin improved significantly by almost 9 percentage points, as a result of higher activity and better pricing.

However, this strong performance was tempered by the effect of the deepwater drilling moratorium.

Latin America margin declined 302 basis points to 14.9%, due to the decreased activity in Mexico/Central America.

Europe, CIS, Africa margin was essentially flat at 18.3%, while the Middle East/Asia margin declined slightly by 84 basis points to 30.3%.

Sequentially, WesternGeco pretax operating income decreased 14% to $40 million, and pretax operating margin slipped 145 basis points to 8.3%.

The three Smith segments contributed $84 million of pretax operating income to the quarter's results.

Now turning to Schlumberger as a whole.

The effective tax rate, excluding charges and credits, was 21%, representing an increase of over 3 percentage points compared to last quarter.

This increase was primarily driven by the fact that we generated a significantly larger portion of our earnings in North America in Q3, as well as the impact of the Smith merger.

As you know, Smith is a US company, and as such, has a higher effective tax rate than Schlumberger.

The ETR is expected to experience at least a similar increase again in the Q4 due to the inclusion of Smith for an entire quarter combined with the effects of the continued positive momentum in North America.

We ended the quarter with $3.2 billion of cash and investments on hand, and short-term debt of $1.9 billion.

Net debt was $3.5 billion at the end of the quarter, as compared to $766 million at the end of Q2.

This increase reflects the assumption of $1.8 billion of net debt from the Smith merger.

Other significant liquidity events during the quarter included $824 million of CapEx, and $463 million of pension plan contributions, and $396 million of stock repurchases.

Although we were blacked out for one month during the quarter pending the Smith shareholder vote, we repurchased 6.8 million shares at an average price of $57.91.

We expect to be aggressive and opportunistic with our buyback program going forward.

During the quarter, we launched a program to buy back certain notes of both Schlumberger and Smith.

The program continues, as you may have seen yesterday in a separate press release.

This ongoing initiative will help us to realign our capital structure following the merger.

Oilfield Services CapEx is now expected to reach approximately $2.5 billion in 2010, while WesternGeco CapEx is expected to be approximately $315 million.

CapEx for the legacy Smith businesses from the acquisition date through the end of the year is estimated to be approximately $260 million.

And now I turn the conference over to Andrew.

Thank you, Simon.

Good morning, ladies and gentlemen.

I have a few comments to add on the quarter's results before turning to the outlook for the rest of the year.

As Simon has said, the sequential revenue increase was largely driven by strong improvements in US land and Canada, which more than offset the sharp decline in the US Gulf of Mexico, as the deepwater drilling moratorium took full effect.

Favorable activity, coupled with robust pricing power for pressure pumping, and the effects of our restructuring efforts led to a major improvement in margins.

Our North America team under Paal Kibsgaard's guidance has made major improvements in efficiency and utilization across the country.

The sequential margin improvement was very satisfactory, and we exited the quarter at a high point for both revenue growth and margins.

Outside North America, our activity was mixed.

Solid improvements were recorded in Asia, Russia, the North Sea, western southern Africa, which offset continued weakness in north Africa and the Gulf of Guinea.

Latin America performed well in all GeoMarkets except Mexico, where budget constraints, weather and security concerns, led to major reductions in IPM project activity.

Higher exploration activity is beginning to result in better technology sales.

New technologies continue to underpin our results, as the quarter's highlights clearly show.

While a number of these have already seen growing market penetration, such as the active family of real-time coiled-tubing services, others such as the unique PowerDrive Archer high-build-rate rotary steerable system are just entering field service.

This particular technology can eliminate the need for a pilot hole in horizontal well drilling, by building an angle much more sharply than other rotary steerable systems.

Other new technologies were unveiled at the Society of Petroleum Engineers Technology Conference in September.

These included the unique Wireline Dielectric Scanner multi-frequency dielectric dispersion service, which has already run 250 jobs in 20 countries during its introductory phase.

This technology enables the determination of residual oil saturation in carbonate reservoirs, hydrocarbon volume in low resistivity or low contrast shaley and laminated sand formations, and hydrocarbon volume mobility in heavy oil reservoirs.

In testing services, we announced the Quartet high-performance downhole reservoir testing system, that allows plants to isolate, control, measure and sample reservoir tests in a single run, using a downhole assembly only one quarter of the length of conventional technology configurations.

In software solutions, we announced the release of the Merak Peep 2010, the cornerstone of the Merak suite of economics planning and reserves management software.

