斯倫貝謝公司 (SLB) 2013 Q1 法說會逐字稿

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

At this time all participants are in listen-only mode.

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 Vice President of Investor Relations, Mr. Malcolm Theobald.

Please go ahead.

Thank you, Julie.

Good evening, and good morning from China, and welcome to the Schlumberger Limited first-quarter 2013 results conference call.

Today's call is being hosted from Shanghai, where the Schlumberger Limited Board meeting took place yesterday.

Joining us on the call 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.

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 from continuing operations, excluding charges and credits, was $1.01.

This is $0.07 lower sequentially and $0.05 higher, when compared to the same quarter last year.

During the quarter, we recorded $0.07 of charges, relating to the currency devaluations in Venezuela.

Oilfield Services first-quarter revenue of $10.7 billion decreased 4.5% sequentially, while the pretax operating margins declined 37 basis points.

More than half of the $506 million sequential revenue decrease is the result of the absence of the year-end surge in product, software, and WesternGeco multiclient sales that we experienced in Q4.

The remainder of the decrease is largely attributable to the seasonal weather-related slowdowns we typically experience in Q1.

Given the significant impact that these seasonal factors had on our sequential performance, our comments will focus on year-on-year changes, unless otherwise noted.

Oilfield Services revenue increased 7.6% year-on-year, while pretax operating margins declined by 59 basis points.

Highlights by product group were as follows.

Reservoir characterizations, revenue of $2.8 billion increased 8.5%, while margins grew by 94 basis points to 27%.

These increases are primarily attributable to a very strong performance in testing services on improved offshore exploration activity.

Drilling grew revenue of $4.1 billion, increased 9.2%, and margins improved by 57 basis points to 17.9%.

These improvements were led by drilling and measurements on strong offshore drilling activity across all international areas and the US Gulf of Mexico.

Production group revenue of $3.8 billion increased 6.9%, while margins fell by 237 basis points to 15.1%.

The effects of ongoing pricing pressure for the Well Services technologies and US land more than offset by double-digit revenue growth across all other segments.

This performance was led by the Schlumberger production management and subsea product lines.

The margin decline for the group was entirely attributable to the impact of the continued excess hydraulic horsepower capacity in US land.

Now, turning to Schlumberger as a whole, the effective tax rate, excluding charges and credits, was 23.3% in the first quarter, compared to 23.8% in the previous quarter, and 23.6% in the first quarter of 2012.

Net debt increased $162 million during the quarter to $5.3 billion, reflecting the seasonal deterioration in working capital that we typically see during the first quarter.

During the quarter, we spent $894 million on CapEx, and we repurchased 2.5 million shares at an average price of $77.63.

CapEx is still expected to be approximately $3.9 billion in 2013, as compared to $4.7 billion we spent in 2012.

And now, I turn the conference over to Paal.

Thank you, Simon.

Our first-quarter results were solid, driven primarily by the overall strength and progress of our international business, but also by continued margin resilience in North America, in spite of both activity and pricing challenges.

Altogether, earnings-per-share were up 5%, compared to the same quarter last year.

Looking at the international markets in more detail, our revenue grew 13% year-over-year, while operating income was up 21%, and margin expanded 135 basis points, demonstrating the strength of both the international market potential, as well as our execution capabilities.

Sequentially, revenue was down 5%, due to the normal seasonal slowdown in the northern hemisphere and the Far East, while operating margin was up 3 basis points, driven in part by strong performance from our IPM and SPM product lines.

In terms of Q1 activity, the international rig count was up 7% versus the same quarter last year.

Pricing trends remain stable, with revenue per rig continuing the slow but steady progress now observed over the past six quarters.

In this environment, we continue to drive high-end technology sales throughout our international operations, and we are also actively adding our latest new technology introductions to our existing contract base.

New technology sales, together with strong execution and operational performance, helped drive both effective pricing and margin levels.

In Latin America, revenue was up 8% year-over-year, while operating margin was up 123 basis points, driven by strong execution, cost control, and new technology sales.

As previously communicated during the quarter, we have had a series of very constructive meetings in Venezuela with Pedevesa, and we expect to finalize the new payment agreement in the near future.

