斯倫貝謝公司 (SLB) 2012 Q3 法說會逐字稿

Welcome to the Schlumberger earnings conference call.

Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you, Julie.

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

Joining us on the call from New York City 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 frequently asked questions document which is available on our website or upon request.

We will welcome your questions after the prepared statements.

However, I would like to like 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, Michael.

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

Third-quarter earnings per share from continuing operations, excluding charges and credits, was $1.08.

This is an increase of $0.03 sequentially and $0.12 compared to the same quarter last year.

As a reminder, all prior period amounts have been restated as a distribution segment as we have reclassified to discontinued operations following the sale of Wilson in the second quarter and the sale of our investment in CE Franklin during the third quarter.

Third-quarter revenue of $10.6 billion increased 1.5% sequentially.

This increase was driven by international revenue growth of 3.1%.

The international growth was offset in part by a 2.3% decline in North America.

Oilfield services pretax income of $2.1 billion increased 2% sequentially while the pretax operating margins were essentially flat.

Sequential revenue and pretax margins highlights by product groups were as follows.

Third-quarter reservoir characterization group revenue of $2.9 billion increased by 4.8% percentage points sequentially, and margins improved 58 basis points to 28.8%.

These increases were driven by improved vessel utilization at WesternGeco following last quarter's transits and dry docks, as well as a strong international performance in testing services.

Drilling group third-quarter revenue of $4 billion increased 1.2%.

While margins declined slightly by 34 basis points to 18.1%.

The revenue increase was largely attributable to billing and measurement on robust activity in the Middle East and Asia.

Third-quarter production group revenue of $3.7 billion decreased 1.7% sequentially while pretax margin fell 148 basis points to 14.9%.

These declines were largely attributable to our North America hydraulic fracturing business as we continue to experience pricing pressure in US land as a result of excess hydraulic horsepower capacity in the market.

From a geographical perspective, North America margins declined by 209 basis points to 18.6% while international margins improved 73 basis points to 21.5%.

Now turning to Schlumberger as a whole, the effective tax rate excluding charges and credits was 23.6% in the third quarter compared to 24% in the previous quarter.

Net debt at the end of the quarter was $6.2 billion as compared to $6.7 billion at the end of Q2.

Significant liquidity events during the quarter included $1.1 billion of CapEx, $121 million of receipts from the divestiture of our investment in CE Franklin, and $149 million of stock repurchases.

During the quarter, we repurchased 2.2 million shares at an average price of $68.19.

In addition, during the quarter we took advantage of the low interest rate environment by issuing $1 billion of 1.25 -- 25% of five-year notes due in 2017, and $1 billion of 2.40% 10-year note due in 2022.

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 third-quarter results continue to show steady improvement in both revenue and margin performance as seen in the overall pretax operating income which was up 2% sequentially and 11% compared to the same quarter last year.

In the international markets, total revenue grew by 3% sequentially in line with the rate count while margins were up by 73 basis points reaching a three-year high.

Activity was solid driven by both key land and offshore markets however, regional growth rates continue to vary driven by changes to activity mix and project schedules.

Service capacity remained tight in our seismic drilling and measurements and wire line product lines and we also saw signs of capacity tightening in our well testing business.

Pricing continued a steady upwards trend during the quarter driven by higher new technology sales, strong operational performance, and further supported by proactive bidding on small to medium-sized contracts.

In Latin America, revenue was flat sequentially while margins were down 113 basis points driven by a shift in activity mix, operational delays, and heavy mobilization costs linked to new contract startups.

In Mexico, activity remained steady during the quarter with continued focus on deepwater exploration, conventional offshore development, and mature fields on land.

We started operations in our first Schlumberger Production Management or SBM project covering the Carrizo field and we also began to mobilize for the second SBM project covering the Panuco block.

In Brazil, activity was also flat during the third quarter with growth on land being offset by less offshore drilling as rigs were redirected towards work-over activities.

Still, the growth outlook for Q4 positive with three additional deepwater rigs scheduled to start operations, together with higher forecasted demolition vessel activity.

Ecuador showed strong sequential growth as we completed the mobilization of the Shushufindi SBM project.

The project is now fully operational and activity and results are progressing in line with our plans.

During the quarter, we experienced operational delays in Argentina and Colombia due to a range of local factors but we are expecting to see solid sequential growth in these countries in the fourth quarter.

In the Middle East and Asia, revenue grew by 7% sequentially while margins were up 126 basis points.

During the quarter, Saudi Arabia again posted strong sequential performance driven by work-over, development, and exploration activity.

These results were further supported by solid activity growth in Oman, United Arab Emirates, as well as Kuwait.

In Iraq, we completed our resource mobilization following the second quarter contract wins, effectively doubling our drilling activity in the country during the quarter.

With this market share gain and our well-established execution track record, we have over the past two years established our traditional international market position also in Iraq.

In China, we continue to see strong sequential growth on land driven by higher drilling and stimulation activity as our Chinese customers embark on more complex conventional and unconventional projects.

Still the geo market with the fastest sequential growth in the third quarter was Australia where offshore activity increased and where our strong contract position in the Queensland unconventionals is starting to have an impact.