This new release, which delivers a complete refresh of the application, allowing customers to proactively respond to complex operational conditions, and rapidly answer business challenges, was developed in collaboration with 15 oil and gas companies, majors, nationals and independents.

We also reported a significant number of new contracts in regions across the world, including China, Brazil, Libya, France and Russia.

Many of these were based on previous strong performance of certain technologies in the field, while others were supported by the growing capacity for integration across the Schlumberger technology portfolio.

The recent realignment of our portfolio within the three product groups following the acquisitions of both Smith and GeoServices is already supporting further integration, particularly in drilling services.

In addition to these contract wins and new technology introductions, I would also like to mention that we have successfully begun operations in the Red Sea for Wide-Azimuth Seismic acquisition.

[Widen], our multi-azimuth, has now been contracted in five large basins outside the Gulf of Mexico.

First it was the North Sea, and this year we have shot in west Africa, and are now starting in both the Red Sea and Brazil.

We will soon shoot in the Mediterranean.

The spread of wide or multi-azimuth is helping to absorb the extra capacity coming out of the Gulf of Mexico on the new build boats entering the market.

In a majority of these regions, the industry is looking for reservoirs and complex geometry in deep water.

In other areas, we announced the signing of a Letter of Intent to swap certain assets in Russia to build critical mass in drilling services.

Under the terms of the agreement, Eurasia will acquire a number of Schlumberger drilling rigs, while Schlumberger will acquire a range of Eurasia service assets including directional drilling, measurement well drilling, well cementing and drilling fluids.

Further, both Companies have agreed to enter into a strategic alliance upon completion of the transaction, whereby Schlumberger will become the preferred supplier of drilling services to Eurasia Drilling for up to 200 rigs for a five-year period.

This agreement not only increases the market for our services across the rig fleet of the largest Russian drilling company, it sets the development for fit-for-purpose bottom hole assembly technology, as drilling intensity increases in Russia in order to sustain hydrocarbon production.

Turning now to the future, we expect the fourth quarter to show continued strong activity in North America on land, but we do not expect any rapid return to deepwater drilling in the US Gulf of Mexico, despite the lifting of the moratorium.

Further clarification of the new rules and liabilities under which activity will be conducted will be necessary before any major increase in activity takes place.

Our restructuring efforts will continue to deliver margin improvement in US land.

Outside North America, the delays induced by the knock-on effects of the Macondo well are now being reabsorbed.

This, and the recent strength in oil prices, gives us some optimism that the rate of recovery overseas will accelerate slightly.

The normal seasonal declines in Russia will be present in the fourth quarter, and the future of Mexico operations will remain uncertain until next year.

WesternGeco will show improvement in the fourth quarter, due to increased Gulf of Mexico multi-client sales.

We are very pleased with the rapid progress that is being made on the integration of Smith and M-I SWACO.

The integration teams and the area coordinators are rapidly identifying both revenue and cost synergy opportunities that all go well for 2011.

The enthusiasm among the employees of all companies is obvious and constructive.

The integration of GeoServices has also progressed, and we have increased market focus of GeoServices technologies by the separation of their mud logging and slick line businesses within the Schlumberger technology portfolio.

Recent robust demand increases, as well as predictions of higher demand in 2011, will continue to support oil prices and activity absent any further deterioration in the world economy.

Further demand increases for natural gas will be necessary to sustain the current level of North American gas drilling activity beyond a certain point in time.

And I will now turn the call back to Greg.

Greg?

(Operator Instructions) The first question comes from the line of Brad Handler from Credit Suisse.

Please go ahead.

Thanks, good morning.

Good morning, Brad.

Maybe I could ask for a couple of comments on WesternGeco.

Couple things in your comments, Andrew, sounded encouraging with respect to both soaking up assets, the wide and multi-azimuth comment, as well as your comments on the fourth quarter and multi-client sales.

So could you elaborate on those, please?

Do you have a better view for pricing improvements now in 2011 as a function of better asset utilization, and again on the data side as well?

Well on the data side-- let me answer the data question first.

I mean nothing is ever sure on Gulf of Mexico multi-clients until the quarter ends.

But the level of inquiries is encouraging, and as we've mentioned before, I think that some of our customers are going to spend a little bit of the money they didn't spend on drilling in improving their data portfolio.

So that deals with Q4 multi-client, Brad.

Okay.

What I'm trying to communicate is that the spread of wide or multi-azimuth outside the Gulf of Mexico is going to soak up capacity.