And we anticipate ramping up activity to meet the current and future needs of Pedevesa's development and production plans.

Elsewhere in Latin America, Ecuador posted the highest growth rate in the first quarter, driven by excellent performance in our Shushufindi SPM project.

The derisking of our development plan is now largely complete, and we are operating four drilling and two workover rigs.

With production levels progressing in line with our plans, the project is set to generate significant value to both Ecuador and Schlumberger in the coming years.

In Argentina, activity was also strong in the first quarter, again driven by drilling and stimulation activity in the Neuquen basin, and from our IPM project in the Vaca Muerta shale.

In Brazil, overall rig count remained flat in Q1, however, we did see activity starting to shift back from workover to drilling for several deepwater rigs.

Our main focus in Q1 was on the startup of new contracts.

As previously stated, the Brazil contracts were generally bid at very competitive prices for basic technologies.

However, given the complex and challenging operating environment, the use of high-end technologies can create significant value for both our customer, and for Schlumberger.

We are therefore already in discussions to add our latest technologies to the contracts, and we will continue to actively introduce new and value-added products and services over the span of these long-term contracts.

In the Middle East and Asia, revenue grew by 21% year-over-year, while the operating margin was up 125 basis points, driven by strong performance throughout the region.

In the Middle East, we again saw the strongest growth in Saudi Arabia, where activity is progressing as planned, and in Iraq, where operational performance of our IPM rigs was strong.

The United Arab Emirates and Kuwait also posted solid growth in Q1, driven by higher customer activity, and further supported by market share gains from recent contract wins.

In Asia, the normal seasonal slowdown led to lower sequential activity in both China and Australia, but this did not prevent both GeoMarkets from posting very strong year-over-year growth numbers.

In China, growth continues to come from both complex conventional land developments, as well as from offshore.

Well in Australia, Queensland unconventional gas activity, together with deepwater drilling activity in the Northwest, will lead to growth in the coming year.

As stated in the January call, we expect strong growth in the Middle East and Asia in 2013, and our Q1 results are so far validating this trend.

In Europe, CIS and Africa, revenue was up 11% year-over-year, and the operating margin was up 120 basis points.

Growth in the first quarter was driven by sub-Saharan Africa, where activity was robust throughout the region.

And water was particularly strong for us in Q1, driven by development and exploration drilling, as well as marine seismic operations.

In North Africa, growth was limited during the first quarter.

While the pending contract issues were generally resolved, security has again emerged as the primary challenge, and had a significant impact on activity levels during the quarter.

Our customers are now in the process of evaluating future activity plans, and the need for additional security measures, and we expect activity to remain subdued, as long as this process is ongoing.

In the North Sea we saw the normal seasonal slowdown due to winter weather, but activity still showed solid year-over-year growth as the transition from exploration to development and production-related work continued.

In Russia and central Asia, we also experienced the normal seasonal slowdown in activity.

Still, the region posted one of the highest year-over-year growth rates in the first quarter, driven by offshore activity in Sakhalin, and by land activity in Kazakhstan.

Russia and Central Asia remain on track to be one of our main growth drivers in 2013.

In North America, revenue was down 4%, while the operating margin was down 356 basis points compared to the same quarter last year.

Still, at 19.1%, our margin remained significantly higher than in previous cycles, and is a clear testament to our newly built strength in the North American market.

Looking at the North America land market in detail, US land rig activity in the first quarter came in below expectations, although the data showed some increase in total rig count toward the end of the quarter.

At the same time, drilling efficiency remains strong, asset utilization improved from the lower levels seen over the holiday season and lowered guar costs provided some relief to pressure pumping margins.

Still the main concern in North America land remains pricing, where the downward trend in drilling, wireline and coil tubing seen in the fourth quarter continued in Q1.

In addition, we also saw further downward pricing pressure on a number of hydraulic fracturing bids during the quarter, adding further uncertainty to the North America land market outlook.

In the US Gulf of Mexico, the overall rig count remained strong, but operational delays relating to the change out of subsea connectibles on the deepwater rigs had a negative impact on a result for parts of the quarter.

However, at this stage, we expect these issues to generally be behind us, and that the US Gulf of Mexico contributions to our business will be in line with expectations for the year.

