斯倫貝謝公司 (SLB) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Schlumberger earnings conference call.

At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session with instructions being given at that time.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Mr. Malcolm Theobald, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Kieley.

Good morning and welcome to the Schlumberger Limited first-quarter 2012 results conference call.

Joining us on the call from Paris today are Paal Kibsgaard, Chief Executive Officer, and Simon Ayat, Chief Financial Officer.

Our prepared comments will be provided by Simon and Paal.

Simon will first review the financial results and Paal will discuss the operational and technical highlights.

However, 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.

However, I would like to remind everyone to limit your questioning to one question and one follow-up in order to respect the other participants in the queue.

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 earnings per share, excluding charges and credits, was $0.98.

This is a decrease of $0.13 sequentially and an increase of $0.27 compared to the same quarter last year.

Oilfield Services first-quarter revenue of $9.9 billion decreased 4% sequentially.

This decrease is largely attributable to the effect of the traditional year-end surge in product, software and multi-client sales that we experienced in Q4, as well as the previously-announced lower utilization and downward pricing trend in our North America hydraulic fracturing business.

Oilfield Services pretax income of $1.9 billion decreased 10.4% sequentially, while pretax operating margins declined 147 basis points.

Sequential revenue and pretax margin highlights by product group were as follows.

First-quarter Reservoir Characterization revenue of $2.6 billion decreased 7% sequentially and margin declined 189 basis points to 26%.

These decreases were due to the seasonally strong WesternGeco multiclient sales, robust end of year SIS software sales that we experienced in Q4.

Drilling Group first-quarter revenue of $3.8 billion was flat sequentially, while margins improved 28 basis points to 17.4%.

First-quarter Production Group revenue of $3.5 billion decreased 4.4% sequentially, while pretax margin fell 338 basis points to 17.6%.

These decreases were primarily attributable to the pricing pressure, lower utilization and cost inflation in Well Services North America, as well as the effect of the seasonally strong completion and artificial lift to Q4 product sales.

From a geographic perspective, North America margins declined 409 basis points to 22.8%, while international margins were essentially flat at 19.1% despite the significant impact of the Q4 product and software sales and the seasonal drop in activity in Russia, China and the North Sea during Q1.

The Distribution segment contributed $713 million in revenue, and $35 million in pretax operating income.

Last week we announced that we reached an agreement to sell Wilson.

We will, therefore, report our entire Distribution segment as a discontinued operation in the second quarter.

Now turning to Schlumberger as a whole, the effective tax rate excluding charges and credits was 23.8% in the first quarter, consistent with the previous quarter.

We still expect the effective tax rate for the full year 2012 to be in the mid-20%s.

However, this can vary on a quarterly basis due to the geographical mix of earnings.

Net debt at the end of the quarter was $5.8 billion as compared to $4.85 billion at the end of Q4, representing a $951 million increase resulting from the seasonal deterioration in working capital we typically see during Q1.

Other significant liquidity events during the quarter included $961 million of CapEx and $324 million of stock repurchases.

During the quarter, we repurchased 4.38 million shares at an average price of $74.

CapEx is still expected to be approximately $4.5 billion in 2012, as compared to the $4 billion we spent in 2011.

And now I turn the conference over to Paal.

Thank you, Simon.

Our first-quarter results showed good progress as we continued our strong focus on execution and operational excellence.

In terms of activity, we saw growth in exploration and deepwater markets, in line with our outlook for the year, while we experienced the normal seasonal slowdown in multiclient and product sales, as well as in activity levels in some areas of the Northern hemisphere.

In North America, we executed well in all parts of the business during the quarter.

Sequential revenue was down 3.5%, and margins were down 409 basis points, driven by lower multiclient sales and the dynamics in the hydraulic fracturing market.

We have, over the past two quarters, signaled that hydraulic fracturing pricing is starting to come under pressure and during the first quarter the downward pricing trends seen in the gas basins also reached the liquids-rich basins.

So far the pricing impact varies by basins, as excess capacity is moved around, but we expect to see lower pricing reaching all basins in the coming quarters.

In addition, the continued movement of rigs and frac capacity adds costs and lowers utilization, which together with the pricing impact puts pressure on margins.

Elsewhere in North America land, our wireline logging, coiled tubing and some drilling product lines saw revenue growth, while pricing remained flat to slightly up.

In the Gulf of Mexico, deepwater activity grew in line with our outlook for the year, and was further supported by a number of new drilling permits granted during the quarter.

Our deepwater market share and operational performance remains very strong and are reflected in our operating margins, which are now back to pre-moratorium levels.

In the international markets, revenue was down 4% sequentially, due to lower product sales and the seasonal slowdown in Russia, China, and the North Sea.

At the same time, sequential margins were essentially flat, driven by very strong execution in all areas.

During the quarter, international activity progressed in line with our outlook for the year, driven by the deepwater and exploration markets, in particular in East and West Africa, and also by strong land activity in the Middle East and North Africa.

In terms of pricing, bidding remained competitive on large tenders for standard technology.

However, we see pricing sentiments are starting to move upwards, as most of the large international contracts have now been rebid and our service capacity is getting tighter.