I don't think, or I don't know whether that's going to be sufficient to move pricing in 2011, but it-- I think it is going to be sufficient to absorb capacity which seems to be becoming a fear that you hear around the community.

I actually think that there will be enough work to absorb most of the bulk capacity.

If, of course, work starts again in the Gulf of Mexico, then it would have an almost immediate effect I think on pricing.

But I'm not going to predict that at this stage.

Sure, okay.

Maybe just as a simple follow up, obviously the fourth quarter is seasonally a little softer in marine acquisition, but the contract announcements in Brazil, Egypt, et cetera, and your new vessel, are those enough perhaps to offset it?

Might you have more of a flattish quarter in marine in fourth quarter?

Just hang on a second, and we'll try and help you there.

No, there will be a seasonal dipper.

There will be a seasonal dip, perhaps not as bad as it's been at some times in the past but there will be a seasonal dip in Q4, which is essentially the North Sea.

Right, right.

Okay.

Well very helpful.

Thanks, guys.

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

Please go ahead.

Hi, good morning.

Good morning.

Andrew, can you give us just a little more color on the charge that you took in Mexico?

Was it due to just purely restructuring down there, or was it a write-down of prior profit essentially due to some project-based accounting?

No we don't use project-based accounting, Dan.

We only recognize revenue when PEMEX accepts the stages of the wells that we've drilled, and therefore there is no element of profit in the charge we took.

Simon, would you like to describe what the charge was?

Most of the charge relates to the early termination fees to the drilling contractors.

We don't own the drilling rigs.

We do have a joint venture, as you know, for some of the rigs, but this is all mostly the early termination fees for the rigs.

So we don't recognize revenue on a percentage of completion or on any of that nature.

It's mainly early termination fees, as I said, and some restructuring associated with the severance.

That's very helpful, given some of the other stuff we've seen.

So as a followup, unrelated, Andrew you mentioned Russia quite a bit the press release.

You recently did the deal with Eurasia.

At the same time, there are a number of NOCs talking about spinning out their service divisions.

Can you talk about Schlumberger's strategy there, the growth outlook in general?

But then also what do you see as the opportunity through all this for Schlumberger to potentially take some share?

Well the Eurasia transaction is very much what, a phrase I don't like but I'm going to use it, a win-win transaction.

Because we could never build a 200 rig fleet in Russia of the quality of Eurasia's.

And as you know, following the Smith transaction, our objective is to sell more drilling services.

And Eurasia's objective, as often the rig owner is the general contractor, is to improve their performance.

So the -- what it does for us is to give us access to 200 rigs, whereas before, including the side track and work over, we had about 30.

And what it gives to Eurasia is access to our expertise in drilling services, and on certain of the wells they drill, access to the high-end services.

And in terms of the divestitures in Russia, we will, I think, participate but extremely selectively, because after 15 years there is a willingness and there is capital in Russia to grow a domestic service industry, and part of that is the consequence of that is companies like Eurasia and Integra.

And we will participate where we can draw a technology advantage through the participation.

But I doubt we will go any more into acquisitions to acquire market share.

And just as a follow up on that, did I hear that correctly that you feel that the offering that Smith has has a large role in Russia?

The offering that Smith has and the offering that Schlumberger has and the offering that we have through certain companies we acquired previously in Russia in the drilling services business has application, yes.

Great, thanks.

I'll turn it back over.

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

Please go ahead.

Hi, good morning.

Good morning.

Question I had for you, Andrew, is on the North American international front.

You clearly made some significant headway on the restructuring process, maybe to a greater degree than most may have anticipated.

In your mind, and in your business plan here, is the rate of change on North America now just bound to slow given the magnitude of ramp-up that we've seen?

Or do you still expect substantial improvement in your operating margin performance over the course of the next few quarters?

I think-- I don't think we can do that sort of improvement every quarter, because this is the first quarter that they got the full effect of the restructuring.

But we do anticipate that we will have further improvements in the margin performance in Q4.

I think that we will probably see them through the first quarter and beyond that I don't know.

Because it would no longer be a question of our restructuring, it'll be a question of what happens in the market.

Okay.

And then I was just curious on the revenue synergy front, there really hasn't been much discussion on that recently, and I'm sure you guys are kind of working through all your opportunities at this point.

I was just wondering if you might be able to give us some glimpse as to where a starting point could be for revenue synergies?

And if not, when you think you might be able to give us some elements of quantification on that?

