斯倫貝謝公司 (SLB) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Schlumberger Limited first quarter 2011 results conference call.

(Operator Instructions).

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Vice President of Investor Relations, Mr.

Malcolm Theobald.

Please go ahead.

Thank you, Stacy.

Good morning.

And welcome to the Schlumberger Limited first quarter 2011 results conference call.

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

Today's call is being hosted from Rio de Janeiro, where the Schlumberger Limited Board meeting is being held in our Brazil Research and Geoengineering Center.

Prior to Andrew's comments, Simon will first review the quarter's financial results, and then Paul will provide an overview of the operational results and technical highlights.

Before we begin with the opening remarks, I'd like to remind the participants that some of the information in today's call may include forward-looking statements, as well as non-GAAP financial measures.

A detailed disclaimer and other important information are included in the FAQ document which is available on our 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.

First quarter EPS, excluding charges was $0.71 per share.

This is a decrease of $0.14 sequentially, and an increase of $0.09 compared to the same quarter of last year.

During the quarter, we recorded $0.02 of charges relating to the continuing integration of Smith and Geoservices.

As we previously announced, the quarter's results when compared to the fourth quarter of 2010 were adversely impacted by a number of events.

The events included severe weather in North America and Australia, political disturbances in the Middle East and North Africa, and the absence of the Q4 early payout of the IPM gain share project in North America, as well as the traditional surge in year-end multi-client software and other product sales.

These items more than accounted for the sequential decreases in the EPS.

This is the first quarter that we are reporting under our new group structure.

As a reminder, our primary reporting is based on our three groups, Reservoir Characterization, Drilling, and Reservoir Production.

These three groups comprise what we will now refer to as Oilfield Services.

In addition, we will report our distribution business as a separate and distinct segment.

From now on, when we refer to the results of our geographic areas, it reflects the results of all three of the groups, including the legacy Smith oil field and M-I SWACO businesses.

Furthermore, the results of WesternGeco are also now included in both the group and geographic results, and are no longer reported separately.

This is a significant change from our prior quarters that I wanted to highlight.

It is also worth pointing out that the distribution business, which predominantly North American centric, is not included in the geographic results.

All prior period amounts that I will mention have been restated to conform to our new structure.

Pretax operating income for Oilfield Services were $1.5 billion.

This represents a $240 million decrease compared to the prior quarter.

Oilfield Services pretax operating margin fell 206 basis points to 17.9%.

International pretax operating margins were 16.5% for the quarter.

Again, the previously mentioned events were the primary drivers underlying this performance.

From a group perspective, Reservoir Characterization margin fell 606 basis points to 21%, as the severe weather and political disturbances significantly hampered Wireline activity, while the absence of the year-end WesternGeco multi-client, and the SIS software sales negatively impacted margins on a sequential basis.

Margins for the Drilling Group improved slightly to 14.6% on strong performances from IPM Well Construction activity, and a number of the acquired Smith businesses, in spite of the weather and geopolitical issues.

Reservoir Production margins decreased 145 basis points to 19.4%, due to the absence of the year-end product sales in Artificial Lift and Completion, and the Q4 early payout of the IPM gain share project, as well as the impact of the weather in North American Land.

Distribution contributed pretax operating income of $22 million.

On geographic perspective, North America had a very strong quarter, driven by Well Services activity and pricing.

As a result, margin increased by 32 basis points despite the absence of the Q4 IPM gain share payout, which accounted for approximately 1.4 percentage points of margin last quarter, and the lower multi-client services.

Latin America margin increased by 78 basis points to 15.7%, as the revenue mix strengthened.

Europe's CIS Africa margin decreased by 6 percentage points to 12.5%.

This decrease largely reflects the impact of the political disturbances in Libya and Tunisia, combined with a less favorable revenue mix in Russia, and the seasonality effects in the North Sea.

Middle East and Asia margin dipped slightly by 145 basis points to 21.9%.

This decrease is almost entirely due to the political events in the area, and the weather effect in Australia.

The impact of the year-end product and software sales also contributed to the decline.

Now turning to Schlumberger as a whole.

The effective tax rate excluding charges was 23.6% as compared to 23.1% in the fourth quarter.

We still expect the ETR for the full-year to be in the mid-20s, reflecting the planned mix of activity between North America and the rest of the world.

We ended the quarter with $4.2 billion of cash and investments, and short-term debt of $2.2 billion.

Net debt was $4 billion at the end of the quarter, as compared to $2.6 billion at the end of last quarter.

Significant liquidity events during the quarter included $844 million of stock repurchases, and $769 million of CapEx.

During the quarter, we repurchased 9.68 million shares at an average price of $87.18 per share.

Additionally, we have now completed the refinancing of all of the long-term fixed rate debt we assumed in the Smith transaction.

In this regard, we repurchased $1.3 billion of notes during the quarter.

This refinancing will serve to reduce our interest expense going forward.

CapEx for all of Schlumberger is still expected to approach $4 billion in 2011.

And now, I will turn the conference call over to Paul.

Thank you, Simon.

Schlumberger's first quarter revenue of $8.12 billion decreased 4% sequentially, but increased 45% year-on-year.

The impact of the geopolitical events in North Africa and the Middle East, as well as severe weather in the US and Australia impacted all three product groups, and represented around half of the sequential decrease in total Oilfield Services revenue.