In WesternGeco, we continued to operate one Dual Coil fleet in the Central Gulf, while multiclient sales relating to the Central Gulf lease sale in March came in well below expectations in the first quarter.

Let me now turn to technology, where I would like to highlight our integration capabilities and the growing value this brings to our business.

As our customers continue to look for ways to reduce finding, development and listing costs, a number of them are now seeking much closer and broader partnerships with us to unlock more value from the E&P value chain.

This includes more collaborative problem-solving to utilizing our complementary expertise, and by further leveraging our wide technology offering and broad integration capabilities.

We have carefully built up our integration capabilities over the past 15 years by developing the required business processes and people competencies and by filling in unmatched spirit of teamwork through our matrix organization.

In terms of our integration offering, we have arranged our business models and focus areas with varying levels of integration and contract risk.

Through our IPM product line, we offer project coordination for complex offshore exploration and development projects, long-term servicing contracts for land well construction, intervention and production enhancement campaigns for mature fields, both offshore and onshore, as well is P&A activity for aging offshore installations.

Today we operate these kinds of contracts throughout our global operations, covering all parts of our customer base.

In addition to our IPM product line, we also offer complete field management capabilities through our SPM product line, where we reach the value of our products and services and sometimes cash in return for a fee-per-barrel of incremental production.

Today, our overall integration capabilities represent a key strength and competitive advantage for us in the marketplace, and going forward, we will continue to develop these capabilities in order to help our customers extract more value from their oil and gas efforts.

Let us then turn to the macro environment, where we so far this year have seen mixed data from the main economies, including China, the US, and the Euro zone.

Still, the overall outlook for 2013 remains largely unchanged from the update we gave in January, both in terms of GDP growth as well as the fundamentals for the global oil and gas markets.

Looking at our industry, the major trends from 2012 are, as expected, continuing this year.

In the international market, we see strong and consistent growth in key regions such as sub-Sahara Africa, Russia, the Middle East, China, and Australia, and with customer activity in general progressing in line with our stated expectations.

In North America land, the outlook remains uncertain, driven by lower-than-expected rig activity and by further pricing weakness.

Cold weather and flattening natural gas production has led to larger-than-expected storage withdrawals in the US in the past couple of months.

However, this has yet to result in an increase in dry gas drilling activity.

In this environment, our entire organization remains focused on growth, margin and earnings outperformance, throughout our global operations.

This commitment and drive is starting to have a direct impact on our results, as seen by the following three facts.

First, our international leadership position in terms of operating margins and share of operating income is as strong as ever, and our international leverage, in terms of operating income is approximately 70% of the total.

Second, following the restructuring of our land business, we have recently taken the lead in terms of operating margins, also in North America.

And third, we have on average delivered double-digit growth in earnings per share over the past three years, and we are, as previously stated, looking to extend this trend in 2013.

These results, combined with a collective motivation of the 120,000 Schlumberger employees to do even better going forward, gives me a lot of confidence in our future ability to outperform and to provide superior returns to our investors.

Thank you very much.

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

Thank you, Paal.

Julie, we will open the call for questions, now.

(Operator Instructions)

David Anderson, JPMorgan.

Oil price weakness has really been weighing on these energy stocks lately.

I know you touched on in your remarks there, but when you look at the fundamentals of the oil market right now, has anything changed really as you've been looking at the fundamentals?

Is anything giving you concern regarding your outlook or is it really just basically the same as you saw it 90 days ago?

Well at this stage, we haven't really changed our outlook.

We have obviously seen the recent drop in Brent prices which is mainly driven by the macro numbers, the recent macro numbers, and also seasonally lower demand, but we still expect very strong support, around $100 per barrel, as demand pick off from the seasonal low in Q2.

So overall, we have not really changed our view at this stage.

Are any markets out there particularly vulnerable do you think to a slowdown, or is there still more than enough cushion here that you don't really get too concerned here?

No, I'm not overly concerned.

I think with the levels you see both on WTI and Brent at this stage, I think both at current levels, both international activity as well as North America liquids facility is pretty solid at these levels.

Okay.

And can you just touch a bit more in the Middle East, just expand on some of your comments there?

