斯倫貝謝公司 (SLB) 2010 Q4 法說會逐字稿

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

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

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

(Operator Instructions).

I would now like to turn the conference over to Mr.

Malcolm Theobald, Vice President of Investor Relations.

Please go ahead.

Thank you, Julie.

Good morning and welcome to the Schlumberger Limited fourth-quarter and full-year 2010 results conference call.

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

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.

We will welcome your questions after the prepared statements.

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

Thank you, Malcolm.

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

Fourth-quarter earnings per share, excluding charges and credits, was $0.85 per share.

This is an increase of $0.15 sequentially and $0.18 compared to the same quarter of last year.

During the quarter, we recorded $0.09 of charges relating to the repurchase of certain bonds and other merger-related items.

We anticipate we will continue to incur merger-related charges throughout 2011 as we continue the integration of Smith.

The Q4 results include a full quarter of activity from the acquired Smith companies as compared to only one month in Q3.

We have continued to make significant progress on our integration during the quarter.

And while the transaction was dilutive to the quarter's results by approximately $0.05, we continue to believe it will be breakeven by the end of the fourth quarter of this year.

Turning to the business segments, Oilfield Services fourth-quarter revenue increased 9% sequentially while WesternGeco revenue increased 17%.

The legacy Smith businesses contributed $2.5 billion in revenue to the quarter.

Approximately 25% of the growth in Oilfield Services was attributable to the traditional year-end surge in product and software sales.

The remaining increase was largely due to the continued strong Well Service performance in US land as well as the revenue generated from the early payout of an IPM gain share project in North America.

Oilfield Services pretax operating income of $1.3 billion increased 21% compared to the prior quarter, while pretax operating margin increased to 224 basis points to 22.1%.

This increase was largely driven by the strong performance in North America, where margin improved by 6.6 percentage points.

Land margins grew 658 basis points to 24%, led by US land.

The [air lifting] out of the IPM gain-share project, which contributed approximately $0.02 to the fourth-quarter earnings per share, accounted for just over 2 percentage points of the North America margin improvement.

International margins improved sequentially by 49 basis points to 21.9%.

This improvement was primarily driven by a more favorable revenue mix in the Peru, Colombia, Ecuador and North Sea GeoMarkets.

In the Middle East, the pretax operating margin decreased as the effects of year-end product and software sales were not sufficient to offset the impact of the weather-related delays in Australia, startup costs in Iraq and an overall less than favorable revenue mix.

Sequentially, WesternGeco pretax operating income increased by $73 million to $113 million.

And pretax operating margin increased by almost 12 percentage points to 20.2% on account of robust multiclient sales.

The legacy Smith segment, particularly Smith Oilfield Services, performed very well, contributing $275 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 23.1%, representing an increase of just over 2 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 Q4 as well as the continued impact of the Smith merger.

We expect the ETR for the full year of 2011 to be in the mid-20s.

This reflects the planned mix of activity between North America and the rest of the world, as well as the full-year impact of the Smith merger.

However, I continue to remind you that we can experience volatility on a quarterly basis due to the geographic mix of business.

We ended the quarter with $5.5 billion of cash and investment on hand, and short-term debt of $1.7 billion.

Net debt was $2.6 billion at the end of the quarter as compared to $3.5 billion at the end of Q3.

This improvement reflects very strong cash collections in the fourth quarter.

Other significant liquidity events during the quarter included $1 billion of CapEx, $449 million of stock repurchases and $200 million contribution to our retiree medical plan.

During the quarter, we issued $1.3 billion of 2.75% notes due in 2015.

And subsequent to the quarter end, we issued $1.1 billion of 4.2% notes due in 2021, and $500 million of 2.65% notes due in 2016.

Yesterday, our Board of Directors approved a 19% increase in our dividend, which brings our annual dividend to $1.00 per share.

This increase reflects the fact that we have not increased our dividend over the past two years, and is consistent with our intention to return excess cash to our shareholders.

Along the same lines, we will continue to be opportunistic and aggressive when appropriate with our stock buyback activity.

Throughout all of 2010, we spent $1.7 billion repurchasing 26.6 million shares at an average price of $64.48.

Despite the fact that we were in a blackout for a significant period as a result of the Smith transaction.

CapEx for all of Schlumberger is expected to approach $4 billion in 2011 as compared to $2.9 billion in 2010.

Lastly, I just want to remind everyone that starting next quarter, our primary segment reporting will be based on our group structure.

In this regard, shortly after this call, we will be publishing an update to the pro forma financial information that we released in early December to reflect the Q4 and full year 2010 results in this new format.

This information can be found on our website.

And now, I will turn the conference over to Andrew.

Thank you, Simon.

And good morning, ladies and gentlemen.

Schlumberger fourth-quarter revenue was $9.07 billion versus $6.85 billion in the third quarter of 2010 and $5.74 billion in the fourth quarter of 2009.

These figures reflect a full quarter of activity from the acquired Smith businesses.