Looking at the product groups, Reservoir Characterization's sequential revenues was severely impacted by the geopolitical events that hit WesternGeco Land testing services and our Wireline activity the most.

In addition to this, WesternGeco revenue decreased following the fourth quarter surge in multi-client sales in the US Gulf of Mexico, even though revenue increased in Marine due to a more favorable activity mix.

SIS revenues fell sharply in all areas, from seasonally lower software sales.

Testing revenue also fell due to less product sales, lower activity in Latin America and East Asia, and due to the winter slowdown in Russia.

Wireline revenue was flat sequentially, as strong winter activity in Canada offset the impact of the geopolitical and weather events.

For the Drilling Group, the sequential drop in revenue was primarily caused by the geopolitical events, and excluding this impact, revenue actually increased for the group.

IPM Well Construction revenue increased on strong activity growth in Iraq, Mexico and Russia.

Drilling & Measurement revenue decreased from lower activity and pricing in Europe, CIS, and Africa, and the completion of offshore exploration projects in Australia/Papau New Guinea.

But this was partly offset by the return of some deepwater work in the US Gulf of Mexico, and by an increase in activity in Latin America and Russia.

M-I SWACO saw continued strong activity in North America, but overall revenue decreased due to seasonally lower product sales, the weather in Australia, and delayed projects in Europe, CIS and Africa.

In Reservoir Production, revenues fell sequentially, largely due to the impact of the geopolitical events in North Africa and the Middle East, and due to severe weather in the US and in Australia.

Excluding these impacts, the production group revenue increased, as higher pricing and strong demand for Well Services technologies in North America more than offset the IPM gain share payout in North America from the prior quarter, and the seasonally lower product sales in Artificial Lift and Completion systems.

From a geographical perspective, the Europe, CIS and Africa revenue decreased sequentially, as a result of the political unrest in North Africa, a less favorable revenue mix, lower software sales in the North Sea GeoMarket, and seasonally lower activity in Russia.

Middle East and Asia revenue was lower, as increasing IPM activity in Iraq, and shale gas activity in India were insufficient to offset the impact of geopolitical events in the Middle East, seasonally lower software and product sales and weather-related slowdowns in Australia.

In North America, excellent growth in pricing, utilization, and activity in our Well Services product line resulted in double-digit sequential revenue growth, which fully offset lower WesternGeco multi-client sales, the non-recurrence of the IPM gain share payout and the impact of weather-related slow downs on Land in the US.

In Latin America, strong growth in WesternGeco and M-I SWACO activity in the Brazil GeoMarket balanced lower offshore activity, and lower software sales in the Mexico and Central America GeoMarket.

Looking at some of the highlights of the quarter, I would like to start off with the WesternGeco, where a number of contract awards in Marine emphasized the success of new technology, both in acquisition and in processing.

Market take-up of Coil Shooting acquisition, with successful completion of the survey offshore Brazil, and the award of a new coil survey in Angola were particularly notable.

The opening of the Brazil Research and Geoengineering Center in Brazil will be key to the processing of the Brazil data, while other centers such as the WesternGeco GeoSolution center in Jakarta will underline other contracts that have recently been awarded.

For the growth in exploration activity to come, WesternGeco is well-placed through technology and footprint to make further progress in the coming quarters.

In the Drilling Group, we continue to make significant progress in terms of integration and synergies between Smith and Schlumberger products and services, to the point that we now see the transaction being neutral on an earnings per share basis in Q2 2011, moving up from our previous estimate of H2 2011.

In addition to revenue synergies related to our global footprint, as well as our IPM and D&M businesses, we are also starting to see the first examples of revenue synergies related to new product development.

As a result, Smith Bits continues to perform very well, keeping its leadership position in the roller cone market, while at the same time dramatically improving its PDC market share, both in international and North American markets.

This position is further strengthened by the introduction of the new Spear bit that brings superior performance to our customers operating in unconventional shale basins.

We have also recently introduced another new bit, based on our unique Stinger cutter technology, developed by our NovaDrill division in Utah which has shown up to 80% improvement in drilling rates, as well as significant reductions in shock and vibration.

At our Investor Conference in February, we discussed the new HiWAY fracture stimulation technology, and this service continues to see very rapid growth.

Total job count is now approaching 1,000, with 528 stages completed in the first quarter of 2011, compared to 102 in the fourth quarter of 2010.

The first horizontal open hole well in the Bakken shale with a total of 19 stages has been successfully completed using HiWAY, and the first job has also been conducted in the Middle East.

A significant number of opportunities for future jobs are now under evaluation for HiWAY and new fields for HiWAY technology deployment are under discussion in the US, and in Canada, Argentina, India, Oman, Saudi Arabia, Egypt, Algeria, Congo and Angola.

In the Investor Conference, we also told you about the leading position Schlumberger has established in well intervention and production enhancements to our market-leading wireline, slickline and coiled tubing offering.

We are currently seeing particularly strong growth in our new coiled tubing service, ACTive, which offers real-time fiber optic-enabled measurements, and this new service has already been deployed to 20 GeoMarkets around the world.

Finally, I would like to highlight IPM's outstanding drilling performance on the well construction project in Iraq.

All the projects have been mobilized and started on schedule in a very challenging environment, and we are now drilling both for BP and Exxon Mobil.