We had revenue synergies in September, but they were obviously at one month, they were very small.

Now we have named area coordinators, so each of the Schlumberger geographical area has a coordinator, who reports back on a weekly basis.

And the identified opportunities for revenue synergies make us extremely optimistic that this is going to be -- go a little-- quite quickly, Kurt.

So I don't have a good -- I can't announce a number, but when you look at the quantity of opportunities that they're sifting through, it looks pretty good.

Okay, great.

Thank you, Andrew.

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

Please go ahead.

Thank you.

On the North American side, is the restructuring complete now?

Is this simply just about execution from here on out?

And basically what do you need to do now?

Is this about building up your presence in certain regions?

And I guess kind of a follow up, how are you viewing this market now as you did last cycle, how are you going to be approaching this over the next couple years?

You're talking about North America?

Yes, I am.

Okay.

So look, on the restructuring, we're not complete, but the bulk of it's done.

I mean we still have certain facilities that we're closing, certain consolidations that are going on between areas, certain procedures in equipment utilization, but the bulk of it is over, but it still will contribute a bit in the fourth quarter to margin improvement.

And how am I viewing this cycle?

So I think that this cycle-- obviously the volatility of gas prices is being dampened by the liquid-rich shales where the activity has been migrating over the last few months.

There is a ceiling to that.

I'm not quite sure where it is.

And the ceiling is governed by the fact that however much liquid you have in it, you still need to get some money for the gas.

So-- and that means that the shales that are going to be drilled are going to be not all the shales are going to be the liquid-rich ones.

So I think the volatility will be dampened, but fundamental economic principles have not gone away, and at some stage activity will moderate.

But please don't ask me when it is because I don't know.

I wouldn't do that.

Just one other follow-up question on your-- on the WesternGeco side.

I was just wondering if could you expand a little bit on the multi-client seismic activity in the Gulf?

You mentioned you get a lot of inquiries, but I'm just wondering, are operators preparing for a lease sale in the spring?

I believe a majority of that business come from the E&Ps.

So I'm just wondering, how concerned are you about their future in the Gulf and what that means to the WesternGeco business model as it pertains to the Gulf?

So where we look at the mult-client inquiries that we're getting today, they are coming from companies who I am pretty sure, I'm almost certain, will be drilling again in the Gulf that-- which gives you an indication of their size.

I think that the E&P presence in the Gulf going forward, and you're quite right to point out that the independents played a large role in multi-client, is undecided at this stage because I don't think it's the rules and regulations surrounding the drilling practices that are going to be important.

It's what is the final solution to the liability that companies have to assume going -- in future lease commitments that they make or drilling commitments that they make.

So we don't know today what the ultimate size of the multi-client market is going to be.

What is true is a lot of our multi-client traction is coming through technology.

The prefunding we're getting for multi-client at the moment is very healthy, but it's based as much on technology as it is on the fact that we're shooting certain areas.

And along those lines, are you moving vessels out of the Gulf?

No, we're down to where we are.

We have permits for the vessels that are shooting, and we don't anticipate moving any more after this stage.

Okay, thank you.

Your next question comes from the line of Bill Herbert from Simons & Co.

Please go ahead.

Thanks, good morning.

Andrew, I'm going to ask you a question that I asked you on the first quarter call, and that relates to the road map for international margins, if you will, between now and over the course of next year, and keeping in mind price activity and mix.

So give us a road map as to how you see international margins unfolding, assuming that oil prices stay above $80 a barrel.

So I think it's important to analyze a little bit why margins have not improved significantly this year.

Okay.

And I think that the first thing you need to say is that Mexico has dampened margins for Latin America, but virtually everywhere else in Latin America margins have progressed.

Yes.

Okay.

You look at ECA, Europe, Africa, C.I.S., the North Sea had healthy improvements.

Western Southern Africa is-- a lot of the projects were delayed by Macondo, but they started towards the end of the third quarter, so that will improve.

The Gulf of Guinea, by which I mean everything from Ghana through Nigeria down to Equatorial Guinea, is being dampened by Nigeria, and of course North Africa has not been good.

And so the slight decrease in margins in ECA is really largely due to the weakness in North Africa and the Gulf of Guinea, which was too much to offset the improvement in the North Sea, Russia and Western Southern Africa.

That's quite, sort of clear.

If you look at EMEA, the only reason our margin declined was because we took all the mobilization costs for the BP [Ramida] project in Q3.

Okay.

If we had not had that cost the margins would have been flat with Q2.