In Oilfield Services, North America activity remains strong through growing demand for services in liquid rich plays and from seasonal improvements in Canada.

Improved pricing and the restructuring efforts that we began in April continued to contribute to margin expansion, particularly for Well Services activities.

Results also benefited from the accelerated IPM gain-share on the sale by the customer of a project on land in the US, which clearly demonstrates how this business model can create value.

Outside North America, activity improvements in the North Sea, West Africa, and Middle East and Asia GeoMarkets -- coupled with strong year-end product sales, particularly for software -- more than offset the combination of continued weakness in Mexico and the seasonal activity decline in Russia.

While this was balanced to some degree by the rapid ramp up of activity in Iraq, which did not yield equivalent profitability as it was impacted by heavy startup costs.

Our WesternGeco excellent fourth-quarter multiclient sales were mostly due to the enhanced quality of subsalt imaging products in the Gulf of Mexico, while the acquired Smith businesses continued to outperform our original expectations, with revenue synergies through the acquisition increasing in each successive month for the quarter.

This quarter's report is particularly rich in technical success, whether through the continuing market penetration of leading services such as the Scope advanced logging-while-drilling measurements, Scanner Wireline technologies or active coil tubing services, the integrated nature of the portfolio underscored considerable success.

Scanner services, for example, are being boosted by the commercial introduction of the latest family member, the Dielectric Scanner.

As a unique industry service capable of measuring saturation in a variety of [weather wire] applications, the service completed a two-year pilot project in Saudi Arabia targeted at reservoir monitoring where 35 logs have been recorded in various fields, both on land and offshore, to assess water flooding sweep efficiency as an aid to field development planning.

The results showed the technology capable of determining oil saturation independent of water salinity while achieving efficiency gains over previous monitoring methods and have now led to the service being considered for use in heavy oil and shaly sand environments.

In reservoir production, active real-time coiled tubing services saw growth, particularly with the active conveyance of wireline flow scanner production logging technology, and with fiber optics' continuous measurements of temperature and pressure along the wellbore.

Expanding deployment of integrated technologies such as these confirm conveyance enabled wireline services to have exciting growth opportunities, particularly in horizontal and extended reach wells.

It is, however, in the drilling portfolio that displayed some of the most exciting successes.

These included the completion of the remote three-well exploration project offshore Greenland that use Schlumberger technologies combined with Smith and M-I SWACO products and services, as well as Geoservices mud lugging.

In Brazil, a similar combination of services helped one well record substantial increases in rates of penetration while meeting all the directional drilling goals.

In this case, the integrated nature of the bottom-hole assembly demonstrated how technology optimization can impact performance in the high-cost deepwater drilling environment.

A third such operation in offshore Indonesia further confirmed the value of integrated bottom-hole assemblies.

Finally, I would like to mention the new inauguration of two new Schlumberger facilities in Brazil to support what has become one of the fastest growing regions in the world.

On November 16, we opened the Brazil Research and Geoengineering Center in Rio de Janeiro, and the following day, our latest new generation operations base in Macae.

The new research center is designed to promote the integration of geo-sciences and engineering to improve hydrocarbon production and recovery from the complex, deep water reservoirs and pre-salt carbonates offshore Brazil.

The center also houses a new WesternGeco Geosolution center dedicated to processing of the revolutionary single vessel full-azimuth Q-Marine services that have now perforated all the major offshore areas around the world.

As we look forward to 2011, it is important to remember that the primary driver of our business has always been and will remain the demand for oil and gas.

For oil, 2010 turned out to be the year of the second-largest demand increase in the last 30 years.

The consensus forecast of demand in 2011 shows a further healthy increase.

Oil prices have moved into a range that will encourage increased investment, particularly in exploration, which remains the swing factor in operators' budgets.

While we do not anticipate any substantial recovery in the deepwater US Gulf of Mexico, we do expect a marked increase in deepwater activity in the rest of the world.

These factors, coupled with increases in development activity and production enhancement in many other areas, promise stronger growth rates as the year unfolds.

For natural gas, demand recovery has been less marked.

Increases in supply of both unconventional gas in the United States and liquefied natural gas around the world will limit the progress of prices.

Nonetheless, activity in the United States is likely to remain strong at least through the first half of the year due to the commitments necessary to retain leases, the backlog of wells to be completed, and the contribution of natural gas liquids to overall project economics.

Increased service capacity, however, will negatively affect pricing at some stage during the year.

Overseas, the governing factor on gas activity, particularly in the Middle East, will be the ability of many nations to use gas as a substitute for oil to meet increased local energy demand, thus freeing up more liquids for export.

Elsewhere, the long lead time necessary to execute large gas projects for LNG exports will ensure that a certain level of activity is maintained.

Unconventional gas resources will continue to attract considerable interest outside North America.

The leading activity will continue to be in conventional gas in tight or low permeability reservoirs and in coal bed methane development.

There will be exploration activity around the potential that shale gas offers in many other parts of the world.