Before discussing the quarter's results by area, I have a few comments on marine seismic where vessel utilization was strong during the first quarter.

At this stage we are already fully booked for Q2, while Q3 capacity is filling up quickly, driven by higher activity in West Africa, the North Sea, the arctic regions, and Brazil.

While some of the upcoming work was bid last year, current bid pricing is up around 10% and we expect pricing to continue to go up as the year progresses.

The WesternGeco backlog increased by 16% during the quarter.

In the Middle East and Asia, revenue was down by 4% sequentially, while margins were down 40 basis points.

During the quarter, we saw strong activity growth in both Saudi Arabia and Oman, and this trend is set to continue for both countries in the coming quarter.

In Iraq, the steep growth trends took a pause in the quarter as a number of our customers postponed awards and startups of new contracts due to uncertainties around the security situation and infrastructure capacity.

Towards the end of the quarter sentiments were again turning positive, and following award of the outstanding bids in the second quarter, we expect to see strong growth in the second half of the year.

In Latin America, revenue was down 4% sequentially while margins were up by 182 basis points.

In Mexico, offshore activity continued to grow during the quarter and we also saw a moderate increase in IPM activity on land.

We are currently mobilizing for the Carrizo production incentive contract with operations scheduled to start around mid-year.

In Brazil, the deepwater rig count remained flat during the quarter, while we saw solid activity in our IPM projects.

There continues to be active bidding for Petrobras, with award of the main outstanding contracts likely taking place over the next quarters.

In Ecuador, we signed a production incentive contract for the Shushufindi field during the quarter with planned startup around mid-year.

In Europe, CIS and Africa, revenue decreased by 3% sequentially, while margins were down by 109 basis points.

During the quarter, we saw strong growth in activity in Nigeria, Angola and East Africa, driven by both deepwater exploration and the major development projects, and the activity outlook for seismic and rig-related services in this region remains very positive.

In Russia and the North Sea, we experienced the normal seasonal slowdown due to winter weather, but both markets are on track for solid activity growth for the year.

In Libya, activity continued to grow during the quarter and we were also back to profitability in March.

Activity will continue to ramp up during the year as additional rigs become available and is set to reach pre-conflict levels in early 2013.

Let me now turn to some of the technology highlights.

The Reservoir Characterization Group saw continuing strength in exploration and deepwater activity during the quarter, as witnessed by the number of high technology logging and testing services deployed in projects around the world.

In addition, we previewed our new generation seismic streamer during the quarter, which uses a novel four-component sensor to measure the reflected wave in much more detail, including its direction.

This is a major step forward for marine seismic, similar to the medical industry moving from a 2D x-ray to a full 3D CAT scan, and it will further widen our technology lead in marine seismic.

In land seismic we continue to deploy our new UniQ technology which offers a step change in land seismic imaging quality.

In addition to operating UniQ on our own land seismic crews, WesternGeco recently created a new division to sell and lease the UniQ technology to other service companies as well as to energy companies who maintain their own crews.

The decision to sell and lease the UniQ technology will open up an additional $1.3 billion market for our WesternGeco product lines.

In the Drilling Group, new technologies introduced during the quarter included the microscope high resolution resistivity and imaging service, which will further support our customers in estimating reserves, placing horizontal wells and optimizing completion design.

In addition, the Pathfinder iPZIG at-bit inclination and imaging service helps optimize well placement in target zones and is developed for unconventional oil and gas markets.

The iPZIG service has already been successfully field tested in coal-bed methane, heavy oil and shale plays in North America and Australia.

In the Production Group, HiWAY activity continued to grow rapidly, with operations conducted for more than 45 clients during the quarter and with the number of fracturing stages growing by more than 25% sequentially.

In addition to deploying HiWAY through our traditional business model, we also introduced the Spark business model in the past quarter to expand the market uptake of HiWAY.

Here we provide HiWAY job engineering and monitoring, proppant and chemicals, as well as blending services, while the hydraulic horsepower, which often makes up two-thirds of the well site CapEx, is provided by a third party.

To date we have pumped around 70 HiWAY stages in North America with the Spark model and we will start conducting jobs in key international markets in the coming quarters.

Also during the quarter, Framo Engineering was awarded the Gullfaks subsea wet gas compression project for Statoil.

This represents the first subsea project of this nature in the world and builds on the unique technology position of Framo Engineering.

Let's now turn to the outlook where the main risk of a global double-dip recession appears to be behind us, although there are still uncertainties linked to the global financial markets and potential geopolitical events.

In terms of oil demand, the 2012 outlook has also stabilized after a series of downward revisions in recent quarters.

Based on the weakness of non-OPEC supply, OPEC's spare capacity being at a three-year low, and supply risks from a number of sources we do not expect oil prices to weaken significantly in the coming quarters.

In the US, the production growth from unconventional gas, coupled with very mild winter weather, has driven storage to record levels.

This has sent natural gas prices to a 10-year low and has led to a subsequent drop in gas activity, which is unlikely to recover in the near term.

In the international markets, natural gas and LNG prices remain solid, and based on the demand outlook, are unlikely to weaken significantly in the near term.

In terms of our activity outlook for the year, we maintain our positive view on the international markets, with rig count growth north of 10%, driven by the exploration and deepwater markets as well as key land markets.