So if-- you go forward into next year, I think that the deepwater activity improvement next year, because of the rigs coming on and because of the Macondo, there will hopefully not be a second Macondo effect, deepwater will improve more next year than did it this year.

We are already seeing to some extent a renewal of exploration programs in areas other than the traditional areas in Africa, and that is helping.

And in the Middle East, if you leave aside Iraq, there are a number of other projects that have very healthy margins going forward.

So overall we've got delayed this year by some extraneous events and some activities that didn't happen, but if oil prices stay where they are, I don't see why margins shouldn't progress next year.

And with regard to what drives margins for next year, do you see any prospect of pricing improvement?

Internationally?

Yes, sir.

Mix-- technology mix pricing improvement, yes.

Okay, and last one for me.

We didn't mention anything about Russia, and I'm just curious as to your outlook for Russia for next year.

I think Western Siberia will be a lot stronger, and Sakhalin will have a bit of a pause because of some shifts in operator activity.

So overall I don't think -- well you may get the same margins but it would be difficult to get improvement I think, because-- just because of our mix.

Got it.

Thanks a lot.

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

Please go ahead.

Good morning, Andrew.

Good morning, Jim.

First question, Andrew, is about Iraq.

How do you expect Iraq now to unfold over 2011 and 2012?

And do you think it's important to have a significant presence in the country on the ground floor?

Well I think the first part of that question is that everyone has a significant presence now.

Everyone has equipment there.

Everyone is doing call-out work.

It's not necessarily in big contracts.

And I think that the real question is really how much of the project activity -- how much of an appetite you have for the project activity.

And frankly, based on our experiences in South America, we are being quite cautious, because the terms and conditions that the operator signed as you know are quite tight.

And therefore they're trying to reflect onto the contractors the same tight conditions in the form of performance, which they are sort of through very tight terms and conditions asking for high levels of liquidated damages.

And in a country where you don't have a great deal of control over the logistics, over security, high levels of liquidated damages linked to performance are not necessarily a good idea.

So on big projects we will be cautious, for everything else we will be aggressive.

Okay.

And the follow up, Andrew, Brazil seems like it's going to be your number one business opportunity in the world over the next two, three, four years.

Can you give me a sense of magnitude on the increases in business you expect there?

And have you noticed any change in the types of bidding that's going on there in some of your major product lines over the last six to 12 months?

Well, no, not really.

I mean there are one or two IPM type opportunities with-- not with Petrobras, but with the others.

The activity with Petrobras, I don't have to describe to you.

And the internationals has been very strong, but of course they're waiting to see what the final form of the new hydrocarbon law is going to be before they invest a lot more.

But overall, it's one--- it's probably this year our highest growth rate, I think, Brazil, of any part of the Company, except North America.

And I don't see any reason why that won't continue.

Okay.

Good.

Thank you.

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

Please go ahead.

Good morning.

Good morning, Alan.

See what I got here.

I'm going ask you about the share repurchase I guess.

The share repurchase was down in 3Q.

You've mentioned a number of times that you had looked to be aggressive and opportunistic in the repo following the acquisition, or whenever actually during the process that you are allowed to be active.

I know you had a blackout there for about a month.

But two things really.

Is there an amount of the $11 billion odd that you paid for Smith that you would want to repurchase?

And two, your share price is sort of in the same range as when the Smith transaction was announced.

You got lots of cash, the debt markets seem accommodating, is there any consideration or appetite for a mini tender offer here?

Can I just say, we're examining all of the above.

Everything you mentioned we're looking at.

It is true in that Q3 we were blacked out for month because we couldn't purchase while the Smith, what was it the reason?

The shareholder vote.

Or for a month in advance of the Smith shareholder vote.

But-- and I don't think I have a fixed portion of the Smith purchase price that we should repurchase.

I think it's to the extent that all the different methods that you mentioned produce an accretive result, Alan.

Perfect.

That's what I like to hear.

My second question, which is clearly not a follow up, is that Smith was kind of hoping to move down its D&E suite of services into the international arena.

When you look at the combination of what you have today or-- does this still make sense as a growth strategy?

I guess did you have that aspect of the market already covered, or are the Smith tools adding to your capabilities to service a broader range of the market?

Essentially are you becoming a D&E category killer now?

So firstly you remember that we were somewhat surprised that we were able to keep the PathFinder, right.

Yes.

But actually, the issue that we've had in our own drilling and measurements over the last five years is coping with the growth.