Last quarter, I believe you said you are expecting the rig count to get to about 170 rigs.

Do you still think that?

Is it higher or lower than that?

And also, if you could touch on how much of the incremental demand is coming from unconventional gas?

Okay, well if you look at the Q1 performance in Saudi, that was, as I mentioned, quite strong for us and the total rigs at the end of the quarter was now up to 140.

And we are still maintaining the number of 170 rigs by year-end.

So, really no change to the Saudi outlook, it is progressing pretty much in line with what we were expecting.

And what with the second part of your question?

I was just curious to how much of that incremental demand that you are seeing is going to go towards unconventional gas or the tight gas that they're going for these days?

Okay, so I would say in 2013, that is still going to be quite limited.

There are pilots ongoing, which we are involved with, but in terms of overall rig count and activity levels these are still quite small in the overall picture in Saudi.

So not a significant part in 2013.

Okay.

Thank you.

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

Please go ahead.

Paal, one quick question, and a follow-up, which may be a little bit longer.

But do you still expect 10%-ish type international activity growth this year?

Yes, that is roughly where we see it.

We changed what we said in January, about 10% increase in international E&P spend.

Okay, perfect.

As follow-up, so if we think about international pricing, you cited six quarters of increased revenue per rig.

One of your competitors this morning cited Saudi in the ramp up there as a potential catalyst to create an inflection point.

I know one of your other competitors has talked recently about this is the time now to raise pricing.

Are you seeing evidence from competition in the market?

I know you have been trying to push pricing for a while here.

Have you seen evidence that your competitors are now on board with this and starting to push price internationally?

Well I haven't seen any significant change in behavior.

I think we have moved on from the [normal] pricing that we saw a few years back.

But apart from that, no dramatic change in behavior from the main players, as far as we've seen.

We have continued being able to drive revenue per rig, which is the overall pricing indicator.

That has to do with new technology sales, it has to do with efficiency and it has to do with the overall quality of our operations.

In terms of rig pricing other than testing pricing on small and medium-sized bids with reasonable success, there haven't been any dramatic change and we still don't foresee any major inflection in 2013, based on where we stand today.

Okay, very helpful.

Thanks, Paal.

Kurt Hallead, RBC Capital Markets.

Just to follow-up on that question, there were obviously indications that at least the tone on the international market has, at least from what I could pick up, drastically improved over the course of the past couple quarters, as it relates to the outlook.

Schlumberger has been in a strong international position for quite some time, and I think your margins this quarter demonstrate that prowess.

As you go forward, are you picking up though that there is any increasing sense of urgency at the customer base, and how do you envision Schlumberger continuing to maintain the wide margin differentials that you've enjoyed over the last 10 to 15 years?

Well, first of all, we are maintaining our positive view on international market which stems all the way back from last year.

Right?

For reference, last year, we grew revenue by 15% and operating income by 31%, on the back of 8% growth in rig count and this is really the kind of numbers we are aiming for again this year.

So overall, we haven't really changed our view on the international market, we are just consistently focusing on it, and we are consistently delivering in that marketplace.

And in terms of protecting our market differentiation or our market lead, that is what we have been doing over the past 5 or 10 or 15 years, and there's nothing really new there.

We do that through the leverage of our size, our infrastructure, our local knowledge, and the fact that we have been in these markets for 50, 60, 70 years.

And also the fact that we have a strong focus on execution, both from an efficiency and a quality standpoint.

So, there's really nothing new in terms of how they're going about it, it is just progressing quite fine in our view.

Okay.

And then just as a follow-up, I know investors were trying to get their arms around the joint venture that you did with Forest last week.

Just wondering if you might be able to take this opportunity to give a perspective on that, and with my understanding being the key element here, you're trying to increase or accelerate the uptake in technology in the US market relative to what you already seen internationally.

So I just wondered if you would provide additional color on that.

Yes, if you look at our [SPM prototype], we have been pursuing production type of contracts for a number of years, and today we are earning about 10 of these SPM projects worldwide, and these are generally fee-per-barrel contracts with no working interest.

Now, in recent years, we have invested significantly in the shale workflows and the shale technologies, and this is all about taking a much more scientific approach to drive production and recovery.