With our strong focus on execution, a very solid contract base, and a rich new technology portfolio, we are well prepared to capitalize on these trends.

In North America, the transition from gas to liquids-based activity will continue in the coming quarter and the outlook for dry gas drilling activity remains uncertain.

We still expect US land rig activity to be in line with Q4 2011 levels, provided the ongoing drop in gas rig activity continues to be offset by increasing activity in the liquids-rich basins.

The other main uncertainty in North America is the evolution of pressure pumping pricing which, based on the ongoing transition, is set to continue down in the coming quarter.

Still, our well-balanced service portfolio on land and our strong leverage towards the Gulf of Mexico puts us in a good position to outperform in the North America market going forward.

Thank you very much.

I will now hand the call over to Malcolm for the Q&A session.

Thank you, Paal.

We'll now open the call for questions.

Kieley?

(Operator Instructions) James West at Barclays.

Paal, I thought the change in your prepared commentary about international pricing was interesting, especially since you highlighted sentiments.

Is this sentiment changes from your competitors who are now out of capacity and need to raise pricing, or is it your customers who are pushing back less on price increases as technology and expertise becomes more important with rig rates moving up as quickly as they are?

Or is it a combination of both?

I think it's a combination of both, James.

So if you want my perspective, bidding is always very competitive, whether we are at the peak or the trough of the cycle.

Now the key to pricing trends is the sentiment which is, again, driven by the view of the activity outlook.

And if you look at the activity outlook going back a couple of years, it's been under a constant cloud of uncertainty, whether it's natural disasters, geo politics or the global economy.

So even though there has not been too much overcapacity or a lot of overcapacity, there's still been a constant negative pricing sentiment.

Now, I think the industry is starting to realize, and we are certainly starting to realize, that in spite of the ongoing macro uncertainties, the tight supply and demand fundamentals gives us very solid basis for activity growth as we have seen consistently in 2010, 2011 and also now in 2012.

When you couple this fact with stabilizing GDP growth and also oil demand outlook, as well as tight service capacity in the industry, it really creates that positive pricing sentiment that I'm referring to.

Okay.

That's extremely helpful.

One of the offshore drillers mentioned yesterday there had been a big change in the last 6 to 12 months around their customers' views of capacity.

I assume you're seeing that similar trend that your customers are now becoming -- that sentiment would argue that your customers are becoming a little bit more concerned about the oil service industry's ability to provide the services they need for their programs.

Yes, I think that's fair.

There are more concerns over capacity now.

Like I said, there was never that much overcapacity and I think whatever overcapacity was there I think is dwindling quite fast.

We are actually quite tight in several of our product lines already.

I think it's also worthwhile to note is that over the past two years most of the major international contracts have now been rebid.

So there is now an opportunity to start raising prices on the smaller upcoming contracts, which we are in the process of doing.

If you look at what's happening in rigs and in seismic, typically there the contract size is smaller, and that's why you can see them move quicker in terms of testing prices.

With big multi-segment, multi-year and multi-rig contracts, like some of the big ones we have been bidding on over the past two years, you really don't want to be shut out.

And I think that's where pricing on the large contracts has been very competitive with that kind of slightly negative pricing sentiment.

But I think most of those contracts are now either bid or even awarded, and there is now an opportunity to start raising prices on the smaller upcoming contracts without any significant risk.

Good.

Thanks, Paal.

David Anderson at JPMorgan.

I thought it was very interesting in your release that you noted a number of reservoir enhancement projects, highlighting ESPs and Framo, a number of projects, but then again on the production management contract in Ecuador.

Now investors typically associate Schlumberger with exploration, but you seem to really be gaining ground on the other end of the production curve.

I was just wondering if you could help us understand how big a part of this is your business now.

And is this something we could see potentially double over the next couple years considering all the mature production coming out of the IOCs?

You're referring to these production incentive contracts specifically?

Yes.

Also, a lot of talk about Framo in there.

That's obviously a different part of your business that seems to be getting highlighted more these days.

That's a fair question.

So if I just take one step back.

We have for a long, long time been very, very strong when it comes to reservoir characterization.

And with the transactions we've done over the past couple years we also built a very similar position of strength in drilling.

Our focus now from a portfolio standpoint in terms of further building portfolio is very much focused on the production side and so you are quite perceptive in picking that up.

When it comes to the production incentive contracts, we see this as quite a strong growth vehicle for us going forward.

This is why we created a separate product line focusing entirely on this.

This part of our business was previously managed under IPM and basically was a subset of IPM.

So today it is not a significant part of our business, but it's probably one of the fastest-growing parts of our business.

It is a new business model where some of the contracts are awarded but quite a few of them are actually just negotiated straight, without bidding in many cases.

So it is one of the areas where we as a Company can get the highest multiple on our services due to our strengths in characterization, due to our strength in drilling, and also due to our strength, which is now becoming even stronger, in production.

So if that business can double over the next three, four years, it can.

It is still a relatively small part but I would say it's one of the fastest-growing parts of our business.

Okay.

As a follow-up, it's not quite related, but I just wanted to ask you about Argentina.

Obviously everybody's got a lot of questions down there in Argentina.