On the BP project, we have already managed to halve the drilling time from the first well we drilled, through the use of both technology and process optimization, and our ability to consistently redefine the benchmark -- the benchmark for this performance is being recognized by our customers.

With that, I will pass the call over to Andrew.

Thank you, Paul.

Good morning, ladies and gentlemen.

Despite the difficult working environment, I'm very pleased with the performance of both our North American and international operations during the quarter, where a number of underlying trends were positive.

Wireline growth was encouraging, particularly for high technology services.

Despite the seasonal drop in Russia's M-I SWACO, the Drilling Group revenue increased through excellent performance at IPM Well Construction, particularly in Iraq.

In addition, growth in revenue synergies with Smith and Geoservices products was very strong.

Reservoir Production continued to make gains in North America in both activity and pricing, which in our total North American results more than compensated for the absence of the gain share project that was recognized in the fourth quarter, and a 42% drop in seismic revenues between the fourth and first quarters.

These positive effects limited the decrease in margins to 206 basis points, led by strong performance in a number of GeoMarkets including Iraq, where we achieved double-digit margins that we expect to improve continuously through the end of the year.

Looking ahead, the recent completion or announcement of various licensing rounds around the world will ensure sustained Marine seismic activity.

The anticipated increases in exploration budgets, and the advent of additional development activity particularly in the Middle East and North America, will rapidly improve business conditions for Wireline and Testing Services.

The continued success of new Petrel releases, particularly for exploration will ensure further strong performance from SIS.

For Drilling & Measurements, however, despite strong increases in demand, service pricing remains extremely competitive internationally, but excellent service quality and advanced technology allows this effect to be offset to some degree.

In addition, callout services on non-contracted rigs have boosted this effect, and further activity increases later in the year should lead to considerable tightening of capacity with a consequent effect on pricing power.

The absence of oil production from Libya, combined with continued recovery in demand has reduced the world's spare capacity of oil production significantly.

The call on both fuel oil and natural gas will increase as Japan recovers.

The exploration and production industry has begun to respond, and absent a further leg to the recession, will have a substantially increased -- will have to substantially increase investment to maintain a comfortable supply solution in the nearer political uncertainty.

We anticipate that high oil prices will continue to support additional drilling in the liquid-rich plays in North America.

The upturn in deepwater activity more generally is becoming increasingly visible and the rate of permitting in the US Gulf of Mexico is accelerating.

Middle East is -- activity is increasing substantially, led by Saudi Arabia and Iraq.

These activities will progressively mobilize over the next six months, and the projected increases will reach levels where some resources will become constrained.

Schlumberger is ready for this scenario with new technology, equipment, and people.

Our Excellence in Execution initiative which we introduced in 2007 is already paying dividends and will continue to do so.

Thank you very much.

I will now hand the call to Stacy for the question-and-answer session.

Stacy?

Thank you.

(Operator Instructions).

Our first question will go to the line of Dan Boyd with Goldman Sachs.

Please go ahead.

Thanks, good morning.

Good morning, Dan.

Andrew, I'd like to just follow up with you on what's going on in North America.

And you alluded to this somewhat in your comments with seismic being down, IPM gain not being there this quarter.

But what are you seeing especially on Land, as underlying sort of revenue and margin trends?

As we look at what one of your competitors put up so far, the numbers look like they may be growing a little bit faster.

So maybe can you talk about what you're seeing there, and maybe update us on your strategy of closing the gap, in terms of I think size and margin within North America?

Okay, Dan.

So can we make abstraction of the gains for the IPM project that was sold in Q4, and abstraction for a sequential drop of 42% in seismic revenue.

And then I'm going to ask Paul to talk about the rest of our strategy in North America.

Is that okay?

That would be great.

Okay.

Paul?

So if you look at what we set out to do about seven months ago, we set out a goal to basically close the margin gap in North America, because at that stage we were severely underperforming in our eyes.

So if you look at where we stand at this stage, we have more or less closed this gap.

So I'm very pleased with the margin momentum that we have managed to create.

And I'm also quite confident and positive in my outlook for our future now margin momentum.

If you look at land, we are at this stage seeing very strong pricing momentum in both Drilling and Wireline.

And I think this will continue in the coming quarters.

I also think that our HiWAY introduction, the new technology, is going to help extend our pressure pumping margin momentum.

We're actually seeing some customers switching to our pressure pumping services at this stage, at the back of HiWAY.

We also continue to drive utilization in all segments, as part of the restructuring that we have initiated, and we have record utilization again in pressure pumping in March.

And also see some impacts still to come from the restructuring, in terms of supply chain services as well as general support.

Now, in addition to that, we are also relatively optimistic on the onset of the Gulf of Mexico coming back.

And we have a very strong position in the high end services of Wireline and Drilling & Measurements in these new rigs and permits that have been granted.

And this is also going to be highly accretive to our nonperformance going forward.

So that's on the margin side.

On the growth, we are very much committed to invest in capacity as we go forward.

The quarter-to-quarter growth for Well Services, as I indicated in my comments, were in double-digits.

But they were offset by the significant reduction in multi-client sales, as well as the nonrecurring gain share we had in IPM.

So we are very much, I would say positive on the outlook of North America at this stage.

We have secured manufacturing capacity on pressure pumping in a multi-year build program that we started last year.