Following a very strong second quarter, revenue in Europe CIS and Africa grew by 2% sequentially while margins were up by a further 138 basis points.

In the North Sea, we saw strong activity for WesternGeco which was offset by startup delays on several smaller projects for other product lines as well as extended summer maintenance shutdowns in both Norway and Denmark.

In North Africa, delays negatively impacted results in Algeria while issues related to the security situation slowed the activity ramp up in Libya.

Activity in sub-Saharan Africa remains strong during the third quarter with significant sequential growth in East Africa.

Russia and Central Asia also saw strong sequential performance driven by activity growth in Western Siberia while offshore activity remained flat for the quarter.

In North America, sequential revenue was down 2% and margins were down 209 basis points.

In terms of activity, the results were negatively impacted by a slower than expected seasonal pickup in Canada, a 3% sequential drop in the US land rig count, as well as the activity shut down in the US Gulf of Mexico linked to hurricane Isaac.

The negative pricing impact on our hydraulic fracturing business in US land continued in the third quarter as the new pricing levels further penetrated our contract base.

Furthermore, in the US land, we also saw the first signs of pricing weakness in our cold tubing business towards the back end of the quarter.

In the Gulf of Mexico, excluding the Hurricane Isaac impact, deepwater activity grew in line with our earlier outlook and the number of deepwater drilling rigs is set to reach pre-Macondo levels by the end of the year.

We continue to show strong operational performance and our Gulf of Mexico business is becoming increasingly accretive to our North American markets.

In WesternGeco, we operated one Dual Coil fleet in the central Gulf, while multiclient sales were flat with the previous quarter.

Let me now turn to some of the technology highlights for the quarter.

In the reservoir characterization group, we opened the Schlumberger Petroleum China Institute in Beijing.

The Institute houses more than 100 of our petrotechnical experts which together with domain experts from all Schlumberger product lines offer a full range of reservoir services to the various players in the Chinese oil and gas industry.

To further strengthen our position in the emerging shale market in China, we also signed a joint venture with the Chongqing Institute of Geology and Mineral Resources to provide basin studies, sub-surface data integration, and optimized well and completion planning for the new players coming into the Chinese shale market.

Elsewhere we continued to expand our presence and capacity for core and fluid analysis with the opening of our latest lab in Houston which joins our network of over 25 labs around the world.

We are also continuing with our strategy of combining our downhole fluid and core sampling technologies with our lab capabilities to provide a seamless integrated service.

In the drilling group, we continue to execute our strategy focused on creating the next step change in drilling performance to total system integration, and we are progressing well with this work as can be seen by the improvement in the drilling group financial results over the past two years.

During the quarter, we reached a significant milestone with Smith Bits for the first time in their history captured the number one market share spot according to the latest Spare's survey.

This achievement is another testament to what the Smith segments can achieve through their unique technology and as part of Schlumberger both with respect to the overall drilling work flow and our global infrastructure.

Another very interesting drilling technology being introduced by Geoservices is the advanced couplings characterization.

Here we perform continuous particle measurements of the couplings as they come off the shakers and through novel data processing we can establish the reservoir quality of the rock and also tie it back to the specific well depth.

This will offer a very effective way of optimizing well placement and completion intervals, for instance, in horizontal shale wells.

In the production group, we performed close to 2,100 stages with HiWAY during the quarter, which represents record activity and a sequential growth of around 60%.

In addition to the established HiWAY markets in North America such as the Eagle Ford, we also saw meaningful penetration into several other basins including the Bakken and in Canada.

HiWAY's production results and completion cost savings have been the main driver for its penetration into these basins.

We also completed a study of public production data covering the Eagle Ford that showed an average production from the HiWAY wells was 65% higher than non-HiWAY completed wells.

In the international market, HiWAY showed continued growth with a near doubling in stage count versus the prior quarter.

Let's now turn to the macro environment where both the US and European central banks announced interventions to support growth in their respective economies.

China continued to show signs of slowing growth, but so far the slowdown appears to be actively managed and for the time being, kept under control.

All together these developments have left the GDP growth outlook for 2012 and 2013 more or less unchanged from the previous quarter.

At the same time, the supply and demand balance of the oil market remains tight with continued production challenges in the non-OPEC countries and with OPEC's spare capacity staying close to a five-year low.

Based on this environment, we continue to see brand crude prices supported around current levels although there could still be periods of volatility.

In the international market, we have seen no material change to overall customer activity plans or sentiments during the quarter and we still expect our activity to grow in excess of 10% this year.

In North America, the activity sentiments are currently more negative both in Canada and US land with liquids activity no longer able to offset the drop in dry gas drilling.

This, coupled with ongoing pricing pressure in hydraulic fracturing, as well as early signs of pricing weakness in coiled tubing in US land indicates no immediate change to the North American headwinds.

As we continue to navigate the overall macro uncertainty, manage the North American head winds, and capitalize on the steady international growth, we maintain relentless focus on the quality and efficiency of our execution.

This execution capability, together with our balanced technology portfolio and unmatched international strength, will allow us to deliver double-digit growth in earnings per share in 2012 as well as solid margin progress in what remains quite a challenging business environment.