You guys have staked out a big position down there; I think you've talked about doing 80% of frac stages.

Can you just help us walk through some of the political risk and how you guys are navigating that?

What's happened in recent days, how does this change your philosophy in terms of that market?

Does it change your views on putting capital in the market?

How are you thinking about this new risk paradigm I guess?

No, that is a fair question.

We have moved a fair bit of capacity into Argentina over the past 12 months, which, actually, I'm quite happy that we've done, because if you try to move capacity into the country now, you might be spending 12 months in customs or whatever.

I think the key now is that we have a very strong position there.

We haven't really changed our view on the potential or the resource base.

That's absolutely there.

Now with the government repealing the Oil Plus program, and also making import and export somewhat more challenging, there is some more short-term uncertainty, but we are still quite positive on the medium to long term of Argentina.

And I think whatever way they're going to develop these resources -- and they will -- there's going to be a strong need for our expertise and for our products and services there.

So I think at this stage we continue to operate as we have been doing, but we have observed some of these political changes.

But as of today, it hasn't really impacted our business.

In other words, the work's still there, it's just you're going to be working for a different operator, essentially.

Potentially, yes.

Thank you.

Kurt Hallead at RBC.

Paal, my question is going to be focused -- I'll get it off the table here -- on North America and your outlook for the remainder of the year.

And if you can maybe pars that between -- I know you mentioned pricing pressures in the frac market.

Can you give us some color on what's going on in some of the other product and service lines?

And can you also just help us understand maybe the margin progression in North America as it relates to, if you will, the frac and service components?

Contrast that to Gulf of Mexico and contrast that to seismic.

That would be very helpful.

Okay.

I'll have a go at that.

I think if we started with North America land, the way I see it we are facing two main uncertainties going forward.

So the first one is the outlook for gas rig activity.

Now, with the record storage levels and natural gas pricing below $2, the drop in gas rig activity is set to continue down from the current levels in the low 600.

How low it's going to go, it is unclear at this stage as the activity floor supported by the lease commitment drilling and carries is actually not that significant.

Now, on the other hand, the other main uncertainty is pressure pumping margins which are under attack from several fronts.

Firstly, utilization is likely to remain challenged because the lower well inventory leaves the frac fleets chasing the rigs much, much more than what they used to do 6 or 12 months ago.

If you look at the bid pricing, it continued to drop in both gas and liquids during the quarter.

On average, towards the end of the quarter in gas, we were bidding about 20% down sequentially and in liquids about 10% down sequentially on average between the liquids basins.

Now, in the first quarter, the new pricing started to significantly impact margins in the gas basins and in some of the liquids basins while the rest of liquids basins I see being impacted on the new pricing in the coming quarters.

Now there's another key thing to realize as well and that is that in the liquids there are more stages per well, but the horsepower required per stage is actually much lower because we pump at lower pressures and lower rates.

So while you need the fleets in liquids, you actually need fewer pumps or less horsepower -- actually fewer pumps per fleet and less horsepower per fleet in the liquids which, again, is going to contribute to the oversupply of horsepower.

So if you add to these factors the fact that there's significant horsepower on order for the industry, we believe there is considerable uncertainty around the outlook for pressure pumping pricing and the margins.

So the fact that it's coming down in Q2 I think is a given and I think there's also significant uncertainty around H2 and it might come down further in H2.

Now if you look at our side, we obviously are in the pressure pumping business but we have the least exposure to this business if you compare us to our main competitors.

Some of the other mitigating factors that we have then is that we have HiWAY within pressure pumping and the uptake of HiWAY is going very well.

We had another 25% sequential growth in the number of stages during the quarter.

And we also introduced the Spark business model which is then focused on the blending or low pressure part of fracking.

Obviously, as I said, we have significantly higher leverage towards wireline logging and coiled tubing and drilling on land and also towards the Gulf.

So I think, overall, there are issues around pressure pumping which is going to have an impact on the business, but we are quite well leveraged towards other things which would give us an advantage going forward.

Thank you for that, Paal.

Very helpful.

Maybe just as a follow-up to that, and sticking just to North America at this juncture.

Would you expect that when you take seismic and your Gulf of Mexico and what's going on with the frac market, when you roll that all together -- margins coming down in aggregate for North America in the second quarter -- do you expect the low point for margins potentially to be second, third quarter?

Or do you think that, given the negative momentum in the frac market, it's just going to drag margins down throughout the course of the year?

What would be your best guess right now?

Like I said, what is clear is that Q2 is coming down.

And that's due to the fact that there will be more impact on the pressure pumping pricing and also we have the Canada breakup.

Now, what is going to happen in the second half of the year, I think that pressure pumping margins are going to continue to be under further pressure.

Now to what extent we can offset this from seismic, from deepwater drilling in the Gulf of Mexico, and from the other part of our land offering, which actually is holding up well in activity and actually holding up very well in margins, obviously we have the ambition of trying to offset as much as possible of this.

Now whether we're going to be able to do that is going to be a function of how severe the pressure pumping pricing and margin decline is going to be.

And at this stage I simply don't know.

That's fair enough.

Thanks again.

Scott Gruber at Bernstein.