And we have a lot of flexibility in our program to continue to take significant capacity additions, which is what we are going to do.

That's very helpful.

There's a lot I could probably follow up on with that.

But let me just go back to the HiWAY, and it's something you talked about at your Analyst Day.

But how quickly can you build that up?

And is that something where we could expect you to start pulling through a lot more services, and using that to lead with as a differentiator?

But in terms of just scale and how many pressure pumping jobs, or how many fleets you could roll that out to, how should we think about the progress that has been made, and how quickly that could continue to ramp up?

I think we are ramping this up very quickly as you see.

There's some modifications needed to be done on the pressure pumping equipment that we have on the well side, but this is not significant.

So the main thing is just to have the product available to pump, and we have obviously, a significant supply line set up to do this, right?

So just in terms of the ramp, we did about 100 stages, as I said in Q4.

And we did over 500 in Q1.

And this is now multiplying almost by the day, right?

So we have not only North America, but we are now engaged in looking at Canada at some projects, pretty much all over the world.

So this is a -- a significant I will say growth vehicle for us on pressure pumping.

And as I said, even in North America we've had cases where customers have switched to our pressure pumping services in the back end of HiWAY.

Okay, thank you.

If I could have one more follow-up on just the Gulf of Mexico coming back, because that's something that Andrew highlighted at the Analyst Day, as something that could -- the one upside surprise to really tighten even international market.

Sounds like you're optimistic there.

But is that something that you think contributes to a -- much higher incremental margins in the back half of the year, just broadly in the business?

No.

I would say so, if you look at our margins in North America historically, the Gulf of Mexico has always been highly accretive to our business.

Over the past year it has been highly dilutive.

So I think it's going to have a significant relative impact to our margin as we go forward.

All right, then?

Thanks a lot.

I'll turn it over.

We'll go to the line of Angie Sedita from UBS.

Please go ahead.

Angie?

Ms.

Sedita, your line is open.

Good morning, Andrew and Paul.

Good morning.

Andrew, in your comments you mentioned that you believe some resources will be constrained as activity increases.

Which product lines would you expect would be constrained first?

And I would assume it would likely be in some international markets over others.

Could you give us a little color?

I think that if the Gulf of Mexico plays out, Saudi plays out, the new deepwater rigs seem to be coming on pretty much as we planned them, then the first place that equipment shortages will show up will be Drilling & Measurement.

In fact, in some places they're showing up already, which makes complete nonsense to the industry's pricing policy at this point in time.

Angie?

And then on international margins, for the third quarter of 2007, we were at 18.7%, obviously increased in Q4 to 19.3% on seasonality and, as expected, declined here in Q1 to 16.5% for international margins.

When you think about the second quarter, could we go back to the third quarter level for international margins of 18.7%, or do you see that as a second half of 2011 event?

No, I will be disappointed if we don't do that in the second quarter.

Okay.

Okay.

And then finally, there's been some commentary about performance-based contracts for Schlumberger, and it's been an area that you're focusing on globally.

Could you give us a little color, what percentage it is of total revenues today?

What could it rise to, what customers you're working for, and is there any risk that this could change the dynamics for peak international margins for the cycle?

I'm going to let Paul answer the question on the strategy with performance contracting.

Okay.

So we have actively been moving our contract base in particular within Drilling & Measurements towards performance contracts over the past couple of years.

And at this stage, we have around one-third of our contracts for Drilling & Measurements based on performance in various forms.

And this is obviously something that we will continue to push going forward.

Exactly how high it will come, I can't give you an exact number on.

But again, we are setting quite aggressive goals, in terms of moving our contracts towards this type of setup.

And the key for that is obviously, when you take on a performance-based contract you need to have confidence in your ability to perform.

And at this stage, we are very confident in our ability.

And the reason for that is the Excellence in Execution program that we embarked on four years ago, where we have basically invested heavily both on the product development side to get better performing products, but also on the operational processes.

And all these elements are now paying off very nicely.

And if I can provide a little color to that, Angie, in Q1 the first quarter of 2011, we replaced our competition in Drilling & Measurements on 40 jobs.

They replaced us on seven.

Almost all 40 we replaced them on were for service quality reasons.

We were replaced once for service quality and six times because we didn't have the right tool available.

So it's just a very nice point that in this international market, as drilling ramps up, quality is really going to count.

Got you.

So is there a specific customer that you're working with -- is this more NOCs in the international oil companies?

Or give us a little color there?

I think it's across the board at the moment.

Okay, great.

Well, thanks guys.

Thank you, and we'll go to the line of Ole Slorer with Morgan Stanley.

Please go ahead.

Thank you.

A question to Paul, or for Simon Ayat.

You didn't highlight any sort of magnitude of the negative headwinds in the first quarter that were somewhat unusual, Australia, North Africa, I mean, we all know this was a very unusual quarter.

Could you give us, not with respect to North America, but with respect to international, could you help us with some kind of magnitude of the negative effect versus kind of a normalized type of environment?

I mean, we all know that there's no such thing as normalized.

But nevertheless, could you help us a little bit?

So only as we announced before this impact of geopolitical and weather, overall impacted us between $0.08 to $0.10.

We're probably more on the lower end of that.

And this is what happened in the first quarter.

Some of it is North America.

The weather impact of it is North America, but the rest is international.

So we are in that range that we announced.