Increased activity coupled with greater technology needs of higher exploration, deepwater spend and tight gas, particularly outside North America, will make 2011 a stronger year for Schlumberger.

The importance of risk reduction and the minimization of drilling costs make the acquisitions of Geoservices and Smith major contributors to our future growth in this scenario.

Thank you.

And Julie, I think we're ready for questions.

(Operator Instructions).

Brad Handler, Credit Suisse.

Thanks.

Good morning, guys.

I guess the first question, I would just love to hear a little bit more on how -- on what was a very impressive revenue growth number in the US land market.

Or just a little bit more color, if you would, on sort of utilization of assets.

If you could comment on capacity increase and then on pricing, that would be helpful.

So the biggest contributors in Q4 as opposed to Q3 were still efficiency gains in activity with some contribution, though not huge, from increased capacity.

So it really was more the results of the restructuring efforts.

In terms of price, the Q4 effect was less than the Q3 effect.

So, it really was the results of the restructuring effort, much greater efficiency and much better utilization that led the improvement.

Very impressive.

Okay.

Perhaps as a follow-up, just to stick with the same part of the world, could you offer some thoughts on the Gulf of Mexico and your outlook?

I know you spoke to it a little bit in your comments, but your outlook for the next couple of quarters specifically and then also as we move into the end of this year.

I don't think we anticipate any major return to work in the first half of the year.

I think we may see a few rigs come back.

But we still think that there are a number of issues that the operators really need clearer resolution on before they are in a position to apply for new permits.

And we anticipate that in the second half of the year, the rate of increase will accelerate.

But we're not -- we don't think we're going back to anything like the 33 rigs that were drilling when the moratorium started.

But you assume (multiple speakers)

-- in 2011.

Right.

In 2012, if you're asking -- do I doubt the future of deepwater Gulf of Mexico?

Absolutely not.

And I think that our multi-client sales are a very good proxy for the fact that there is still huge interest in deepwater Gulf of Mexico.

But until some of the questions around the regulation and the definition of liability, and the definition of what constitutes well containment are settled, it's difficult to know exactly who the client base is going to be.

Fair enough.

Okay thank you.

Kurt Hallead, RBC Capital Markets.

Good morning, Andrew.

You referenced, obviously, on your commentary, the IPM project in North America, and you put that impact in the commentary as well.

So I'm just curious here.

Can you elaborate a little bit more on this IPM gain-sharing project?

And can you elaborate more on how this business model has evolved for Schlumberger?

And how can we think about that impacting Schlumberger differentially compared to its peers as we move forward?

So, the project in question was in the Bakken.

The owner of the project was a private equity.

So, therefore, we did absolutely everything.

We invested our services as our share of the investment.

Normally we would have been paid out on the ratio of our services over the balance of the whole project life.

But the agreement contained a resolution in case of the owner selling the property, which gave us the same multiple on our invested services costs as the seller obtained on his sale.

So, what I'm saying is, that it is unlikely that these projects get sold very often because more -- it's far more likely that they continue for long periods of time, particularly outside the United States where they tend to be with national oil companies rather than with private investors.

But it does demonstrate how -- where our technology allows the customer to create considerable value in a short period of time, how we can share in it.

Okay, so in the context of that, as we think about this from a financial community standpoint, it's something that could recur, but is something that is -- (multiple speakers)

No, it's something that is providing a new income stream in Schlumberger which is not particularly visible yet because it's not big enough, but at very satisfactory returns.

The only reason you saw this one in one quarter was because the operator sold it.

And overseas particularly, it's unlikely that operators, particularly as they are national oil companies, will sell them.

So the gain will be spread over contract life as opposed to coming in one quarter.

Okay.

And if I may, just on a follow-up, on US you referenced again some concerns about potential pricing pressure in the market.

Is -- how would you characterize your conviction in that perspective?

And is it something that we could be looking to update and change, maybe on a quarter on quarter basis?

I don't -- I've been wrong on North America so often, Kurt, that I'm reluctant to say too much.

I don't think there's a huge risk to activity in the first half of the year.

I do think that pricing momentum is going to slow progressively.

But at the point where it tips over, I suspect it's going to depend on when the capacity out there is sufficient to address the current activity.

And it looks as if that's in the second half of the year, not the first.

Okay great.

Thanks, Andrew.

Ole Slorer, Morgan Stanley.

Thank you.

Andrew, when do you think that we'll spud the first exploration well in deepwater Gulf of Mexico?

I'm going to go out on a limb here and say the end of 2011 or the beginning of 2012.

When you say -- are you saying rank exploration or delineation?

Rank exploration.

2012.

I'm going out on a limb.

I'm guessing.

So can you talk a little bit about what could -- your thought process around why 2012 and --

For all the reasons I gave to Brad earlier.

Firstly, they -- there is -- while some of the regulations have been defined, some of them haven't.

The need for environmental assessments and spill containment capability is on the way, but is not yet there.

And it's not yet, I think, necessarily clearly understood how the operators are all going to share that.