This position and these capabilities also puts us in the driver's seat for continued outperformance in 2013, which remains the collective ambition of the entire Schlumberger team.

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 up the call for questions.

Julie?

(Operator Instructions)

David Anderson, JPMorgan.

Question, international performance particularly out of the Eastern Hemisphere is very impressive this quarter, particularly how it's progressed for the last year or so.

As far as you could talk a little bit about the drivers behind that.

How much of this would you attribute to say execution, activity levels, pricing, and I guess what I'm really trying to understand is how much this momentum do you see continue into 2013?

In other words, is it sustainable now and do we continue to build from here?

Okay.

So starting with the Q3 performance, I would just say that I'm overall pleased with the progress.

We are keeping very strong focus on execution as we have been talking about in earlier quarters.

And we also are doing quite well when it comes to cost and resource management.

We also continue to work on our internal improvement programs, which by the way is included in our normal operating costs.

So in terms of margins, we saw further progression in Q3 and we had very good incrementals and as I stated in my prepared remarks, our international margins is now at a three-year high.

And some of the drivers behind this is slow but steady pricing increase driven by new technology sales, as well as strong operational performance but I would also say that the quality of service is still a market share driver for us.

Right.

The D&M Q3 replacement ratio was again 34 to 3 so we're maintaining this 10 to 1 ratio and this is actually starting to become a meaningful for D&M now which has showed a significant improvement in financial performance during this year.

So if you didn't take that performance and try to look forward, we maintain our positive view on international markets and also our performance there.

Right?

We have a very strong international contracts portfolio and this portfolio has solid upside when it comes to both technology and the performance.

And the other thing I would like to highlight as well is that we continue to expand the international presence of our smaller product lines.

If you look at operations internationally today, we operate in over 80 countries and we have 17 product lines.

But in 50% of these countries, we only have 50% of our product lines present so I would say that we still have a lot of runway in terms of growth as per market penetration.

So in terms of margins going forward, I would just say that we will continue to leverage the size and the infrastructure and the execution capabilities to drive both the top line and further margin expansion.

So as overall, our view on the international market remains positive.

And I'm pleased with the progress in terms of how we're executing and I would expect us to continue to improve going forward.

More specific question on the Saudi, if you don't mind.

How do you see Saudi market developing next several years and how much of that growth is going to come from gas?

I know we're not going to see a huge massive ramp up we saw last cycle but we're hearing more and more talk about gas being one of their focus up there so I'm just kind of curious how much of gas do you see that be as a contributor there and can you give us a sense as to how much that gas market in Saudi has grown over the last year?

I don't have a breakdown of the rig increases that we've seen over the past year.

But Saudi today is on track to reach the 134 rigs by year-end which they more or less indicated.

In terms of the outlook beyond year-end, we don't expect a dramatic increase in rig count, I would say the first half of next year, but rig less activity remains strong and is also a key growth driver for us in Saudi.

But like you said, gas is important.

Saudi Aramco recently announced a gas discovery in the Red Sea, which there's no firm plans beyond this but with the gas discovery I think it's reasonable to assume that there would be more exploration activity around that.

And there's also a lot of gas related activity in the Northwest linked to both tight gas and shale.

So you're right to point out that gas is important and I would say that gas in terms of future growth in Saudi is probably going to be one of the key drivers.

Thank you, Paal.

Kurt Hallead, RBC.

Paal, just wondering if you might be able to provide us some perspective on you guys sent out some very strong performance here relative to your peer group over the last couple of quarters.

Maybe provide some perspective on how you plan on maintaining that performance differential going forward?

And then in addition, some of your commentary we recently heard from some land drillers and from some of your competitors are calling for an uptick in activity in US market and US land drilling market going out into 2013.

If you can give us some perspective on the outlook there, that would be hopeful.

Appreciate it.

The first part of your question was related to North America as well?

Just globally, really.

Looks like your performance overall for revenue growth, margin performance, et cetera, has been exceeding your peers over the last couple of quarters.

Okay.

If you go back to the first question, I also I think a lot of the elements of our international performance I covered there so maybe I'll just focus in a little bit more on North America.

Okay.

Fair enough.

So if you look at Q3, overall again, solid performance for us in Q3.

I'm pleased with the progress.

Since we restructured our business about two years ago, we now have a very lean and focused North American organization.

We have invested quite strongly in infrastructure over the past couple of years so we are now able to leverage that and we also -- after the Smith merger, we now have a very broad technology and workflow offering in the North America land market place, which we're also able to leverage.

And finally what I would say on the means we have to succeed, we probably have one of the best supply chain organizations in the North American market as well.

They have done a really great job in particular together with our pressure pumping organization this year.

So further on performance in North America, if you look at how we have been addressing the fracturing market more or less from the beginning of this year, we have kept focus on what we call minimum effective margins.

This is basically the product of our bid price times the utilization.

So if these effective margins will below a certain level we are prepared to lay down crews.

So we laid down crews in Q2.

We also laid down crews in Q3 and this is how we are able to protect better, I would say, the margins in our pressure pumping business.