Now, our approach is used extensively in the pilot projects in the international market.

However, as we talked about before, the uptake is quite slow in the US, with the exception of some key customers.

So what we wanted to do was to create an SPM project in the US to really have a showcase and be able to demonstrate our capabilities.

Before this became an opportunity, and initially we aimed for the traditional SPM contract model here, that wasn't workable for a variety of reasons, so the working interest was really the only solution to get the deal done.

But it was much more as a consequence rather than the objective of the deal, this is a one-off deal in terms of taking a working interest, and we have no plans of pursuing this type of contract model further, but it is really key for us too really demonstrate our capabilities within the shale technologies and shale workflow, and get a higher return on the significant R&D investments we made into this area.

So that is really the whole rationale for this deal.

Michael LaMotte, Guggenheim Securities.

Paal, I would like to follow-up on the SPM model, and in particular, what differentiates it from IPM and integrated or bundled services that your competitors might provide?

You mentioned fee-per-barrel, but what are the true characteristics in addition to the revenue model, with respect to the breadth of services and the ability to leverage the technology?

Well, if you look at the SPM model, we would then take full control in terms of operation and decision-making when it comes to the fee development, rather as the subset of the fee or a complete fee.

In the IPM models, the overall decision-making is still generally governed by the E&P Company.

So in the SPM model, we get to decide where to drill, how to drill, how to workover, and how to further invest into the field.

And in the SPM model, we would risk the value of our products and services in general, and in some cases, also risk cash into the deal.

But predominantly, it's the value of our products and services.

So that means that if we create incremental production, we will get paid, and we will get paid also an upside beyond what we have invested, but if we don't deliver incremental production, then obviously that is our problem.

So, it is mainly the overall risk profile of the deal, combined with the fact that we have complete management control over the operations within the SPM deal structure.

And you mentioned in terms of there are 10 projects globally right now, which suggests to me that we are still pretty early in the evolution of this concept.

Do you have an idea as to how big this market could be, or just from a resource limitation within Schlumberger, how big it could get over the next two to three years?

Well, it is a part of our business which we are looking to grow, because it is highly accretive to our margins, if you look at the portfolio we have, but at the same time, it is resource intensive, the whole sales cycle is quite long, and also, we are very careful in terms of evaluating the project that we get ourselves into.

So, we are interested in growing it in our traditional SPM model, but it is an area where we can afford to kind of hurry slowly, so there's nothing that we are looking to ramp up dramatically.

Okay, but can we -- is it fair to say that 10 projects could be 20 in the next two to three years?

Is that the trajectory that we seem to be on?

Probably not 20, if you look at reasonable sized projects, we might look to add two, maybe three a year, I would say that is probably the maximum at this stage.

Bill Herbert, Simmons & Company.

Quick question on North American margins.

Given the magnitude of the drop in multiclient sales expected seasonally, coupled with the Gulf of Mexico issues in Q1, I would have expected margins to be a little bit more poorly behaved, and yet they were only flat to down.

What accounted for that resilience quarter-on-quarter?

I think it is still three things.

Canada had a reasonable quarter, decent activity there, and the break-up happened toward the end of the quarter, as we were planning.

Gulf of Mexico, although there were delays in deepwater operations, also posted I would say quite a strong quarter overall.

Although it could've been better.

And then it is all about the approach we take to US land, in particular in pressure pumping, we are not pursuing share, we are looking to protect margins.

And we are focusing in very much on utilization and only taking on contracts that meet a certain return for us.

So I think that it is all how we manage US land, and then we had a decent performances in both Canada and the Gulf of Mexico although multiclient sales were down quite significantly sequentially.

With the reversal of the operational delays in Q1 in the Gulf of Mexico, also taking into account break up in Canada for the second quarter, what should we expect for North America margins in Q2?

Still flat to down or do they do better than that?

Well, I would love for them to go up.

I have to say that, but I think you point out the main items here.

Right?

So we will have continued pricing challenges on US land.

At the same time, I think we will have the Canada break up.

Those are the negatives, and then it is just a matter of how well we can manage within the overall US land operations, as well as the progress we will make further in the Gulf of Mexico.