Part of it is North America, but the large part of this is international, because of the geopolitical and the Australia weather -- the severe weather we experienced in Q1.

Does this answer your question?

Yes.

So if you look at the margin impact from that, say for international, so would this be -- so in percentage terms, on international margins, what would that translate into?

We're not going to give you a percentage, Ole, but the decremental was very high.

Because weather, you can't cut costs.

And when you're evacuating a place like Libya, you have very high decremental costs, so you can assume it was a very high percentage.

Yes.

I was trying to get a feel for, as things normalize without pricing where your margins would be, but I think I can back into it from what you've said.

Second question, Andrew, I mean talking about this nonsense pricing that the industry's engaged on, I mean, how much are your capacities tied up on nonsense pricing at the moment?

And when do you think it will roll off?

Not a great deal.

As yet there are probably one or two fairly large contracts where to retain them we've gone to nonsense pricing.

But as long as those contracts are long term, we know very well that in a year's time, we won't be selling the technology we bid on.

So the possibility to recover margin is very much there.

Okay, so if --

So it's not -- what I'm worried about is -- what I'm concerned about is that we're going into a market where the demand for the service is picking up very, very rapidly, and we still see a lot of nonsense pricing out there.

Well, do you think that -- I mean you've been through a few cycles.

So when do you think that there will be an environment that people will realize that it's better not to (multiple speakers).

They will realize it when -- and it's happened in one or two places already -- when they win contracts that they can't service, because then the customers will become upset.

And once the customers have become upset -- if you want to provide a decent service, you have to pay for it, right?

So the emphasis will shift.

Do you see a scenario where international margins could catch up with North American margins?

And if so, when would that be?

Well, that's going to depend an awful lot on two things in North America.

The first is the speed with which the Gulf comes back after this initial flush of permits.

Right?

So what is the total rig count in the Gulf going to look like in 2012?

And the second is will -- even if activity doesn't roll over, pricing roll over on Land in North America because of the surge in capacity.

So if those two effects will -- our North American margins are a little bit unknown at the moment.

But I think that -- absent the second leg to the recession or a severe drop in demand due to high oil prices, that the trend in international margins will -- in the back half of this year should accelerate.

But no kind of --

I mean we are, as I said in my comments, more and more confident that the activity is there.

Okay, Andrew.

Finally, this one, could you quantify what you mean when you say spare capacity in the global oil markets have tightened up significantly as a result of Libya?

Could you just share a little bit more of your thoughts on that?

You've lost -- well, I mean, very rough numbers, you've lost 800,000 barrels to 1 million barrels a day out of Libya, which is having to be made up by other people, which means that from the global spare capacity, which you could calculate as really being around 5 million, 4.5 million to 5 million barrels a day, you've lost 1 million.

And I actually think that the political uncertainty, will add to the need to add spare capacity, or to have more spare capacity available in the world.

Do you see a scenario in North America (multiple speakers).

And I think prices -- oil prices are reflecting that at this point in time.

Do you see that a scenario where shale oil could become as big a surprise as what shale gas was to all of us?

You are going to have to define what you mean by shale oil, Ole.

Okay.

So (multiple speakers).

Are you talking about Colorado?

No, North America global unconventional oil, what is the scope for that to surprise the way North America unconventional gas did over the past couple of years?

I don't know.

I honestly don't know.

I mean, we are looking at it, but we don't -- I don't have a decent result.

Do you want to say anything, Paul?

No, I still think it's early days, Ole.

I think at this stage it is really what is driving the sustained activity in North America.

All right?

And but, I mean, we have some of these wells, we've produced them for what, one or two years, maximum I'd say.

It's still early to see how sustainable it is, but at this stage, it is looking quite promising.

Thank you very much.

It is -- like shale gas, Ole, it depends a lot on infrastructure.

We all got that one so completely wrong, so I'm just wondering what is the scope here that we can grow oil production significantly more than what anybody is kind of thinking about at the moment, if the right (multiple speakers).

I don't think you can take these reservoirs as being some form of way of replacing the Middle East or something.

Okay.

Okay?

Thank you.

We'll go to the line of Brad Handler with Credit Suisse.

Please go ahead.

Thanks.

Good morning, all.

Good morning.

Could we spend a little time on your seismic outlook, please?

Very nicely optimistic.

I guess what I -- maybe one way of asking the question is how much of your optimism is based on the broad demand for seismic services, for Marine contract services specifically versus kind of nice illustrations of Coil Shooting technology and uptake there or continued uptick?

But how much of it is sort of technology driven, and specifically Schlumberger technology?

Just trying to parse between those two.

So I think the main basis for optimism at this stage, is the fact that we have a very, very strong technology position, both on the acquisition side and on the processing side.

Right?

So the examples we showed on Coil Shooting is obviously at the absolute high end of it, but there's also a lot of other technologies within the offering which is unique to us.

Right?

So we are quite, I would say, upbeat and optimistic on the basis of this strong technology position.

I think what's going to be the key element that's going to determine the uptick on Marine pricing is going to be what's happening -- what is going to happen in the Gulf, and whether the lease sale round is going to go forward at the end of this year or early 2012.

If that is the case, then I think there will be significantly more multi-client acquisition activity in the Gulf, which again is going to tie up vessels that are currently on third party.

And this again, will then hopefully create the pricing traction that we are looking for.