And in terms of the other product lines on land, we continue to have solid performance both on Drilling and Wireline and obviously the Gulf of Mexico remains strong for us and was in Q3 highly accretive again even with the Hurricane Isaac impact.

And this is with flat seismic sales quarter-on-quarter.

Now, if you look at the North America market going forward, from our standpoint, on the plus side, we expect to see continued strong performance in the Gulf of Mexico from us both when it comes to drilling activities as well as seismic, and we also see Canada having a positive impact for us in Q4 and Q1, although not to the same level it had in the previous year.

Now on the negative side, fracturing margins are going to come down further in Q4 and likely also in Q1 as the new pricing levels work its way through our contract volume.

As I also mentioned, we also see some margin pressure in coiled tubing.

Now, what's going to happen beyond Q4 or Q1, I would say there's really three main questions in my mind.

Firstly, will there be a Q1 recovery in liquids rig count, after Q4?

As this is key to maintain the current land pricing overall, both for fracking as well as for the other product lines.

The second question is, will there be a share place in the frac markets and a new pricing floor?

Given the fact that there are significant excess capacity in the market and also when the guar bean comes, is this going to be another source of market share place?

The third question in my mind is, in terms of how North America overall is going to perform, what are really the normalized frac margins?

The way I see it or we see it, the frac market in North America today is largely a commodity market with a very low barrier to entry where capacity is really driving the pricing and we peaked at around 30% margins and the [trough] is now in low single digits and I would say in my mind that the normalized margins are more in the middle of this, they're certainly not towards the upside, so I think these three elements obviously are going to be important to sort of guide us in how the North America market is going to continue to evolve.

But I would say I'm very optimistic though in terms of our ability to outperform on a relative basis in North America.

Okay.

Great.

Thank you.

James West, Barclays.

Paal, as we think about 2013, I want to dig in a little more on Dave's earlier question.

Given the large number of startups and staging for contracts that's underway now which I guess first off makes your margins look even more impressive, but there's a lot of work that's been awarded to yourself and the industry that is getting underway now that should lead to significant growth in '13.

I'm talking more on the international side, of course.

Do you see international growth in '13 consistent with '12 or could it be above or below?

I think in terms of the activity outlook for international, it's still a little bit early to kind of pin it down in detail, right?

We are just entering our planning process and our customers are doing the same thing here.

So I would just say that we maintain a positive view on international markets.

We see growth in 2013.

I think the rate of growth I think is going to be much clearer by year-end.

But again, we have not seen any major shift in customer sentiments over the past quarter.

So unless it's a dramatic change in their view of the market and their spend, at the commodity planning cycle, we are optimistic that it's going to be more of the same for next year.

Okay.

Fair enough.

And then on seismic which has been an area of strength this year, it seems like the fourth quarter is mostly close to sold out at this point on the marine side.

And that would set up for a good 2013.

Are you continuing to see good pricing gains on the seismic side and am I correct that the fourth quarter is mostly sold out that should lead to a very strong '13?

Yes.

I think that's correct.

Q4 is more or less booked as you say, largely driven by South Atlantic activity, both West Africa and for us, Uruguay.

So our view hasn't changed.

We were indicating that we didn't think that Q4 would see the normal seasonal low and that's actually transpiring.

So going forward we continue to test pricing for 2013 work.

We already awarded some work for the next North Sea season and the pricing is even up from what we have bid earlier.

We are now pushing about 15% versus the 10% that we talked about earlier.

So overall we maintain quite a positive view on the seismic market.

Okay.

Great.

Thanks, Paal.

Scott Gruber, Sanford Bernstein.

Simon, a question for you on initial CapEx thoughts for '13.

Bakers come out guided for a big 25% reduction.

Halliburton was out earlier guiding for a decline as well.

Are you anticipating a reduction in spending levels next year?

Paal, just mentioned that we're going to -- we're going through the planning cycle.

And I'm going to turn it over to Paal to tell you what are the initial numbers that are coming, but we are going through a planning cycle as we speak.

And there is a bit of shift between activity places that might require additional CapEx.

Paal?

A little input now on the early stage.

Yes.

Firstly, 2012 CapEx spend is going to be around $4.5 million as we said which is in line with the plan that we previously communicated.

The main shift we've seen during this year going back to what we were planning at the beginning of the year is that we have significantly reduced non-CapEx and this has been offset by our international CapEx.

So as Simon was saying, the 2013 CapEx spend outlook, it's still early days.

We are just starting in the planning cycle now.

But I would say as a general view, at this stage, I would say CapEx would be likely flat to slightly down.

The main drivers or the main focus for us in 2013 is going to be the international market and it's going to be a traditional high capital service segments like WesternGeco, Wireline, Drilling & Measurements, and Well Testing.

Now, while we continue to inject capital into these businesses, we also continue to drive efficiency and utilization for all of them to make sure that we can be as lean as possible with how we spend our cash.

The other key thing for us next year in terms of CapEx is that we are also continuing to invest further in infrastructure and particularly in sub-Sahara Africa.

And also in the Far East in particular in China.