I would say, I don't expect a significant improvement in margins in Q2.

If we can hold them around where they are, I will be quite pleased.

Okay.

And then a point of clarification, with regard to your narrative on your SPM business model.

If I understood you correctly, you basically take full operational control and that's the distinction between that and IPM basically.

On the Forest arrangement, if I read the press release correctly, Forest will continue to be the operator?

Is that correct?

Yes, Forest will continue to be the operator.

When I say operational control, we don't take on operatorship in any of these deals, but we have a much more of a say in how we go about developing these fields.

So there is always some dialogue with the E&P company who maintains operatorship.

But if you look at it from a well construction type of contact in IPM, where we are told where to drill and we just go about drilling the wells, there is much more as a dialogue around the entire development plan within an SPM project, and we have a lot more to say in how we go about doing that development.

That is helpful.

Thank you very much.

Angie Sedita, UBS.

Paal, so you noted, and a peer mentioned earlier today, and you noted that you don't believe that the Saudi activity will lead to a pricing inflection in 2013.

It was also mentioned that Saudi activity could lead to higher activity by neighboring countries later this year and going into 2014, higher activity than already today.

Any thoughts there?

Well, like I said before, the overall Middle East area is looking quite strong.

So you have Saudi Arabia, you have Iraq, and you also you have Kuwait and the UAE, which are also quite strong in terms of year-over-year activity and how that business is progressing.

So don't get me wrong, I would love to see an inflection in pricing in 2013, it is just that I'm not in the stage where I can promise it at this stage.

We will continue to test pricing and to try and move things along, because in our view there isn't a lot of spare capacity out in the international market at this stage.

It is just that to predict that inflection, which we have all been waiting for quite a few years, I'm not ready to do that, yet.

Fair enough and given that this work is gas versus oil as it was in last cycle, how do you see the service intensity, even though there is tight gas and unconventionals, but how do you see the service intensity of this growth in the rig count versus what we saw in the prior cycle?

Are you talking about Middle East?

Yes, and Saudi specifically.

Well I think the service intensity in Saudi and also the neighboring countries there is quite strong.

Both in gas as well as in liquids.

There is a lot more deviated again, extended reach in horizontal wells for both gas and liquids.

So the overall service intensity is strong, and it requires high-end technology, and very solid operational performance, which again, plays to our strengths.

Then as an unrelated follow-up, on the one source JV with Cameron, any further insights on when we will have details on the structure, when the deal will close?

And then has the team determined how long do you think it you think it would take to develop your own subsea separation unit?

Well, in terms of when we are looking to close the deal, we were hoping to do it in Q1 but it is now going to slide into Q2.

As you see, our goal will probably be to close in June.

We are just getting the final regulatory approvals from various countries.

We have most of it sorted out by now, but we are relatively confident we will get it closed in Q2.

At that stage, we will then put the organization in place.

There has been some limited discussions with Cameron, on how that is going to be.

So, I think we should be ready to hit the floor running as soon as we get the deal closed during the quarter.

And as to when we will get the new technologies introduced and so forth, I think it is a bit premature for me to comment on that at this stage.

Other than that we will have quite aggressive R&D plans for the JV.

We have some significant objectives that we want to achieve, but I think I will hold off on commenting on that at this stage.

Ole Slorer, Morgan Stanley.

Just a slightly higher-level question.

On the press release, you mentioned that the growth in North America oil production has been offset by non-OPEC producers seeing declining production and that you expect spare capacities to remain around current levels.

Could you elaborate a little bit on this statement?

Try to put some numbers around it if you feel confident about that?

Well, if you look at spare capacity now, I believe it is sitting at about 4 million barrels, right?

So we expect it to be around this level in the near term, barring any major macro events.

And if you look at the whole balance of supply and demand, the overall demand growth projected for this year is about -- just short of 1% or 800,000 to 900,000 barrels a day, so offsetting that demand growth is mainly the continued growth in North American production, and we don't expect any significant growth in the non-OPEC production outside of North America.

And that leaves the core of OPEC more or less unchanged.

That is the main balancing act that we are looking at this stage, which is similar to what we talked about in January.