I think that the operators are not going to commit until they are pretty sure of the framework within which they are going to operate.

And I just doubt that for rank exploration, we're going to get that clarity in 2011.

And if we look elsewhere in the world, what do you see as the most prospective exploration bases at the moment?

And whether it's a seismic activity or well testing or any other of your exploration oriented services, are there any new basins that could in 2011 pick up the slack from Gulf of Mexico?

Well, when we look at -- let me answer you that another way.

When we look at deepwater in 2011, the number of affected rig years added -- so this is not the number of rigs added.

It's the number of rig years, which is the number of months they are actually drilling, right?

Is much, is substantially greater than in 2010.

And if we look at -- if I look at -- if I leave aside Brazil where everybody knows the story and you can, to some extent, make your own estimate of how many rigs will actually get added, then I think the most prospective area we're going to see in terms of deepwater exploration in 2011 is West and East Africa.

And to some extent, remote Indonesia.

If I may ask a third question, what are your thoughts on WesternGeco in this context?

Is the fact that the Gulf of Mexico is a bit of a vacuum maybe this year, a problem?

Or is the international momentum strong enough to (multiple speakers)

We think that momentum in proprietary seismic outside the United States is sufficient to absorb capacity, but the lack of the Gulf of Mexico is going to slow pricing.

We thought we would get pricing momentum back early this year.

We are now thinking that if we do get it back, it's going to be late this year.

The big question, I think, on seismic for 2011 is, if there is prospectively a large lease sale at the beginning of 2012, then multi clients could be very strong in the second half of this year.

Thank you very much.

Michael LaMotte, Guggenheim Partners.

Thanks, good morning, Andrew.

If I could ask a question on fracking as it relates to a comment you made earlier last year about drilling geometrically versus drilling geologically, the frac market has been essentially geometric as well.

But there is evidence that that market is perhaps migrating more towards an intelligent model faster than the shale drilling market in North America.

Could you talk about that?

I'm sorry, you're comparing what -- what are you comparing to the shale market?

The liquid market or what?

I'm sorry.

I'm referring to drilling versus completions, and the trend of geometric to geologic activity.

I think you have to assume that over time, that -- you call it geologically, but geologically, what we're trying to do is to drill in such a way that we can identify the place where we want to have completions instead of geometrically completing it, because we don't really know where the sweet spots are.

We can't classify them well enough to do it otherwise.

I think that progress is being made.

I think that this is going to go faster outside the US than inside the US for the reason that a lot of the environmental concerns and the infrastructure concerns that can be addressed in the North American market cannot be addressed overseas, and therefore people are going to be a lot more careful.

And we definitely are seeing that.

So, over time, yes, I still believe that completions will be designed geologically as opposed to geometrically.

That drilling and measurement will become a tool to reduce the intensity of fracs.

But we're not there yet.

But those markets are essentially trending in tandem as opposed to -- it strikes me that perhaps the completions market with microseismic and variable staging is perhaps moving more towards an intelligent model faster than --

Yes, I don't think we would include microseismic in that, because microseismic is a so-what service.

In other words, it's done after the fact.

What we're talking about is services that are rendered before the fact in such a way that you design the completion to minimize the footprint and eliminate the fracs that never -- the perforations that are fracked and never produce anything.

Okay that makes sense.

For a follow-on, can you talk quickly about the reservoir surveillance collaboration with Shell and what that broader opportunity might look like?

We are seeing a very considerable increase in business associated around the design of EOR programs, particularly in the Middle East.

Shell is very active, particularly in Oman, in EOR.

And the programs that we have with Shell are around services where our capacity to do characterization with downhole tools can be matched with Shell's knowledge of how the reservoir behaves.

And I would say that the collaboration at the moment is linked to very specific services, and going forward we will see how it goes.

Is it a scalable model though?

Sorry, in terms of --?

In terms of participating in these types of programs with other operators?

Well, it's -- to be honest, Michael, we have programs of this sort with lots of operators.

I talked about Petrobras, right?

And the thing -- we have it with many others around the world.

In this particular case, Shell wanted to make a press release.

Okay, so it falls under the classification of generally technical collaborations.

Yes.

Thank you, Andrew.

Mike Urban, Deutsche Bank.

Thanks good morning.

Andrew, you talked about exploration as a swing factor in operator budgets.

Is that something that you are already seeing and is reflected in your current outlook?

Or would you view it as upside as you see demand -- oil gas -- or I guess oil demand continue to improve and confidence improving as the commodity price holds up?

I think you -- it's a little bit of both.

I mean, I think everybody noticed that Totale made a public statement about the amount of exploration they were going to do.

And when we visit potentially strong exploration GeoMarkets at this point in time, we found, we find customers making a lot of inquiries that they weren't making three months ago.

So, a lot of it will be second half year.

And why is it the swing factor?

It's the swing factor because it's the only thing they can ramp up quickly.

They can't ramp up big new development projects quickly because of the amount of engineering that is necessary.