The last part as well, as I mentioned, we are looking to further expand our smaller product lines into the international market and there's some associated CapEx with that.

But overall, I would say at this stage, CapEx is likely to be flat, or slightly down.

And if I stood back and think about the broader environment, thinking not just about '13 but into '14, are we entering a period of declining capital intensity?

Now that the big spend on US pumping is over, I realize there's still roofline investment going on abroad, but it sounds like that's going to be flattish, maybe down relative to this year.

And it looks like too that the big spend on international shale operations is still a few years off.

So if we look at CapEx relative to sales or cash flow, do you anticipate potentially a few years of declining capital intensity?

I wouldn't stretch it further than 2013 and the comments that I made but I think your commentary around investment into pressure pumping capacity, I think those are fair.

We have enough pressure pumping capacity at this stage to go around for a while, right?

I think so does the overall market.

And you're also right in saying that the volume of international and conventional activity is not likely to skyrocket anytime soon.

With that said, though, the investment into our high-end service lines such as WesternGeco, Wireline, and Drilling & Measurements, in particular for deepwater exploration type of activities, there's lower CapEx that goes with these activities.

And the returns, both on the capital and the return on sales is obviously very good to that.

So if the market is there, we will happily invest into those businesses.

As long as we get the right returns.

But the investment in seismic is primarily technology, not vessel spend right now, correct?

Well, we have two vessels under construction which we will be delivered in 2014 where a significant part of the CapEx associated with those vessels will be taken in 2013.

Also, as we continue to ramp up the coverage of IsoMetrix on our seismic vessels, that will also be a significant CapEx spend.

So I would say seismic over the next couple of years will be a significant CapEx spend for us provided the market continues to head in the direction we see now.

Okay.

Great.

Thanks.

Bill Herbert, Simmons & Company.

Back to the international outlook for a second, and recognizing the fact that as you mentioned, the outlook for '13 should begin to crystallize, much better towards year-end, but it doesn't -- it's not all that obvious to me that the IOCs even with very generous oil prices are generating significantly abundant cash flows, surplus cash flows, which leads to the same rate of growth that we saw this past year.

I'm curious as to how, just conceptually, how growth rates in '13 could match 2012 if the cash flow generation is going to be less generous and then is the swing factor the NOC, the greater sense of urgency on the part of Petrobras?

More catharsis in west Africa?

Greater uplift in Saudi?

How do we match those growth rates year over year?

So first of all I'm not saying that we will match the growth rates.

I'm just saying that we maintain a positive outlook on the international market and we see growth in 2013 as well.

Right?

So it is still typically we don't even talk a lot about the coming year in the -- after Q3 typically leave that to January.

But like I said we are -- we maintain a positive view on next year.

I think it's probably better to look at -- maybe you can switch from activity and revenue to earnings.

Right?

Then I would just say that we obviously continue our focus on growing total earnings and that's through both the top line and margins.

And I would say that assuming no major negative change in the global economy, and no further setbacks and a second letdown in North America, we are at this stage aiming for double-digit EPS growth in '13, right?

And that will be a combination of top line growth well as margin improvements.

So I think it's too early to break it down to look at what of the IOCs and the independents and the NOCs are going to spend next year because we really don't have the data.

But we are aiming for double-digit EPS growth in 2013.

Okay.

That's fair.

And then secondly, with regard to coming back to the near-term here, you mentioned you're not going to witness the same seasonality with regard to contract business thanks to good bookings and in the South Atlantic margin.

Do you have a window into the outlook for year-end multi-client sales at this stage in the Gulf of Mexico?

No.

Not really.

Other than that there is a lease around in November in the western Gulf and there's another one in March in the central Gulf.

Typically, the way the fourth quarter goes when it comes to multi-client sales is down to the last week of December when we finalize the last major sales.

So it is difficult to say what it's going to end up on but I would just say that in North America or in Gulf of Mexico, there's a lot of positive sentiments around the outlook for the Gulf of Mexico.

Drilling rigs continue to rise.

We will be at pre-Macondo levels by the end of the year.

The lease rounds that are announced I think is a positive.

So we maintain a positive view on the business there overall, so I would expect there would be a good multi-client sales in Gulf of Mexico in Q4 but it's going to come down to the last week of December.

As always, thank you, Paal.

Bill Sanchez, Howard Weil.

Paal, I was just curious if you could talk a little bit more about Canada longer-term here.

By our math, it probably is still north 10% of your North America revenue stream and I think what we've found there's been some conjecture on whether or not this lower rig count has been more transitory here as opposed to something structural changing within the Canadian market and as we look out to next year, I know you mentioned earlier you are aggressive in right-sizing your North American operations but as you see Canada going forward here, do you feel like you're properly right-sized or how you see the longer-term activity there in that market or do you think industry as a whole is frankly probably over-committed to that market at this time?

Well, I think we were a bit surprised when we looked at the -- when we saw the recovery in the rig count over the past quarter.

We were expecting it to be pretty much in line with last year, right now, this is a combination of high gas storage levels, as well as weather and soft road conditions.