I want to inquire about the impact of contract rule internationally.

Paal, you mentioned that the majority of the large contracts had been repriced.

But are all these contracts in force today, such that the negative rule has passed, assuming broadly static pricing on future contracts?

There are still some contracts that are being evaluated and are going to be awarded and I think the main of these are centered around Brazil and Petrobras.

But I would say the majority of the large international contracts have been awarded and they are already in effect.

So most of the pricing concessions that have been given in the large contracts, I would say are in our operations today.

Okay.

And then can you provide some color on the revenue split internationally between these long-term contracts, whether it's for bundled or discrete services, the full IPM contracts and the shorter cycle work?

What's the broad split between those three buckets?

It's very difficult to give a number, but I would say that the large multi-segment, multi-rig, even multi-client type of small contracts is centered in certain parts of the world.

Obviously you have Brazil, you have part of it in the Far East around the Pan Malaysian contract, and you have some of them around the North Sea.

They are significant contracts for the markets that I was referring to, but it is only a part of our international operation.

There's a lot of other contracts and if you look at the volume of work we have, for instance, for other NOCs and for independents, and even other IOCs, that's still quite significant.

So I can't give you a number.

We put a lot of focus on it in our commentary because they are key battlegrounds for pricing, but they're only a subset of our total contracts portfolio internationally.

Okay.

But it's fair to say that given that there's few awards coming out this year, I think there's only two big tenders to be signed, the shorter cycle work, the seismic activity, they're going to be much more significant drivers in '12 versus repricing on big tenders?

I think that's fair to say, yes.

Okay.

Great.

Thanks.

Bill Sanchez at Howard Weil.

Paal, I see that you're keeping your CapEx guidance flat at $4.5 billion for the full year.

You've outlined here, I think, a modest bump in terms of your international rig count growth expectation for the year.

I know you're keeping a close eye in terms of North America pressure pump capacity additions.

Where do we stand right now in terms of maybe -- have we already seen a reallocation of capital from the North America markets to the international markets to start funding those opportunities you have there more fully?

Or is that something we could still expect going forward?

First of all, Bill, there is no change to the rig count outlook for international.

I believe we said north of 10% in Q4 and we're saying north of 10% at this stage.

So really no change to the activity outlook.

International is coming in basically exactly the way we were foreseeing it.

When it comes to our CapEx, yes, we are upholding the $4.5 billion outlook.

In the Q4 call what I said was that the budget or the plan was $4.5 billion, but we would look at the year in two halves.

In the first half we would invest at 2011 levels, which is around $1 billion per quarter, and then potentially ramp up another 20% to 25% in H2 based on how things were going and also based on our view of 2013.

If you look at where we stand at the end of Q1, Q1 was at the planned rate of around $1 billion, and Q2 is going to be quite similar.

The main change was that we halted the non-pressure pumping additions and we redirected this pressure pumping capacity or CapEx to the international markets, giving them their pressure pumping capacity earlier in the year.

Now for the rest of the year we're going to make a call on H2 whether we actually go for this 25% ramp or not.

We'll make that call during the coming quarter.

If I was going to do a preview, I would say that the non-pressure pumping CapEx will likely be lower than plan.

And any CapEx additions in North America for pressure pumping is likely to be more focused on the low pressure blending part, rather than on pumps, based on what I was referring to in my North American comments.

While internationally, I think you could see a ramp further from the spending level now in H2 but within the envelope that we've already given.

Okay.

And if you do go ahead and make the adjustments on the pressure pumping side in North America, Paal, would that be outright cancellations of capacity or would you just shift those deliveries into 2013?

We're already cutting in North America for pressure pumping.

So we will see how much international wants to pick up from that and the balance we will then either work with our suppliers, we'll see what we will potentially keep in inventory and basically manage that.

But we have a very good dialogue and setup with our suppliers there and I'm very convinced that we can manage that in a good way.

One follow-up for you.

As we look at certainly very good performance in margins in first quarter and everything I think you've outlined from a pricing and activity standpoint suggests margins just continue to improve here.

I'm just curious your thoughts as we continue to see mobilization of people and tools for you into these incremental opportunities in the deepwater contracts.

Is there any expected margin drag you anticipate on your international businesses as a result?

There's always additional costs when you mobilize and start up new projects, but this is an ongoing business expense and we have these type of costs on an ongoing basis.

We are focused on delivering steady international margin growth throughout 2012.

The starting point of this is really our focus on very strong execution.

I'm very pleased with what each part of the business has done so far this year in terms of very good cost and resource management.

I'm also very pleased with the progress that Smith and M-I is having, in particular internationally.

They're doing very well both in terms of growth and in terms of margins.

And then we have a very strong portfolio of new technology that we are introducing, as well.

So I think overall there are always added costs when you start up new projects but this is part of ongoing business expenses and not something that should really impact our results.

Fair enough.

Thanks for the time.

I'll turn it back.

Bill Herbert at Simmons & Company.

Continuing with the margin question internationally here, clearly first-quarter margins, at least for most of us, were better than expected.

Flat quarter on quarter, given the extreme seasonality in Northern Europe and Eurasia, was impressive.