But the counter to that is, whether some of the players, more specifically my Norwegian friends, keep adding vessels to the global seacraft.

But overall, the technology position is, at this stage, what makes us quite optimistic and upbeat on seismic.

Understand.

Just a couple of -- maybe quick follow-ups on that.

So I understand the Gulf position, but I guess you have new horizons in Brazil that are -- you are securing new work to shoot, as well as I am sure there is more to come.

Obviously, you have a number of emerging basins.

Can that -- I guess the suggestion is, that can all soak up what capacity is today.

And is it a tighter outlook on that basis than perhaps you've been suggesting over the last six months, or is it more -- is it pretty similar?

I think overseas, it is pretty similar.

Right?

We've had these surveys planned, and they're all going ahead, and that's good.

And some of them are actually going more high tech than what we initially thought.

But I think the main delta here, is how many vessels are going to be attracted into the Gulf of Mexico, as we get ready for this lease sale ramp.

I would just add if I may, Paul, that the awards of [blocks] in the Kwanza basin in Angola, where all the people who have been awarded have a time limit in which they have to shoot 2500 square kilometers of seismic is a fairly significant event in demand over the next 18 months.

That's very helpful.

One last one, quickly.

Your backlog of $900 million in WesternGeco, how does that compare with a quarter ago?

Slightly improved.

It's a slight improvement, Simon's saying.

Okay.

Very good.

Thanks, guys.

We'll go to the line of Michael LaMotte with Guggenheim.

Please go ahead.

Thanks.

Good morning, guys.

I've got a couple of quick follow-ups.

First, on North America.

If I think about just the changing complexion of the market, with liquids and foreign capital, IOCs coming back, does the liquids, and just the -- call it the tool kit required to get at that resource, and the operator mix shift at all?

Does Schlumberger benefit disproportionately from those two factors you think, in terms of your opportunities for market share?

I would say not at this stage.

I still think, as you know, I've said on many occasions that even for both these liquid-rich plays as well as the gas plays, that longer term the current technology is extremely wasteful.

And longer term that's going to shift and it's going to shift to a point where the completed zones will be pinpointed rather than being almost statistically fracked.

But the technology is still two or three years away from that, probably.

Okay.

So the resource that we're after, doesn't really change that underlying trend that you've been talking about for a while then?

No, not really.

Not really.

The tool set is not there yet.

Okay.

Thank you, Andrew.

On -- quickly a follow-up on the seismic side.

Paul, your comment that sort of the technology uptake early on, if I could sort of think about exploration cycles, from leasing rounds to seismic acquisition, I think the uptake rate historically was pretty slow, in the sense that you had lease, and then some maybe 2D.

And as you got more comfortable you went to 3D, and -- but the technology penetration seems to be occurring a lot faster in the cycle.

So is it correct to say that there's in effect a double lever this time around, and that exploration activity is growing very rapidly, and that you're seeing that technology penetration much sooner in the cycle?

Mike, I'm just going to answer that, because it's a subject I really enjoy.

The advent of our technology is almost redefining the way in which people will do their initial delineation after 3D.

So for example, a lot of the work we're doing in Brazil is -- they've made the discovery.

They've identified the reservoir.

But before they go into development, they want to have a really, really high resolution map of the actual reservoir from seismic.

So the technology is redefining, to a certain extent, the way that they're applying it, applying seismic as a tool.

If I could add, I think also in the past, you may have had options of whether you went with 2D or conventional 3D, and you could still get a reasonable view of the reservoir.

Some of the reservoirs that we are chasing now below salt, there is only one option in some cases, and that is coil shooting.

So in fact, the need to move to high end technology even to get some type of answer is a lot more significant at this stage.

And that's why I think the technology uptake, again, is going to be quicker and higher.

That's great.

Thanks, guys.

We'll go to the line of Kurt Hallead with RBC Capital Markets.

Please go ahead.

Good morning.

Excuse me.

Good morning.

Good morning.

Thank you.

The question I have is -- when you look at the numbers, you had very impressive international margin performance, something around 900 basis points better than your closest competitor.

So what dynamics are in place that could provide Schlumberger with the opportunity to increase this spread?

And do these dynamics provide a unique opportunity for Schlumberger relative to your competitors?

So if you look at the margins overseas again, similar to North America, we are also -- I'm also very confident in our ability to basically continue to widen the margin gap that we have versus the competition.

Some of the reasons for that is, that we still see significant margin upside from the Smith integration, as we continue to get both the revenue synergies and the cost synergies.

As we switch into the exploration phase, the value mix of our services is, I would say, still significantly higher or more favorable than that of our competitors.

And also given our size at this stage, and the focus that we have put over the past year on internal efficiencies, there's significant cost and margin potential from our side.

I would say that generally, the margin momentum we have overseas is significant, and we will continue to pursue it, and maintain a very meaningful margin gap towards our competition.

Kurt, we explained in Boston, and I'll repeat it, that as prices go up, and as projects become more and more difficult, service quality and technology become more and more important.

And the operator's desire to take chances diminish, and I think that's what you'll see happen.

Okay.

Great.

That's all from me.

Thank you so much.

We'll go to the line of James West with Barclays Capital.

Please go ahead.

Good morning, guys.

Good morning.

Andrew, I had a question about the Middle East specifically.

We obviously see the ramp-up that's occurring in Iraq, and we have improving trends in Saudi here.