So like I said before, we are expecting growth again for Q4 and Q1 but if the activity levels are going to be well below last year, with that said, I think overall, Canada they have a lot of resources, both on conventional gas liquids as well as heavy oil.

So there will be a lot of activity I think in Canada going forward.

We have, in my mind, a good set-up there.

And we will continue to invest into it as the market evolves.

Where we probably have more opportunity going forward is in the heavy oil which I think we are less representative than we are for instance in the shales and in Eastern Canada.

But overall we maintain a positive view on Canada.

Okay.

So as you see it going forward you are right-sized properly for that for the activity levels you forecast and actually be looking maybe to put some incremental services in there?

Yes.

That's correct.

Okay.

My follow-up would be as we think about international, just near-term, is there anything, Paal, that would alter the view of what we saw in 4Q as we think about the seasonal uptick that you typically get in your business from your own product sales and the like that fourth-quarter revenue growth internationally should be pretty strong here as we look to 4Q?

Yes.

We don't see anything largely different than what we would expect in previous years.

There's typically an uptick in fourth-quarter sales, both linked to software, say, hardware completion sales as well as multi-client.

So there's always some variation and uncertainty of what happens with respect to those sales but overall we expect that to occur again this year.

Okay.

As I look at fourth quarter '11, you were up high single digits in Eastern Hemisphere, third to fourth quarter.

That's probably not unreasonable to think about for 4Q this year?

I haven't looked at the numbers but I would say that a similar type of uptick as we saw last year is not unreasonable to expect.

Okay.

Thank you for the time.

Michael LaMotte, Guggenheim.

I wanted to follow-up on some comments that you made back at the last analyst meeting in Boston with respect to the supply chain and procurement initiatives.

Can you give us a progress update as to how far along you are vis-a-vis those targets and perhaps some indication of the impact that that's had on the P&L thus far?

I know it's a big part of the execution program, but focusing more on the cost side of the equation as opposed to execution in the field?

Yes.

I think if you split it into quality and efficiency, I would say the quality part we have worked on now since 2008, 2009 and it's starting to have a meaningful impact in terms of the overall reliability of our services.

You see that in particular in a segment like drilling and measurements, so that is part of why I believe we are superior when it comes to execution strength from a quality standpoint.

Now, the other part that I referred to over the last quarter was more linked to the efficiency side.

And this has much more to do with internal things like asset utilization, transportation, shared services, and these type of things.

I would say we are in a much earlier stage of capitalizing on those benefits.

You always get some low hanging fruit as you start focusing in on things.

But these programs are multi-year.

And we will see gradually fruits of them coming forth in the coming years.

Can you remind us of what the targets are for that program?

We have targets but I haven't shared the targets and I don't intend to share them.

Okay.

The other question I had was with respect to the shale workflow.

As we're moving from a horsepower-driven market, everybody's trying to differentiate themselves and one of the common terms that we've heard just in the last few months has been around the notion of workflow.

Can you address the competitive advantages you think that Schlumberger has with respect to workflow?

We've been talking about workflow now for a couple of years.

I find it interesting to see that the broader industry is now taking up the concept and also want to take part in it.

Right?

So the advantages we have is starting off with reservoir characterization and our ability to basically establish three-dimensional models that can predict variation in shale quality similar that what we can do in conventional reservoirs.

Now, when you have that capability, you can firstly place your wells in the right position, aerial, and secondly, when you evaluate the quality of the rock in the horizontal section you can also complete the partially horizontal section, which is most likely to actual flow.

Today there's a significant part of the horizontal sections that are fracked that never actually flows anything which means that the frac itself was probably a waste.

And then the last part also has to do with how you frac these wells.

¶ Today, we create a very deep fracture network and we only are able to prop a small part of it, which means that all the horsepower in the water that you use to create a deeper fracture is also a waste.

So I would say that we have a very clear view on where the waste in the current process is.

And we have technologies and workflows that can help our customers address these.

We see a further uptake of these technologies and these workflows in North America and for the projects that we are involved in internationally, which are more exploration or appraisal focused, we always use these workflows overseas.

If you had to gauge growth internationally, versus say penetration of workflow, domestically, which would grow faster, do you think?

It's difficult to say.

I would say in international markets, the two markets I would say would have the most meaningful activity growth in the coming couple of years would be Argentina and China.

And it's interesting to see that YPF seems to be quite eager to pursue the Vaca Muerta shale in Argentina so there's a fair bit of rig activity moving into the Vaca Muerta.

I think in that sense, we are a lot more optimistic on the activity outlook for Argentina at this stage than maybe what we were one quarter ago.

And you've also seen some of the moves we have been making in China recently and that's again at the back end of our view that China also will see good growth in both tight gas and shale gas going forward.

So to what extent that is going to generate growth versus the penetration in North America I think is a bit of a tossup.

But I would say more and more customers in North America are interested in the shale workflow and the associated technologies that we have to go with it.

Great.

Thanks, Paal.

Angie Sedita, UBS.

Paal, recently made some very positive comments regarding the clearly attractive subsea market.

And certainly understand you may be in the early stages of looking at opportunities, but two questions.

Would potentially a JV or an alliance with the subsea production company make sense around the now wholly-owned Framo business?