Starting from a higher base than you did last year for sure, but with regard to the road map for international margins over the course of 2012, you said steady improvement.

Does that convey the same order of magnitude of improvement that we witnessed last year, Q1 to Q4, or do you expect better than that?

I don't even remember what's that improvement (multiple speakers).

You were up 250 basis points from Q1 to Q4 of last year.

You went from 16% to 19%-and-change.

You are starting at 19%.

I'm sure you know that I'm probably not going to give you a number, right?

But I would just go back to say that there is opportunity within how we execute, with getting at least slight pricing, I would say slight effective pricing traction maybe in the second half of the year from more of the activity mix, as well as from the sell-up of new or high-tech technologies.

We have margin expansion potential during this year.

Whether it's going to be 250 basis points or not, I'm not going to give a number on that, other than we are working very hard, both through how we execute and also how we position ourselves for the new and upcoming contracts, to drive margins up.

Two questions on seismic for you.

Very positive commentary with regard to the outlook for pricing on your bidding.

You're up 10%.

Do we actually start to get pull-through from that pricing improvement on your P&L second half of this year?

Yes.

So what you have is for our upcoming work in Q2 and Q3, some of the work was bid last season, which is obviously on last season's pricing.

But there is a part which is bid now, and more of that in Q3 than Q2, which is going to be at that higher pricing and then we'll have the pull-through that you're looking for.

Then last question on multi-client.

Central Gulf of Mexico lease sale coming up here this summer.

Did we see the benefit of that in the fourth quarter or do we expect to see the benefit of that in the second quarter predominantly?

First of all, we did not see it in the first quarter.

I think we saw some of it in the fourth quarter.

I think there's still some uncertainty around how much of a boost we're going to have in Q2 because the IOCs and the large players, many of them have already purchased data either through pre-commits to the service that we've done over the past 18 months and also from late sales that they did back in Q4.

So, in order for it to be significant in Q2 I think we need a lot more interest and activity or participation from the independents, which we so far haven't seen yet.

Thank you.

Michael LaMotte at Guggenheim.

Paal, I'm really intrigued by the Spark model.

And in particular, if I think about the contrast of bundling as a means of trying to create value, you're essentially dislocating the most commoditized and the horsepower.

I'm wondering two things.

One, what that means for your margins, unlocking the big capital component, and, two, how far you think this model can go.

Could we ultimately see horsepower, in your view, going the way of even a rig market, being completely disassociated?

I think it's a bit early to stretch it that far now.

First of all, margin-wise for the Spark model, these margins are accretive to our pressure pumping business and it's also quite attractive from a return on assets or return on capital standpoint.

And that makes it quite interesting.

Part of the reason for doing this is that we've seen a trend where some of our customers have started to vertically integrate on the pressure pumping side with quite limited ability to do any kind of sophisticated higher-end blending type and pumping more sophisticated fluid systems.

So we, through HiWAY, have really the only significantly differentiated fluid system in the market at this stage.

And that's why we see that as a very good fit with some of these pressure pumping companies that are owned by our customers.

So that's the starting point.

How far it can go, I don't know.

I think the main view I have, or we have, is that the pump itself is not a significant part of the pressure pumping operation.

It's going to be much more the fluid or the engineered fluid system that basically creates the conductivity down-hole that drives the value proposition going forward.

And I think this is why you see as soon as there is enough supply of pumps the pricing goes down very quickly.

So I think there is a chance to get a lot more sustainable pricing and performance in a pressure pumping business if your business is more centered around what really generates the value.

And that, as far as we see it, that is much more the fluid system than the actual pump.

That's very helpful, thanks.

Totally unrelated follow-up on the international gas side.

Our view is that LNG prices are going to remain very strong for a very long time, which has obviously set off a scramble for exploitation of stranded gas, as well as redevelopment of more mature gas in places like Indonesia.

I'm curious, within the context of a 10% rig count growth, if you could give us a bit of a sneak peek into '13, what the bigger constraints are to seeing faster growth on the international gas front.

Is it a rig constraint or is it at this point just about getting operators that are focused on projects and queuing them up?

I think it's a bit early for me to make a firm comment on that.

We haven't looked at it in that much detail.

But I would say that if it's conventional offshore I think that there is no immediate shortcoming of rigs at this stage so I think it's more getting the projects lined up.

But if you go more towards higher end rigs, that might be a constraint.

It's a bit early for me to comment on it in terms of 2013 at this stage.

Okay.

And maybe as a follow-up then, do you see more work coming from new basins such as Mozambique or redevelopment of more mature provinces like Indonesia?

I think we see both.

I think the Far East, with Indonesia, with Malaysia, Thailand, is looking to be quite busy this year and going into next year.

And obviously there is significant focus on East Africa from an exploration standpoint.

So I would say that both those regions and those type of developments, more mature basins as well as newer basins, are seeing good growth.

Thanks, Paal.

Jim Crandell at Dahlman Rose.

Paal, first question is in seismic.

Given how pricing is improving, and given the contract outlook, do you think it's possible at this point for you to reach last cycle's peak margins at WesternGeco in 2013?

Again, I think it's too early to say.

We are starting to see the signs of pricing traction which we have been looking for for the past 12 or 18 months.

So capacity has tightened.