For your other customers in the region, are they starting to consider or starting to accelerate programs in response to this, perhaps to secure service capacity?

I don't think we've seen that yet, but I don't think it's very far away, James.

Okay.

I don't -- I can't honestly say we've seen it yet but I don't think it's very far away.

But it certainly hasn't gone unrecognized what those two countries are doing, I would assume?

Oh, absolutely not, no.

And also the Gulf.

Right.

The reissuing of permits in the Gulf, the operators all notice these things.

Understood.

And then, one question actually on the Gulf of Mexico.

It has been a negative drag on earnings.

If we assume your cost structure as it is today, and your current market share, historical market share there, how many rigs do you need running in the deepwater to turn breakeven or positive from an earnings perspective in the Gulf?

We've never been negative in the Gulf.

So we've kept most of the infrastructure in place.

We did not export a bunch of equipment, so there's not a huge amount of investment.

And we will bring people the skilled -- the very skilled people who we've been using overseas, from the Gulf back into the Gulf, so the actual cost structure is not going to be significantly different from what it was before.

So we will -- the margins, as Paul pointed out a few minutes ago, are going to accelerate pretty rapidly.

Okay.

That's helpful.

Thank you.

And we'll go to the line of John David Anderson with JPMorgan.

Please go ahead.

Thanks.

Good morning, Andrew, you probably have as good insight on the mentality of the NOC as anyone out there.

Just kind of a related question to what James was asking, specifically about the Manifa.

Would Manifa have happened at this time if it wasn't for Libya?

In other words, was Manifa planning to go at this stage all along, or have we seen a change in kind of the way ARAMCO is operating, and they are kind of accelerating things.

And I guess you are saying you think it's out there.

Has anything kind of shifted, in terms of your views of the international cycle, as it kind of all fits in together?

I'm absolutely not going to make any comments on the specific policy of Saudi ARAMCO.

They always had the option of accelerating Manifa.

And at various times in the last two years they've slowed it down, and they've accelerated it now.

Why they're doing it at this point in time, it's not for me to speculate.

But yes, I think the absence of Libyan production, worries the oil producers generally, because while they like a higher oil price, they do not like too high an oil price, because of the potential it has to destroy demand.

So will we see a greater activity from other NOCs?

I think we probably will.

And also, don't forget, that this activity that's being added, we do not see that coming at the expense of the expansion of gas activity which is already taking place in the Middle East.

So is it fair to say you're incrementally more positive on terms of the timing of the international spend than you were 90 days ago?

I have a great deal more comfort that it -- well, I have firstly more comfort that it's happening, because we can see what's being bid, what's being mobilized, and all the rest of it.

And given the geopolitical circumstances, the condition of Libya and Japan and everything else, yes, I think that I'm much more confident that the international spending is going to come back faster.

Also, Andrew, in your release you were talking about exploration spending ticking up.

And we're certainly seeing it pretty well distributed globally.

I was wondering if you could just kind of provide some context as you see how exploration versus development spending evolves over the next couple of years compared to last cycle?

In other words, if you look out the next kind of twelve months, how does that kind of spending mix of exploration, where does that compare?

Should we be looking at kind of like 2005, 2006, and how that ramped up?

How are you thinking about that, as you look out?

I think the biggest -- there are two significant changes in the way that exploration might occur in this cycle.

The first is obviously the availability of deepwater rigs and their relative increase in our knowledge of how to prospect in deepwater compared to five or six years ago.

That's one.

And the second is that, the national oil companies are themselves coming back to exploration, which is not something that they did on any scale in the previous cycle.

So generally, and I mean, if you look at the basket of oil companies, private ones, the reserve to production ratios are not great.

So where they have acreage that's going to be prospective at these oil prices, I think they will substantially increase their exploration spend.

And you've seen one or two of them announce that.

Thank you.

We'll go to the line of Bill Herbert with Simmons & Company.

Please go ahead.

Thanks.

Good morning.

Sticking with the Middle East Asia-Pacific region here quickly, Andrew, back in 2005, 2006, 2007, we had sort of annualized revenue growth of 20 to 30%, almost hard to believe that now.

I mean, clearly, you were coming from a smaller base.

You were in the midst of Saudi tripling its rig count.

But based upon the broad and building swell that you're seeing right now in the Middle East, do we get back to those kind of annualized revenue growth rates, do you think?

Well, firstly you have to remember that the biggest change between now and then is we have Smith.

Yes.

And we have the opportunity to expand both Smith and M-I SWACO in those regions that we did not have in the previous cycle.

Activity-wise, I don't think that it will -- I still don't think it's going to ramp as fast as it did in 2005, 2006, because the tripling of the rig count in Saudi was a sort of once in a 100 year event almost overseas, because overseas never normally goes that fast.

But over time, can we double Schlumberger in Asia again?

Yes, I think we can (multiple speakers), particularly with Smith.

Okay.

Secondly, with regard to Drilling & Measurement sort of performance based contracts, I'm curious as to how your appetite for performance-based contracts, Paul, will shift in the event we get the supply and demand framework for D&M tightening and pricing improving demonstrably relative to the super-competitive environment today?

Does that lessen your appetite for performance-based pricing in an improving overall pricing environment, or is it still sort of a strategy of yours irrespective of pricing, where you want more performance-based contracts?