And two, given that you do now own Framo outright, would you consider bidding directly on subsea separation opportunities in the offshore market?

When it comes to generally how -- what we will do in the subsea market going forward, that's something that we're still evaluating.

So I wouldn't provide any specific comments on any plans that we may or may not have in terms of how we address the market going forward.

What I wanted to do when I put subsea on the agenda earlier this quarter was just to indicate our view on what the opportunity in subsea is.

And a lot of the opportunity evolves around the fact that the recovery rates are on average 50% for subsea developments compared to what conventional topside developments are.

And if you look at the capabilities we have in terms of subsurface understanding, modeling, and prediction, the ESPs, the intelligent [bod] completions and Framo, as you rightly point out, we have a lot of the ingredients that can help drive recovery from these type of developments.

So would we bid directly or independently on processing projects?

We would have to look at how big they were and how we potentially could align ourselves with other players that have some of the capabilities and some of the, I would say, technologies that also needs to go into that project.

But we are undertaking a number of significant projects with Framo already.

Some of them we highlight in the press releases that we send out every quarter.

And I would just say that Framo as it is today is one of our fastest growing product lines.

And they're at the cutting edge of technologies.

So as it is today, we are very pleased with how it's performing.

Fair enough.

Great business.

And then as a follow-up, or a separate question, thoughts on Mexico and Russia for 2013.

Both from a period that they could be a bit stronger with new opportunities specifically in Mexico and what type of opportunities do you see next year in both areas?

Yes.

As we start with Mexico, I would say that we have quite a positive activity outlook on Mexico, driven by both land and offshore and offshore both shallow water and deepwater.

The deepwater Gulf of Mexico activity for Pemex continues.

We have a significant presence on that.

There is also a continued focus on mature fields in Mexico and the potential for more SPM activity.

And there's also now more focus again on the shales in the north region as well from the Pemex side.

So I would say that the overall view on Mexico is quite positive for us going into 2013.

When it comes to Russia, quite similar, also positive.

We expect to see again continued growth in Western Siberia where we have a very strong position through our local presence there.

And then you'll have continued exploration activity, for instance, in the Baltic and the Bering Sea.

And we also see very solid activity for Sakhalin and the Caspian region.

You're right to point out Mexico and Russia as positives going into 2013.

Thanks.

I'll turn it over.

Brad Handler, Jefferies & Company.

Maybe you can speak a little bit, guys, to SPM.

You just touched on it with Mexico I know but can you give us a sense of perhaps the run rate in the third quarter?

How that compares to where it was a year ago or a couple of years ago on the top line?

We don't disclose those details.

Other than we have -- if you look at the number of projects that we have and are in the process of taking on at this stage, we are I would say significantly up in terms of overall activity and also overall the number of barrels that we actually manage.

So a lot of the contract wins that we've had have been in Latin America.

And the Shushufindi project is probably the biggest project that we've ever taken on.

And the ramp-up has now been completed.

We're operating in five rigs in this project.

And we are pretty much on track for the work program and for the production profile that we laid out to achieve.

The other project is in the Carrizo project in Mexico where again we are just in the process of mobilizing now, or more or less finished, and are starting to mobilize for Panuco.

So overall I can't give you the exact number for revenue or for productions, but we split SPM out from IPM about a year ago.

And we did that to put a lot more focus on to these production incentive contracts because it is a differentiated growth opportunity for us given the capabilities we have here.

And also the margins for this type of business is highly accretive to the overall margins of the Company.

And that's why we are continuing to pursue them.

Now, the overall sales process for these type of project is quite long.

There's a lot of due diligence work needed to go in.

And I would say that we are not accepting every opportunity.

If we are not satisfied with certain elements of how these contracts are set up, we will turn them down.

We have turned down contracts even recently that we decided were not good enough for us.

This is all of our portfolio management and risk management.

And we will take our time in terms of how we grow the business.

But there's a lot of opportunities out there and we will continue to pursue them.

Thanks for that color.

You anticipated a couple of follow-up questions anyway but I'll sneak in another one in the same area.

Maybe you can give us some sense of the degree to which, as it sits today with what you have won, there is a performance kicker tied to SPM.

Or how integral is that to your selling process?

Do all of them have performance bonuses presumably based on production increases and the like?

All the SPM projects are performance-based.

If it's only turnkey drilling or normal contracts, we don't classify them under the SPM product line.

So this is where we are typically paid on a fee per barrel.

So we will invest the value of our products and services.

We will agree a decline curve with our customer.

And the production that we will generate through our investments on top of that decline curve we will get a certain fee per barrel for and that's all how we are paid.

And that's why generally this will generate cash for our customers and there are ways -- this is a way for them to unlock maybe aging assets that is not really a priority for them to spend their cash on.

And that's why this is just quite a good business model.

In terms of how this will be a growth avenue for us going forward, it's still a relatively small part of our business, but again we continue to focus on it and we will continue to grow it in that, I would say, in a somewhat conservative way.

Fair enough.

Do you think it's relatively less or more capital-intensive than the balance of your business?

Simon, have you looked at it specifically that way?