And the addition of PathFinder allows us to deal with parts of the growth that we absolutely probably couldn't address through our own drilling and measurements.

So, yes, the Smith strategy of expanding the PathFinder offering overseas is not dead.

It's the markets we're going to address with it that may have changed.

And please don't ask me what they are.

All right, that's good.

Thank you very much for the answers.

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

Please go ahead.

Good morning.

Good morning, Bill.

My first question, Simon, is for you.

I know you outlined here this morning the dilutive impact of Gulf of Mexico, roughly $0.04 to $0.05.

And also you gave us the Smith impact of about $0.05.

I'm just curious, appreciate on a stand-alone basis, isn't there some overlap, if you will, in those two numbers?

In other words, the Gulf of Mexico dilution includes also dilution from the Smith acquisition as well, or should those truly just be two independent numbers as we think about the fourth quarter estimate?

It's a good point you're raising.

Actually, it is two independent numbers except for the number of shares that are now issued, right.

So the earnings per share or the cent per share is a bit higher, right.

But it is two independent numbers.

The dilution from the Smith activity includes the impact of the Gulf of Mexico on Smith, which is the M-I SWACO and some in the -- and the twos, so it is two independent numbers.

Okay.

And I guess just looking at the SWACO margin as a whole for the quarter, when you consider that most of the North American exposure that SWACO has is offshore, I see you really don't have the US land offset there, if you will.

The fact that you were able to do flat sequential margins in that business, Andrew, was there something in the international arena that kicked in that we should be aware of going forward as we think about SWACO's contribution, especially to 2011?

I can't think-- I'm afraid I can't think of any individual event.

Must have-- there was a much stronger North Sea in Q3.

But actually SWACO has done an excellent job on land in the US.

I know their traditional exposure was very much offshore, but they have taken a considerable position in US land over the last year.

Okay.

Okay and if I could just ask one more here.

As we think about fourth quarter and the impact of direct sales, Andrew, anything there we should be aware of especially in the Eastern hemisphere market and a potential positive effect on margins?

Well, there will be the traditional year end completions, artificial lift.

The biggest margin effect we will get is through the SIS software sales.

But we do not sell-- remember, we don't sell Wireline or D&M equipment so we won't have any of those sort of sales.

Okay.

Okay, thank you for the time.

Your next question comes from the line of Michael LaMotte from Guggenheim Partners.

Please go ahead.

Thanks, good morning, Andrew.

Good morning, Michael.

Couple of questions on strategy, if I may.

First on technology.

You've talked the last few quarters about the commercialization pipeline and new products and you identified a few of the technologies in your release and in your comments.

Can you talk about where we are with respect to the rollout?

And secondly, what's driving the up-take of the technologies in a market characterized by a lack of general inflation, which can often be an accelerant to up-take?

So actually in the pipeline, when I look at our pipeline now, Michael, the true acceleration is the back half of next year.

So we have a normal number of products filtering into the market now.

The true acceleration is the back half of next year.

There are a number of things driving the up-take.

So first is the Q3, we saw more exploration.

Therefore, a higher quality mix in what we saw.

Oil-- we're $80 a barrel, oil companies are a little less stringent with their engineers in allowing them to buy some extra technology.

And some of the technology, particularly things like power drive I-share, are-- fairly dramatically reduces the operator's cost.

So there's no one reason, Michael, but those are the three that I would identify.

Okay.

And if I think about Archer in particular in having come through the downturn, the appetite for just absolute costs versus performance tends to shift.

We're definitely-- it sounds like we're seeing a shift back in terms of willingness to spend more to get more productivity as opposed to focus on absolute costs.

Is that a--

I think that's fair.

Fair characterization.

Okay, second question, if I look at the comment on the OGX arrangement, I think that sort of this business model approach that you have in projects like this is truly unique and different.

If I think about what growth in that market or that opportunity set looks like over the next few years, is the constraint more Schlumberger's appetite for risk and finding the right type of projects, or is it really in educating the client in terms of the value proposition of what you're doing in that kind of arrangement?

So firstly, obviously post-Macondo, the assessment of risk has become a much more important criteria before going into the execution of those types of projects.

So I mean we actually have had an ongoing program since Macondo to not only review all of the products and services of Schlumberger that provide barriers to influx, but also reviewing obviously all the IPM projects where we have responsibility for it.

So risk is a consideration, but not something that's going to stop us doing it.

It's more a question of the type of customer, educating the customer, and getting the customer to accept that we have all the competence necessary.