And therefore their swing factor is exploration and, to some extent, trying to enhance production from existing fields.

Great.

That's very helpful.

And an unrelated follow-up, on the CapEx side, a decent increase, but less than I might have thought given that you will have a full year of Smith.

Is that a function of better asset utilization and synergies between the two?

Or is that something that we could see under upward pressure either because opportunities materialize or cost inflation?

Or just (multiple speakers)

So firstly, we always -- we will review CapEx particularly in the CapEx intensive segments every quarter.

And, any CapEx that we authorize in the end of March, for example, will hit the end of the year.

If it's beyond that, it's 2012.

You have to remember that Smith is not a CapEx intensive business.

It is not a CapEx intensive business nearly to the extent that Schlumberger is.

So you can assume that the bulk of the increase is Schlumberger not Smith.

Okay.

Makes sense.

That's all for me.

Thank you.

Bill Herbert, Simmons & Company.

Thanks.

Good morning.

Andrew, similar to the exercise that you took us through on deepwater in terms of markets that are expected to witness the most pronounced positive of rate of change year over year.

Can you walk us through that exercise for international onshore markets?

2011 versus 2010, what looks to witness the biggest positive deltas ex-Iraq?

I thought you were going to let me talk about Iraq, Bill.

(laughter)

Well, you can if you want.

Oh, no.

So there's the one huge unknown which is Mexico, right?

Yes.

And if you exclude that, then you have to assume that Russia will be very positive; should be.

I don't think that the recent change in the export duty law that was announced a couple days ago will have a great deal of effect in 2011 because most of the guys have fixed their budgets already.

Okay.

Then I think you have to assume that places like Peru, Colombia, Ecuador, Land Brazil where you have a lot of new independent operators, it's -- that we will see a recovery in what was a very weak North Africa in 2010.

Weak, as you know, for a number of reasons, but we should see some recovery this year.

And to the extent that the oil price is high, it will be that much better.

Are there markets which are building over and mobilizing over the course of this year which set up for a very strong or much stronger 2012?

Two markets, for example which come to mind which have announced significant multiyear spending programs, KBC, a $90 billion program over call it 5 to 7, 8 years -- something like that.

ADNOC putting $60 billion to work in Zakum.

Places like that, I mean, are there markets that are really mobilizing hard in 2011 to set up for a much bigger 2012?

Yes.

Which are --?

You mentioned the two obvious ones, yes.

The -- if you look back into the 2004, 2007 cycle, the only country in the Middle East that substantially increased its oil production was Saudi Arabia.

Right.

And I think the Saudis feel that it's time the neighbors did their bit.

Okay.

All right.

And then the second line of inquiry, if you will, is North America.

And, not going to pin you down here with regard to when exactly margins roll.

But I guess in terms of your expectation here, using 2006 to 2008 before the world came to an end as an analog, when we had the capacity growth and then the market became more balanced, and margins over kind of 2006 to 2008 normalized if you will.

And if I look at Schlumberger specifically, your margins peaked out at 30%, 31% in North America, and then over two years, basically regressed to kind of a low 20s range.

So it wasn't a collapse, but it was a normalization.

Do you --

Can I just say, it was a lot better than previous cycles, Bill.

Indeed.

And, those were good margins even in sort of a normalized state.

So I'm wondering, is the expectation this time around for a similar evolution?

Or are you looking for something more dramatic with regard to a margin response based upon all of the capacity that's coming?

You mean capacity --

Well, no, the impacts -- so the impact on capacity, you mentioned sensibly that you think that pricing momentum is going to slow.

And the implicit statement there is that margins -- obviously that momentum is going to slow as well.

And at some point they are going to roll.

And I guess what I'm interested in is your perspective with regard to the evolution of that margin roll.

Is it a normalization?

Or is it a more dramatic reduction in margins over time?

What's your expectation at this stage?

I think that service intensity is such that absent a collapse in the oil price, because the collapse in the gas price we basically have already, yes?

Absent a collapse in the oil price, there will be a normalization, but not a total collapse -- in North America I'm talking about.

Yes, exactly.

Okay.

Thanks a lot.

We have another question, Julie?

Daniel Boyd, Goldman Sachs.

Thanks.

Andrew, I would like to just get your thoughts on the progression of margins internationally.

Just when you think about there are three drivers, right?

There is pricing, volumes, but then there's also mix that can be impacted as you upsell technology.

If you could just give us your thoughts on where you are in the pricing front, but also where you are on the product and exploration cycle.

Seismic isn't picking up, but you did mention in the commentary that you had a poor mix in the Middle East.

The fourth quarter is traditionally not a great mix in the Middle East because of the Artificial Lift and completion sales which, obviously have lower margins than our measurement technologies.

I think that international margins -- bidding international markets on large developments will remain, for comparable technology, extremely competitive because everyone wants to grow overseas.

But, the higher the oil price is, the more people are in a hurry, the more exploration they do, the more that we are going to be able to upgrade our technology sales.