If I look at the number of 3D vessels coming into the market scheduled for this year, which I think for the total market is only around three, I don't see any issues with further capacity additions in terms of how it will impact pricing.

So I think there are good chances of getting sustained pricing traction, at least through this year and then it's going to be a function of I think how much capacity is being added to the market.

But the fact that margins are coming up is clear, but I think it's too early to say yet whether we're going to see the peak margins of the previous cycle.

And I think multi-client activity is also going to play into that equation.

Okay.

And my follow-up, internationally, particularly offshore, it seems to me as if one of your big competitors wants to have a higher market share in LWD, particularly in deepwater, particularly offshore, and I would argue that your other competitor wants to have a higher market share in wireline.

You're a company that measures market share very closely.

With pricing coming up, do you think you've at least maintained your market share in both of those two businesses over the last year?

Yes, I do.

And I would say that international market share is really a function of the number of good contracts that you have, not the number of bad contracts.

Also, international market is a function of how many contracts you retain and not necessarily how many contracts you win.

So our contract portfolio today is very strong.

There is significant upside potential in terms of new technology and this whole aspect of operational integrity and quality of service is still key market share drivers.

I've been quoting numbers about D&M replacement ratios in previous quarters.

I think in Q4 this number was 31 to 5; that we replaced our competitors on rigs or wells or contracts 31 to 5. And that number for Q1 is 30 to 3. So we continue to take work that our competitors might have previously won in terms of bidding, but they can't perform it, whether it's quality or capacity.

I think the other thing I would say is that there is also an ongoing discussion about competitive pricing on deepwater and the margins we have there.

I think the key -- if you want to look at how we have managed to maintain market share and maintain profitability, you need to look at our margin gap towards our closest competitor which has expanded in the past year.

Right.

Okay, thank you very much.

Douglas Becker at Bank of America Merrill Lynch.

In the past we've seen the share repurchase program characterized as aggressive and opportunistic.

During the first quarter it looks like the pace slowed considerably from what we saw last year.

As we go through 2012, should we expect a less aggressive share repurchase program compared to 2011?

Simon, you want to answer?

Yes, okay.

Thanks for asking the question.

We obviously slowed down the repurchase program in Q1.

Now, I want to take advantage of this question to highlight our strategy on how we consume our liquidity.

So, after dividend, the cash is used -- first priority for the cash is really the business needs.

And this is CapEx, the working capital, when we have expansion, and a small acquisition.

And any excess cash we will spend it on buyback.

Last year we did expand, if you want, beyond the excess cash, because of following the acquisition of Smith and the number of shares we issued in that transaction.

So we decided to be more aggressive on the buyback.

You're going to see it more in our traditional way, which is basically avoiding the increase in the number of shares due to the stock-based compensation schemes that we have.

So it will be slower, yes.

Makes sense.

And then Paal, recently you announced an expansion of core analysis capability in Houston.

And I appreciate it's a pretty small part of the business but can also generate very high returns.

What role do you see core analysis playing in your business as you go forward?

It's a key part of the reservoir characterization work flow and we have over the past five, six, seven years gotten further into that business.

We have a great company up in Utah called Terra Tek, which is leading in really high-end core analysis.

And we've combined this with other parts of the Company, as well as with our fluid analysis, some of the companies we bought there.

And this is a key part of the characterization work flow.

It is not a significant volume in terms of revenue.

But like you say, it is higher margin and it's also a critical part of putting together that entire work flow and the entire, I would say, answer product to our customers.

Okay.

Thank you very much.

Mike Urban of Deutsche.

Obviously a lot of focus on the international pricing comments that you made.

I wanted to take a little bit different approach and talk about some of the other potential drivers of margin in the international business.

In particular, I would think of things like mix of business as being a potential driver of margin and then also the volume.

Now you've talked about rig count, but are you also able to expand out-of-scope work and things like that as you grow into some of the infrastructure investments and as some of the projects that are out there mature?

I'm just wondering if you could comment on those two items.

Yes, I think all those items that you're listing are key contributors to how we will drive margins, in addition to when we get pricing, more pricing power.

But the starting point for driving margins is very strong execution with respect to cost and resource management.

We have a lot of focus within the Company around leveraging our size and our footprint, even in a better way than what we've done in the past.

We have a very strong international setup and the way we run and conduct our business from a support standpoint, from asset management, from maintenance and regional distribution of support activities, we have upside in terms of how that's run.

And we are in the process of streamlining and upgrading how that's done.

In other words, we will have a benefit to the bottom line.

In addition to that, as I alluded to earlier, Smith and M-I is performing very well and continuing to improve margins under our international structure.

We managed to lighten their support cost base.

And also, as they continue to grow, the fall-through we can get on their business, even without pricing improvements, is actually quite good, as well.

And then like you say, the activity mix is favorable to us.

Deepwater activity and exploration activity is highly accretive to our margins, and we also have a very strong portfolio of new technology.

So I'm not going beyond what I said earlier in terms of how fast we can expand international margins, but we have potential to expand them and we're working hard on getting that done.

That's very helpful.

And then in terms of some of the pricing improvements that you've talked about, not so much on the large projects, which again is still competitive, but the shorter cycle stuff, smaller projects, how quickly will that flow through, just given some of the lead times that we typically see internationally?