So the OGX arrangement is probably the most advanced one of those that we have.

We have others where we provide probably the same degree of supervision but we don't take the same degree of responsibility or risk.

And so actually I think that the extent to which that market grows, Michael, is going to be in function of the type of operators that spring up.

And we have a similar project in Middle East/Asia, which is basically where we're acting for a consortium of local companies who've decided they want to be in the E&P business.

But I really think it's going to depend on how the client base evolves.

Okay, if I could just ask one follow up on that if I look at the portfolio of some of the-- BP, for example, in terms of the review post-Macondo, of call it the proliferation of potential daughter companies, I would imagine that that would invite a pretty interesting opportunity set.

Yes.

I mean we are seeing private equity look at this, but the risk profile for private equity is difficult to manage.

Okay, thank you, Andrew.

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

Please go ahead.

Thanks, good morning.

Good morning, Mike.

Wanted to dig in a little bit on the reorganization you're undertaking along product lines.

And was just wondering if that -- one, what's driving that?

And two, is that something that you were looking at prior to the Smith deal, or was there something unique about the portfolio of assets that you've acquired that's pushing you in that direction?

No look you-- this is a slightly structural question.

When we set up the GeoMarket system 12 years ago, we actually probably had about seven product lines at the time, and therefore to shift responsibility for management from product line to geography was not -- it was not impossible, or to shift a large part of the responsibility.

We now have 15 product lines, and therefore no human being is capable of intelligently managing 15 product lines.

And we've learned a lot about how the geographical organization works.

And whereas it works extremely well for bidding of services, it is not so strong for the bidding of products because when you sell products you need to base your pricing off the manufacturing costs.

And therefore the shift back to groups and segments represents the recognition that this is a much larger Company and it needs a different management style if we are going to carry it forward intelligently.

It does not in any way detract from the ability of the GeoMarket system to provide a sound, intelligent customer interface locally around the world.

And secondly, to run the lowest cost support operation possible for those 15 different product lines.

That's the basic underlying theory.

Okay, makes sense.

And along those lines, I mean how are you balancing the two?

In other words, there are some risks in going too far down that path and thinking in kind of somewhat of a silo mentality, and one of the advantages that Schlumberger has always brought is that the whole is more than the parts.

The GeoMarket managers bring that together.

So that's still very much intact?

Yes.

Okay, that's all for me, thank you.

Thank you.

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

Please go ahead.

Thank you, Andrew.

I wonder if you-- going back to North America for a moment, we've seen tremendous activity in the shale plays as you've indicated in the liquids-rich.

In the dry gas areas we're seeing some decline in activity.

What is your view of the potential for pricing to be weaker going forward in the dry gas shale plays versus the liquid-rich?

Well at some point, sufficient capacity will come on to bring down pricing across the hydrocarbon spectrum.

It doesn't matter whether it's dry gas or liquids.

It's a question of at what point, in my opinion, the capacity in the market overtakes the demand, total demand.

And I don't -- I mean, I'm going stick my neck out now and say I don't think that's going to happen until in the second quarter or third quarter of next year, but there is a risk it will eventually happen.

Okay.

Another question I had was, you've mentioned this year that a great deal of your time has been devoted to the Smith acquisition.

Yes.

And I wonder if you could share with us going forward what would be your highest priorities for your time and attention across all the challenges you face?

Well, I think that Smith will continue to be a priority for at least another year or 18 months.

We've kept the integration team well staffed.

We're managing closely the relationship between the Smith companies and the Schlumberger Companies and progressing quite rapidly across the integration.

But it-- like any problem that is basically a human one, it requires a great deal of attention and a lot of communication, so I will continue to watch that.

And then the obvious other one is ensuring that the passage from me to my successor goes smoothly.

Okay, thank you.

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

Please go ahead.

Thanks very much.

A couple of small questions for Simon.

When you talked about the tax rate in the fourth quarter, are you saying that there's going to be another 300-basis-point increase in the fourth quarter?

That's correct, Geoff, yes.

And would that then be the reasonable run rate for 2011 obviously subject to mix profit contribution?

Yes, subject to mix and some restructuring that we will start undertaking in 2011, yes.

Okay, could you elaborate a little bit on that?

What's the restructuring-- is this a continuation of what you've got underway, or is there additional restructuring?

No, I didn't mean-- well it's more restructuring for the Smith the companies that we acquired and this--

It takes some time, Geoff.