And if you remember, I think I said publicly on several occasions that we actually did slow technology introduction a little bit in 2009, 2010 because we felt that the pricing environment was not such that we could realize the full value.

I think you will see in 2011 and 2012 the rate at which we introduce new technology, particularly towards the end of this year and even more importantly in 2012, is going to increase considerably.

Okay, and then just a follow-up on a comment you made earlier.

On one hand you have exploration which oil companies can pick up quickly, but then you also have work on mature fields, which I know goes back to the root of IPM.

Can you comment on what [your theory], seeing IPM bidding activity on these more mature fields picking up?

And what type of growth rate could we expect as we look out over the year?

I don't think we -- IPM tends to be a huge project or nothing.

So, is the dollar volume of projects on which we're bidding much higher?

It's much, much higher.

But actually how many deals we will land, and what effect it will have on 2011, is very difficult to put a number on.

So, I have absolutely no doubt we will land a couple of big deals.

I suspect they are more likely to be significant in 2012 rather than 2011.

Can you just comment on which regions you are seeing the activity increasing the most?

I would much rather not.

Okay.

Thank you.

I'm not going to give a roadmap to some of my friends.

(laughter)

Bill Sanchez, Howard Weil.

Good morning.

Andrew, I was hoping perhaps you could talk a little bit about, just in short term, how we should think about the progression in the eastern hemisphere as we look at fourth quarter to first quarter.

With product and software sales not recurring in 1Q, and more intense weather in Russia and say the North Sea causing some seasonal disruptions there, how do we think about the progression fourth to first quarter either topline [and] margins eastern hemisphere as a whole?

Or maybe some sort of [sense] per share that you can attach to that?

Perhaps that's a better question for Simon.

We don't give guidance, Bill, as you know.

But we won't be at all surprised if the earning -- EPS in Q1 is lower than in Q4.

Because of the seasonality of both the Russian market which you know is very large for us, the weather effects of the North Sea, and the absence of the sales -- The product and software sales that we have in Q4.

And, the big number there of course is that Q4 is always the highest quarter for multiclient seismic, and -- which did extremely well and Q1 will be much lower (multiple speakers) more technical.

Sure.

Thank you for that color.

One additional question.

I know we have essentially reiterated our outlook as it relates to an expected kind of breakeven expectation on Smith by fourth quarter 2011.

In the past, you have quantified the cost savings related to this deal.

I think we've heard more positive commentary about the revenue synergies here.

Anything, Andrew, in terms of mix that's changing your outlook and how you get to break even?

And at some point, do we start getting a little bit more quantification on the revenue pull through or revenue synergies you see from (multiple speakers)

We will give you a full update on the revenue and cost synergies at our investor day in Boston in February, Bill.

Okay.

Thank you.

I'll turn it back.

David Anderson, JPMorgan.

Good morning.

Just a quick question for Simon right off the bat.

In your release you mentioned a $0.05 gain on inventory adjustments.

I assume that was mostly North America.

If so, did that contribute to the sequential margin gain this quarter in North America?

I'm just trying to get a handle on how sustainable these margins are.

No, this is actually related to the Smith integration.

It's not only North America.

It's total.

And it is a step up in inventory that, you know, it gets amortized over the period of the consumption of the inventory.

No, it has nothing -- it has no impact on the sequential gain in North America.

Okay Thank you.

And Andrew, I just want to move on to the Middle East.

In your statements you were talking about gas in the Middle East.

And, it's pretty obvious we all know the region is short of gas, so there doesn't seem to really be that sense of urgency over there on the part of the NOCs.

How do you see that playing out over the next couple of years?

And how much of a catalyst could this be for your business do you think?

You cannot be talking to the same NOCs as I am, David, because without mentioning names, we see considerable urgency and worry, which is reflected in, for example, in a lot of exploration work that we're doing in one country, and the fact that we are heavily participating in a gas development in another country.

So I don't know where you got your information, but I don't see it at all that way.

Okay.

And one other question just in terms of market dynamics in the Middle East, if we go back and we compare it now to really 2005, how do you see the kind of overall competition playing out?

It seems like some of your competitors have used that downturn to build out capacity.

Are you concerned at all about share losses?

Or do you think that the gas side can more than make up for any kind of capacity that's been built up out there?

Well, first, you're going to have to identify the share losses for me because we don't see them.

Okay.

We don't make press releases every time we win a contract.

And, it's not the -- the spectacular announcements that have been made have been in markets where we didn't participate very much anyway.

So we don't see any significant share loss across the Middle East.

In fact, in one or two of the new programs, we see significant share gain.

Okay.

That's all from me.

Thank you.

Alan Laws, BMO Capital Markets.

Good morning.

I guess my first question will be on the international shale here.

A commentary on this, on the opportunities around this, sort of dominated your press release and your spoken commentary here this morning.

Can you talk about the expectations here as maybe in the areas of the regional growth, and maybe how this may affect your expectations of relative growth and mix, say D&E versus completion services?