I don't think a tightening of capacity necessarily is going to change our strategy on that.

I think the benefit of this model is that we have the ability to set ourselves apart from the competition, due to the stronger performance that we have.

And obviously if there's a tightening of capacity and the base prices continue to go up, they will have to be a higher value for the performance that we put up.

But the contractual framework very much holds water in a tighter capacity situation as well.

So we will continue to push that, and make sure that we get our fair share of the value that we create with our customers.

Now, I'm sure it varies by contract and by customer, but remind us the framework of how performance-based pricing works.

What's the base pricing, if you will?

Is it at a discount to what you would otherwise charge in a standard contract?

And clearly, you're going to get something above and beyond what you would get on a standardized basis, in the event that you deliver on the performance.

But remind us the framework if you will as to how the performance based pricing works.

Well, what you said is pretty much the case.

These things vary significantly, in terms of how you formulate it in the various contracts with the various customers.

But the principle is that there is a basic fee that we get for being there and doing the work.

And that could typically be lower than what normal pricing will be.

But then there is a similar upside for us to harvest, in the event that we outperform what is currently perceived to be the benchmark.

And the benchmark will be the average performance of, I would say, us and the various competitors.

So exactly how you formulate it in contract varies somewhat, but that's the basic principle.

And by having that basic principle it's just a matter of how much you put on the basic fee, and how much you put on the performance upside.

And at the end of the day for us to deploy equipment into these type of contracts for customers in a tightening market, it would have to be attractive.

Okay.

Thank you.

We'll go to the line of Mike Urban with Deutsche Bank.

Please go ahead.

Thanks.

Good morning.

Andrew or Paul, you talked about the tightening you see in pricing I guess initially in Drilling & Measurements.

Is that -- given the increased visibility that you've seen, was that something that you felt was going to be happening anyway, as we progressed here?

Or has that been more a function of Saudi coming back into the market, in terms of your view (multiple speakers)?

One more time.

I always thought, I may have been wrong, but D&M would be the segment that tightens first, partly because they lose a lot of equipment.

So if you have an increase in activity, the normal rate of equipment losses, things tend to tighten very fast, unless the industry is completely over-built.

Now the Gulf of Mexico and Saudi Arabia are both very heavy users of D&M equipment, so those events have probably given us confidence that pricing is going to come back sooner.

Is that okay (multiple speakers)?

I agree.

We said year-end early on, and I think it will definitely be by year-end if not the second half of the year.

Okay.

And then, after D&M where would we progress in terms of the tightening cycle and pricing?

Well, I think the next segment that we would see that in would be most likely open hole Wireline.

That's the next in line for that.

So probably similar type of time frame, maybe slightly after Drilling & Measurements, but very quickly Wireline as well.

And then where do you have -- conversely, where do you have the most excess capacity in the industry, what would be last to tighten?

Sorry, can you repeat that.

What would be last?

Where should we expect to see pricing lagging?

I don't -- it's very difficult to say.

That will depend an awful lot on how capacity evolves in North America.

Okay.

Whether we overbuild, or we don't overbuild.

Okay.

Got you.

That's all from me, thank you.

And we have time for one last question, and we'll go to the line of Bill Sanchez with Howard Weil.

Please go ahead.

Good morning.

Good morning, Bill.

Andrew, you've mentioned a couple times now that either you've replaced one of your competitors on several contracts, or that you anticipate perhaps doing it in the future, given their inability to deliver on contracts.

I'm just curious, when you're replacing someone on these contracts, are you doing it -- not only getting the volume pickup, but are you doing it typically at a higher price than what the competitor was doing that work for?

We are not an insurance policy for our competitors.

In other words, if we replace them, we do not agree to the contractual terms that they accepted to get the job.

If we accept a replacement at their contract value, we're just an insurance policy.

Okay.

Sure.

So there's some embedded pricing improvement, I guess, in that?

And then just one follow-up.

Paul wants to say something, sorry.

As we decide to take on someone else's contract, whether that's for one well or two wells or whatever it is, we will obviously look at the value of that contract, and whether it's something that we do want to take on.

So it would have to be attractive again for us to do it, and increasingly so when our competition keeps bidding low and our customers wants us to come and bail them out.

Sure.

Just as we look forward a quarter or two here, can you all give some just sense in terms of -- you had almost a 10% drop in Eastern Hemisphere revenues in first quarter from fourth quarter.

I know we had seasonal issues, clearly, that were addressed.

But can we just talk a little bit about top line recovery here as we kind of look out the next couple of quarters, and maybe how you guys think about the Eastern Hemisphere as whole, year-over-year growth perhaps 2011 versus 2010, given what's gone on in North Africa.

So the bulk of the revenue drop outside North America was either seasonal or geopolitical.

So obviously Libya's not coming back, right?

The rest of it probably will.

And the mobilization of projects towards the end of the quarter offshore was quite high.

So second quarter, can we recover what we lost compared to Q4 for example?

I don't think we're going to be very far away.

Okay.

Thanks, Andrew and Paul for the time.

In closing, I would like to thank Robert Bergeron for his support during his time as manager for Investor Relations, and wish him luck in his next assignment.

And now on behalf of the Schlumberger management team, I would like to thank you for participating in today's call, and Stacy will now provide the closing comments.

Thank you, ladies and gentlemen.

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