And so in a historic context, would you say that this is a constructive backdrop, or is this a backdrop which could lead to some nervousness?

If you look at 4 million barrels of spare capacity on about 90 million barrels of production, it is around 4%, and it is still about 1 million barrels below where we stood prior to the Libya conflict.

So I don't think this is an excessive spare capacity.

I think it's, if anything, relatively tight.

Very good.

Secondly, you mentioned the ability to upsell technology.

We have all seen the headline numbers, let's use Brazil is an example.

So, do you expect this fully to offset some of the pricing pressures on recent contract signings, so let's say Latin American margin is expected to be able to hold those margins at this level?

Well I can't guarantee quarter-to-quarter, but I would say that for all these large contracts that we have been talking about for the past year, not just in Latin America but globally, we have an overall plan in terms of how we bid for the basic technologies, which are generally comparable to our competitors.

Then, beyond that, for these medium to long-term contracts, we have a plan about new technologies will be introduced and added to the contract base.

And based on these technologies, which would bring significant value to our customers, but also to us, we are quite confident that we can make these contracts that were originally quite competitively bid into quite viable contracts for us over the span of the contract term.

So, when we think about margins, if you look at your North American margin, very impressive level at the moment, more or less in line with your international margins, where do you think you will exit the year, with higher North American margins, or with higher international margins?

Relative to one another.

That's a good question.

If I was going to make a guess without really committing to it, I would say I still expect our international margins will be higher than North America, in terms of the exit this year.

Scott Gruber, Bernstein.

Coming back to the motivation for the Forest deal, the appetite for technology in the US onshore has always been low, but has there been any degradation to that demand?

Have the E&Ps, as they move into the harvest mode with the shales, and now the conventional service pricing is lower, has it actually diminished the demand for technology in the US?

Is this a response to that?

No, I don't think it's going in that direction.

I think what you will find is that in the past, we haven't really had a significant focus on developing new and high-end technologies that had, I would say, significant application in North America.

Now over the past five years, with the renewed focus we have on North America, we have invested a lot more into these type of technologies.

And what they are looking for now is just to try to accelerate the penetration to get return on these investments.

So, there is no, I would say, reversal of the technology uptake, it is just that we have a much broader, and I would say much more interesting technology portfolio with applications in North America and we are quite eager to get these technologies further into the marketplace.

Great.

And then turning back to the macro picture, Paal, you mentioned that the backdrop today remains constructive, even with a bit of the decline in crude price.

One of the top concerns we hear is how long can Schlumberger continue to grow at something close to 10%, in a world of flat crude prices?

How do you think about the medium-term outlook for growth over the next, call it, three years?

If crude prices are flat, can you still post top line international growth that comes close to 10%?

Yes, we're still confident that we can do that.

And I think there is, obviously, several ways that we are pursuing this.

We obviously are present in every market around the world, so we have a very broad growth opportunity.

But one thing I would think will be quite interesting from our side is that, if you assume that crude prices are going to stay flat, as you indicate, then I think it is going to be a need for our customers to look at driving more costs out of the E&P value chain, and I would say integration, which I talked about today, has the potential to do that.

And also overall quality and efficiency of operations, which in many cases comes down to the size of the operation, is also going to be key.

So I think we sit on several unique enablers that will allow us to be a very interesting partner for the E&P companies, in terms of how things then drive costs out of their system and then unlock more activity for us, and more growth for us.

Jim Crandell, Cowen Securities.

Paal, I know that Schlumberger is a company that of course pays a lot of attention to its market shares around the world and formation evaluation.

I was little bit surprised to hear one of your two major competitors on their call this morning say that in LWD/MWD they are the market leader now in revenues, in both the Gulf of Mexico and Norway.

A, would you agree with this, and B, is this something that you have a plan to reverse?

Well, Jim, there is nothing to reverse.

If there is anyone the leader in LWD anyplace around the world, it is Schlumberger so I don't think I'm going to engage further into that question.

I was surprised when I heard their response, but anyway.

Secondly, could you specifically talk about the Petrofac joint venture, and where you are in that, and additional work that could be forthcoming there?

Yes, so we are still engaged with Petrofac in evaluating SPM-type opportunities around the world.

We are still actively in dialogue with them.