I was very careful to say in the commentary that the principal activity in unconventional gas, not shale -- unconventional gas in the international market for the next year or so is going to be in tight gas that is low permeability formation.

That is pretty general across the eastern hemisphere, particularly in North Africa, the Middle East, to some extent in Russia, and coal bed methane which is essentially Australia.

The international shale gas activity, which is going on at the moment, can be classified very much as exploration activity as opposed to development.

Because -- as for the reasons I mentioned before, there is no way that overseas, people can mobilize the land or the infrastructure or the environmental constraints the same way as in the United States.

And therefore they are going to be much more careful before they go into full-scale development.

Now in terms of unconventional gas development or shale gas exploration overseas, we have a very high participation.

The essential places where this is taking place at the moment are Poland, Argentina, India, Algeria, and China.

And tight gas would be the Middle East and Russia, and to a certain extent, North Africa.

So it's big D&E laden activity still?

Look, you're not going to get me to say that the international market is going to go to the same fracking solutions as the US because they won't.

(laughter) Appreciate that.

So, yes, it's drilling and evaluation at the moment.

Fracking will always be a part of it and therefore, you know, fracking is important once they've done their D&E to see how these wells are actually going to flow.

But it is not going to be on the scale of the US.

Okay, I appreciate that.

My follow-up is an international pricing question.

When you look at your current spare capacity and notionally that of your peers, how long do you think it will take to absorb this capacity to a point where pricing becomes a material contributor?

You know, I have always said that it doesn't depend on the capacity.

It depends on the rate of acceleration in activity.

Therefore, for the significant pricing traction in services that all the principal Oilfield Services companies can provide to take place would require a much greater activity increase than we see at this point in time.

And I suspect that if it does happen, it's going to be because oil prices are sustained around about 90 to 100 into 2012.

Okay that's great.

Thank you very much, Andrew.

Doug Becker, Bank of America.

Thanks.

Andrew, you've highlighted a number of times that new technology introductions will accelerate in late 2011 and in 2012.

I generally think of new technology just introduced over the last five years accounting for about 30% of revenue in any given year.

Is this in the ballpark for Schlumberger?

And is that revenue mix of new technology for Schlumberger, whatever that is, meaningfully below normal right now given the downturn in 2009 and into 2010?

Yes, it's been meaningfully below the normal.

And therefore the acceleration in the rate at which we introduce will be a meaningful increment.

And is that 30% figure in the ballpark?

No, it's a little high.

Okay.

For the Oilfield Services industry.

But this is a very difficult area because everyone puts their own metric on what they call new technology.

Fair enough.

Switching to Mexico, still seeing weakness in that market.

Are there any signs of a meaningful recovery in 2011?

And what do you see the implications of the performance-based contracts in Mexico being for Schlumberger?

I think the -- there is -- in my mind, there is considerable uncertainty around how the PEMEX budget gets spent in 2011.

I don't think it's necessarily going to be exactly what was laid out.

Therefore, we remain very cautious on the overall level of activity in Mexico.

We think it will be good in the South.

We think there will be some improvement offshore.

But as far as the North is concerned, we are quite reluctant to be anything other than very conservative.

In terms of the performance contracts, the only ones that have been let out so far are so small that I don't think they are of great interest to us, and possibly not the other service companies.

I think the first wave will probably go to local Mexican companies.

And obviously we will be bidding with local Mexican companies to provide the services necessary to execute the contracts.

I think that the first wave is to test the system.

And the really interesting ones will come later.

And later being potentially 2012?

Yes.

Okay, thank you.

Angie Sedita, UBS.

Good morning.

Andrew, could you give us a little bit of color on what you're seeing specifically in Iraq and Russia?

On Iraq, obviously there's high startup costs in Q4.

Do you expect that to continue into Q1 as well as Q2?

And thoughts for margins as we progress through the year generally.

And on Russia, an activity growth outlook for 2011 and color on [Eurasia] asset swap, the alliance, and where you are getting traction in the region.

So on Iraq, we -- our revenue in the fourth quarter was closer to [50 than 10].

We have three rigs drilling for BP.

We're currently mobilizing three rigs for Exxon Mobil.

We're providing services to a number of other customers on a callout basis and on a discrete basis.

And we have inherited some business from Smith in Kurdistan.

So, we will have further startup costs in Q1.

But we are optimistic that we will break even in Q1, be profitable in Q2.

And we will, with careful contract management, have an ambition to be in double-digit margins by the end of the year.

Okay.

Fair enough.

And on Russia?

Russia?

Western Siberia we'll have a better year.

Sakhalin will have some slowdown because basically one of our customers is doing a six-month rig move.

And, the rest of it, Eastern Siberia I think we will continue to see some good exploration and development in some of the new fields.

So overall, Russia will have a better year than it did in 2010, but not a gangbusters year because of the slowing in Sakhalin.

Okay.