The capital associated with SPM project is not more than our regular business.

What is more than our regular business is sometimes you have investments upfront and this is part of the overall evaluation of the project, and how much is the cash flow required up front and the investment.

And the investment is not in CapEx.

The investment in services that are spent ahead of time in anticipation of the uptick in the production and therefore the additional revenue that we generate.

We are very conservative on how we will account for these projects.

And there is a regular evaluation of the potential of the additional revenue and additional production that will basically compensate for the initial investment.

Got it.

Thanks very much.

Jim Crandell, Dahlman Rose.

Paal, I think in your remarks you talked about new Wireline tool introductions in the quarter and your largest competitor also talked about that this morning.

And their's was focused very much on the deepwater and then in return they mentioned the Gulf of Mexico.

Can you talk a little bit about what your new Wireline tools are that you're introducing and what market they are earmarked for?

Well, if you look at the two latest that we have introduced, it's the Dielectric Scanner and the Litho Scanner, it's all part of the scanner family.

So the Dielectric Scanner is focused in on information evaluation and carbonates and heavy oil and mixed salinity.

So these are a special type of measurements.

With relatively broad applications as you can see, right?

And the Litho Scanner is again a formation evaluation measurement linked to shale which gives you shale composition and also total organic content.

So what we are trying to do on the formation evaluation side in Wireline at this stage is to focus in on these, I would say, complex reservoirs or on conventional reservoirs in terms of formation evaluation both in terms of fluid determination as well as the composition of the rock.

So those are the two I would say latest and two main introductions that we've done recently.

Okay.

And as a follow-on, if the domestic rig count, domestic meaning US land rig count, were to fall by another 10%, would you consider Wireline or LWD prices to be at risk of going down under that scenario?

I think if the overall North America land rig count was to drop by 10%, I think I would be concerned about the ability to hold pricing on the other services on land, that being drilling or Wireline.

Like I said, we are already seeing some early signs of weakness in coiled tubing whether that is going to continue or more of a Q3, Q4 effect which will bounce back next year is too early to say but it's really the first product line that we have seen pressure in so far.

The other ones are holding.

But you're right to point out that if the rig count was to go down overall further, then I think there might start to be pressure on the others.

We haven't seen anything yet but that is something that I would probably worry about.

Okay.

Thank you.

Jud Bailey, ISI Group.

Wanted to ask about a couple of markets.

Paal, you mentioned in your prepared comments some of the work you're doing in China.

I was wondering if you could give us a little more color just on that market, how we should think about it in terms of growth opportunity and what kind of product lines you're utilizing the most?

So what happened in the China market recently is that there's a lot of drive I think from the government to develop the unconventionals, both the tight gas as well as the shale gas.

They're importing LNG at very high prices and they have a significant unconventional gas resource in the country, which they're very keen to develop.

So tight gas remains the main focus of the three main Chinese and national oil companies but shale gas, the government has classified not as a hydrocarbon but as a mineral.

And when it's classified as a mineral, it is basically open for any other company to bid for licenses and actually go ahead and do work.

So there's a lot of interest from other type of companies whether it's utility, code companies, or just private equity companies to come in and take licenses in shale and to start developing them.

Very few of these have any capabilities when it comes to reservoir evaluation or actually well site execution when it comes to these things.

They don't have their own service companies, which the three main Chinese companies have, so that's the opportunity for us to have significantly more penetration of the shale market in China as it evolves going forward.

This is again why we have made some of these moves in terms of joint ventures, so the joint venture with Chongqing is linked at the reservoir evaluation standpoint while the joint venture we signed this quarter with Antonoil is more focused on IPM activities around well construction and fracking of these shale gas wells.

So there's a retro aspect to it.

There is the full portfolio of drilling and production related activities that goes with it as well.

That's interesting.

And would you say the better opportunity is at market penetration or just the growth of the overall market itself?

I think it's actually both.

In the past, we've had limited penetration because the state oil companies have their own service arms.

We do some of the high-end activities for them.

We help them up in certain things but there's a lot more opportunity in the shale now for these other players to do a much more significant part of the work.

So I think that's where the opportunity lies.

My last question is just on Brazil.

They've taken -- Petrobras has taken delivery of a lot of deepwater rigs the last year or so.

They're going to get more active in some of their pre-sell development but another initiative of Petrobras is trying to stem some of the production declines in the Campos and I was curious to get your view on that market and the opportunities for growth and to what extent you may be talking to Petrobras on some of their production issues.

I would say that just in general we maintain a positive view on Brazil.

There has been delays in terms of rig startups, rig arrivals during this year.

And also when Petrobras turns some of their deepwater capacity towards production, that obviously impacts our drilling related product lines as well, right?

But they are putting priority on like you say stemming the decline and getting production back up again so that makes sense and we will work with them in whatever capacity we need to to help them up with that.

But overall, Brazil is going to show good growth going forward.

There's probably going to be some bumps along the way but we are there.

We have a very strong presence.

We have a very good relationship with Petrobras and we'll work with them the way they want us to.

Great.

Thank you.

I'll turn it back.

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

Julie will now provide the closing comments.

Thank you.

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