Okay.

All right.

All right.

The-- in the charges, I was I guess a little bit surprised at the magnitude of the WesternGeco charges.

Can you elaborate at all on what--?

No, the-- so firstly the Q charges, first generation Q, which now we have unique in the field, it's very obvious that that is going to be obsolete very quickly, so we're biting the bullet on what remains of the net book value in spare parts for first generation Q.

And in electromagnetics, we down manned our vessels, so the essential of that charge is the termination of the lease on the vessel as well as an equity investment we had in another technology that we don't want to continue.

That does not mean we've exited the electromagnetics market.

We can still bid, and we can reman a vessel as necessary.

And we have stayed very much in the land acquisition market for electromagnetics as well as the processing and interpretation.

All right.

And in terms of technologies, you highlight this Wireline Dielectric Scanner, I may be making this a bigger thing than it is, but is this part of your thoughts, Andrew, about the development of gas shales in particular moving out of the brute force and ignorance?

No, this is not gas shale.

This is a technology that has been around for a long time but until fairly recently, it was almost impossible to build the antenna and the electronics to put it into service.

If we're highlighting, it's because probably it is likely to be the most successful Wireline tool we've introduced for a long time.

Okay, all right.

Could I ask you to elaborate a little bit on the brute force and ignorance topic?

Do you see changes going on?

I think that, I think that actually I was a little primitive with that remark.

I think that as completion technology improves, the economic effectiveness of brute force is still there in the US, not overseas, but in the US.

And probably a technology change is going to be dependent on other things.

I mean it's going to be dependent on water usage, it's going to be dependent on somebody coming with a really good sweet spot identifying sweet or logging well drilling but it's still someway a wager.

Great, thank you very much.

Your next question comes from the line of Doug Becker from Merrill Lynch.

Please go ahead.

Thanks.

It looks like you guys are going to have a modest decline in oil service CapEx relative to previous expectations.

Is this a function of reallocating some capital post the Smith acquisition, or is there another driver there?

Are you referring to fourth quarter?

Essentially just the $2.8 billion for Schlumberger oil services going down to $2.5 billion.

I don't think, has it gone down, Simon?

No, as a matter of fact in the Q4 we don't-- maybe as compared to what we previously announced, we did go a little bit down, yes.

(multiple speakers)

Yes.

Yes, yes and just relative to what was previously announced.

Nothing to do with Smith.

It may be to do with the Macondo effect, and it may be due to the fact that some of the restructuring we've been doing is leading to much greater operating efficiency of our equipment.

Okay.

Is it's not a significant shift in terms of our outlook or anything else.

Okay.

No, that's what I was leading to.

And then in terms of the international rate of recovery accelerating, just want to better calibrate that, is that-- are you measuring that by rig count, is it revenue?

I would say it's project starting.

Okay.

And just one last quick one.

You mentioned the North Sea and the healthy improvements there.

Others have specifically mentioned Norway as an area of weakness.

Any thoughts on what might be the cause of divergence?

No, I mean we-- I don't know, we're very much a drilling Company, drilling and evaluation Company, other companies are more completion companies.

But we didn't see any notable decline on the contrary in our production business in the North Sea -- in Norway, sorry.

Okay, thank you.

And your final question today comes from the line of Ole Slorer from Morgan Stanley.

Please go ahead.

Thank you.

Couple of questions.

One is on the (inaudible) completion, and the second one will be on deepwater exploration in 2011.

First, one of your competitors have argued that they're introducing a deepwater completion tool that's cutting the rig time by 60% to 70%.

Do you see this as a major threat to your deepwater position or how do you intend to respond?

Well actually I'm quite surprised that it's seen as such cutting edge because I think BJ through the Osca acquisition has a very similar system, and so do we.

So they may -- there may be something I just don't know about this, but we don't see any reason for it to be a huge competitive threat to us or others at this point in time.

And the second question is on deepwater exploration outside the Gulf of Mexico and outside Brazil.

There seems to be quite a lot of initiatives kicking off next year.

Could you share with us your view on 2011 as a deepwater exploration year?

Without -- don't ask me to quantify it, Ole, but every indication would be that it's going to be a much stronger year.

And as you say, there are projects opening up in new provinces around the world which are really quite ambitious.

So it's going to be a better year, but don't ask me to say by how much.

No, but it does appears to be going after some world-class initiatives in several basins.

Yes.

I agree with that.

Thank you.

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

Greg will now provide the closing comments.

Thank you.

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