And then as an unrelated follow-up, you mentioned in the press release you are seeing revenue synergies from Smith and specifically you mentioned drill bits in Brazil.

Where else are you seeing revenue synergies as far as by product line or region?

And are you seeing traction with Pathfinder internationally?

Well, the answer is all over.

And actually we -- again, I would much rather that we gave you a comprehensive update at the Investor Day in February than piecemeal stuff now, but synergies are all over.

All right, fair enough.

Thanks.

Geoff Kieburtz, Needham.

Thanks very much.

Andrew, in the press release, you talk about stronger growth rates as the year unfolds.

How should we think about the trajectory?

I think that comment refers to international growth and related to your comment earlier about pricing being tied to the pace of growth.

I think that the best proxy for the growth rate going through the year is going to be the rate at which you see offshore rigs either coming into service as new builds or being contracted out of the existing fleet.

Because, as I said in answer to an earlier question, we can see a lot of inquiries, but the rigs don't yet have contracts.

So it's likely to be second half.

Yes, so little bit of second-half waiting.

You've also mentioned several times, the expectation of increased exploration activity.

We've -- you've made these comments, forecasts before.

It doesn't seem like they have necessarily come to fruition in the past.

What's your confidence level on this increase in exploration activity?

You know, I was extremely confident last year until Macondo.

Okay.

Macondo, as I said before, put significant delays all over the world not because people abandoned programs, but because everybody wanted to check their rigs before they proceeded.

We think most of the Macondo delay is behind us outside the United States.

But -- and that the number of rig years from new builds in 2011 is significantly higher than in 2010.

So, my confidence level is the fact that I hope to God we don't have another Macondo.

And the fact that -- so that the inefficiency that came overseas because of Macondo has been absorbed, and because the number of new deepwater rigs that's being added is higher this year than it was in 2010.

If I could add just one more question directed to Simon, you gave us a 2011 tax rate guidance.

I wondered if you could give us a sense, just kind of rough estimate of what the pro forma tax rate for Schlumberger would have been if you had owned Smith for the entirety of 2010.

The question is really -- mid-20s seems like you're kind of expecting North America contribution to be at or maybe even slightly above what it was in 2010, which doesn't seem to be consistent with the other commentary.

But I don't have a pro forma for the combination with Smith.

Geoff, I don't think you can conclude on hourly growth rates and from a tax rate.

But let me -- to answer your question, obviously if we had Smith for the whole year, it will be higher because Smith is a US based source of income.

We do see the mix.

As you know, the US source income during 2010 increased gradually.

So in 2011, we'll continue at the same pace and obviously that's the result of the increased effective tax rate.

It's both the mix of revenues, not only from North America, but other places as well and Smith.

Okay.

So I shouldn't really relate (multiple speakers) higher tax rate to --

(multiple speakers)

I'm sorry.

I spoke over you.

Go ahead.

No, I said it's hard to reconcile where the growth rate is coming compared to the tax rate that is the element of Smith, yes.

Okay, but what I was saying is we shouldn't assume that higher tax rate necessarily means higher North American contribution.

No, because of the heritage Smith.

The other thing, Geoff, is that Simon will of course be gradually restructuring throughout the year in such a way that we try to minimize the effect of the fact that Smith was a US company.

It is very difficult for him to predict exactly what the tax rate is going to be this year.

Thank you.

Kevin Simpson, Miller Tabak.

Thanks.

I guess Andrew, I can close with the North America margins, the nice improvement in the quarter and even excluding the -- that one time win.

But you're still below the -- your largest competitor.

Is there still more upside do you think?

And then I guess secondarily, or do you need -- because you guys were so strong in the deep gulf, need really some normalization before you can get margins back to the mid-20s or maybe even better?

We still have upside certainly through the first quarter.

You are probably correct in that for us, our margins to be considerably better than our principal competitors, we need the deepwater Gulf back.

Okay.

And, there's a little bit of your normal whatever skepticism about sustainability and North American comments, I -- as you're allocating CapEx here to some of these bigger plays with a fairly pretty robust budget for 2011, are you -- is there a kind of a contingency for the second half that you're going to wait and see in certain areas before putting additional frac crews or directional crews into specific markets?

Or that might even cost you a little bit of share?

Or I'm just wondering how you were handling --

No.

We got caught out on the way up by our organization, and we have reorganized in such a way that we understood -- we now thoroughly understand what we're managing and how we're managing it.

And you can assume that the true test of the systems that have been put in place would actually be on the downside rather than the upside.

So without wanting to tell you exactly what we plan, I can tell you that we have a very robust planning system to deal with any rollover in activity in North America.

So you think you have more flexibility in terms of managing your fixed costs?

Much more.

Much more.

Okay great.

That's it for me.

Thank you.

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

Julie will now provide some closing comments.

Thank you.

Ladies and gentlemen, this conference will be available for replay after 10.30 AM today through midnight, February 21, 2011.

You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 176290.

International participants dial 320-365-3844.

(Repeats numbers).

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.