Is that something that could still materialize in 2012 or is that a more material move next year?

I think you will have contracts where we will test pricing and likely win during this year.

And we also -- when I refer to the wells or the projects or the contracts where we are replacing competition, we always not replacing our competition on the same price as they bid at.

So there will be some opportunities for smaller contracts with higher pricing.

How quickly that's going to be material to the overall results is yet to be seen, but the fact that that trend is starting will be a positive contribution.

Absolutely, have to start somewhere.

That's all from me.

Thank you.

Angie Sedita with UBS.

Paal, as we discussed here with international pricing and a change of sentiment, one of your largest peers said that they are, quote, pushing for pricing on small to mid-sized projects.

Obviously it's not only sentiment, it's what your competitors are doing, so are you also seeing this in the marketplace?

And if so, are you seeing this specifically in certain regions and product lines?

I wouldn't go into what regions we are seeing it.

We are also testing pricing on smaller contracts.

The main segments that we are seeing this in are the ones that are the tightest in capacity.

Obviously seismic we already talked about, but then I would say wireline and drilling and measurements are the other ones where we are basically seeing this.

Okay.

And then given North America's obviously flattening out and weakening and yourself and your peers are moving CapEx from the US markets, the North American markets, abroad, do you think there is or is there any risk that the international markets don't tighten further in 2013 if this CapEx moves abroad?

I don't really think so.

I think the main shift of capacity or CapEx would be around pressure pumping.

And to what extent -- I'm sure the other main or big integrated services companies is going to look at making sure that international operations get the right amount of pressure pumping capacity, as well, which over the past couple of years, at least we have been, in many cases, given priority to North America with the fast growth rate.

So we are now getting back in, making sure we are properly set up in all the key basins where we need pressure pumping capacity and I would say today we are almost there.

So in terms of how the international market is tightening, I don't think a shift from North America to international is going to be a significant problem because the activity level in North America is not really going down.

The main issue you have is that there is oversupply of pumps.

Fair enough.

Finally, you also mentioned you're halting your capacity additions in pressure pumping here in 2012.

What does that imply as far as when you would stop seeing new capacity additions from Schlumberger?

Is that Q3 or is it still coming into Q4?

Can you give us a little color there?

I can't give you a time because we will add back capacity when we can get utilization.

I see really no point of adding pressure pumping capacity into the market now if I can't get the utilization right.

So it will be a function of when we can get that.

And also, what I was saying is that the demand for pumps or horsepower in the liquids is going to be lower than what we had in the gas.

So what we also can do is by investing in blending and low pressure equipment you can, in many cases, create more fleets out of the same horsepower in liquids than what you actually had in the gas.

So our focus on CapEx in North America, if we need to add fleets, will be to add the low-pressure part of the fleet and then basically use the existing horsepower first until we run out of that.

Robin Shoemaker at Citi.

Paal, I wanted to ask you, going back to the international side, in terms of the specific regional markets that may be holding back some of your margin progress, I'd just like to ask you to highlight maybe a couple of those.

I would start -- actually the first question with regard to Russia and how you see the evolution of that market, including potentially using higher-end technologies.

I would say, first of all, to your question about the overall margins, I would say that all parts of the business I think are doing a very good job in terms of how they execute, and how they focus on both market share and margins in parallel.

So that's the first point.

But on Russia specifically, we see very good growth in the Russian market for this year.

In particular, in Western Siberia.

And just picking up on your point in terms of how higher-end technology can apply more there, I think what we're seeing in Russia is a continuous upgrade of the rig capabilities, more towards Western standard and more towards higher-capacity rigs.

And as you upgrade the rig base, the need for higher-end technologies that can drive efficiency will obviously go up.

So we are seeing a continuous, I would say, high-grading or upgrading of the rigs in Western Siberia and with that we will have a wider market for higher-end technologies.

And what we have done over the past decade in Russia is that we have established a very solid footprint from the Russian companies that we have bought and we have been continuing to use their locally-made technology to have a deployment mechanism for higher-end technology when that becomes a requirement.

So I would say that we are very well set up in terms of our footprint in Western Siberia, in particular through the Eurasia partnership and deal that we made last year.

And with continuous upgrade of the rig capabilities, the demand for higher-end technology is just going to grow.

Okay.

Then in your earlier comments you mentioned an improvement in sentiment in Iraq just quite recently.

Is the profitability level in Iraq likely to rise through the year as more rigs go back to work?

I would say that our overall profitability in Iraq for the past two, three quarters has not really been an issue and we continue to see that's not an issue.

We had a pause in the growth rate, and that was more down to uncertainty around the security situation as the US Army left towards the end of last year.

And also some concerns around the rate of new infrastructure, in particular offloading capacity in the Gulf for Iraq production.

So those were the sentiments that I was referring to that was turning positive towards the end of the quarter.

And there is a number of contracts to be awarded and also started up, which a lot of it's going to take place during the second quarter.

Beyond that we see very strong growth going forward and also we see profitability being quite reasonable for us there.

Okay.

Thank you.

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

Kieley will now provide the closing comments.

Thank you.

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