There is a number of prospects that we are pursuing.

The overall sales cycles for these projects is quite long, and the projects we are looking at with Petrofac is also where there is a balance between what is required from the subsurface, which is our strength, as well is what is required from the surface, which is obviously their strength.

So that whole cooperation agreement is still very much intact, and we are still engaged with them in pursuing global opportunities.

Brad Handler, Jefferies.

Could you please speak to, well I guess the following issue as it relates to the second quarter.

So, there was a traditional, in the non-North American markets, there is a traditional seasonal recovery.

If I look at last second quarter, you had 9% sequential revenue growth and 40% type of incremental sequential incremental margins, and I guess I'm just curious whether or not there is some dynamics that happened in the first quarter this year that might make that progression look different in the second quarter of this year?

For example, the progress in SPM which might make the seasonal pickup a little less dramatic, or in Latin America, that might be the case.

But if you could speak to something in that dynamic, and give us some perspective on the second quarter non-NA on that, that would be helpful.

Well, in terms of Q2 consensus, you know that we don't give guidance, I'm not going to start doing that.

But I would just say that generally there is nothing dramatically different in our business today than what you saw a year ago.

We expect good seasonal improvements in our earnings per share in Q2.

As I mentioned on several times during the call here, international looks solid.

I think the main uncertainty continues to be the market evolution in North America land, and the main headwinds there are going to be continued pressure on US land in terms of pricing and the Canada breakup.

But overall, we expect to see a good seasonal improvement in earnings per share in Q2.

Fair enough, thanks.

An unrelated follow-up I just happened to notice significant pickup in working capital in Q1, which looks like it stemmed from a sizable reduction in payables.

Could you speak to that a little bit, what was driving that, and perhaps give us a visibility on how cash might flow from working capital for the balance of the year?

Well I would hand that to Simon.

So, as we mentioned, Q1 normally is a bit of pressure on our working capital.

One of the reasons is actually the year-end compensation for our employees, that related to incentives and bonuses that takes place in Q1 funding of pensions and others.

So this is the immediate deterioration the to place on the working capital.

As far as the rest of the year, we expect to have pretty good performance on collections, as we progress during the year.

CapEx, as I said, is $3.9 billion, and we will continue to buy back to compensate for the increase of stock we issued in relation to the stock-based compensation.

So, no, we think that going forward into the year, the cash situation will improve.

Okay and then just to clarify what I think I just heard you say, the starting point philosophy on share repurchases to cover what will be issued in shares as comp?

Correct.

And as we always said, any excess cash over a period of time, we will return it to our shareholders.

But the bottom level would be to compensate for the creep in the number of shares.

Yes.

There we go, understood.

Thanks.

Jeff Tillery, Tudor, Pickering.

Seeing as you're in China, you highlight China in one of the recent investor presentations.

Could you help us think about I guess, one, size of the market for you today, the growth rate you are achieving, you've given us a little snapshot on Iraq recently as well, any color you could provide on China would be very helpful.

Well China for us is one of our fastest growing new markets.

We are seeing a lot more opportunity emerging here over the past one or two years.

The offshore business, we have always been strong in, and that continues to grow, but we see a lot more opening up of the land business, here, partly in terms of complex conventional land developments, where we are working with our traditional Chinese customers, but also as the shale is opening up to a lot of non-traditional customers.

There is significantly higher market potential for us even in that market.

So, we are quite, I would say, bullish in terms of the overall growth potential and the growth rates that we expect coming out of China and that is why we, over the past 12 to 18 months, have been trying to I would say improve or expand our positioning in the country, and we continue to invest into the business there, both in terms of capacity but also how we JV and partner with local players.

So overall, China is way up there with the highest-growth regions that we expect in the next couple of years.

And the only follow up that I have is around Venezuela, the release and then you reiterated today, discussed ramping up of activity.

Could you give us some color on this?

Anything on order of magnitude or timing?

Is that a late this year event and then will there be any incremental disclosure on receivables in the Q1 10-Q?

We're not going to disclose anything further on receivables beyond what we did in January.

Our collections have improved in Venezuela during the quarter, as I mentioned we have had a very good dialogue with PdVSA.

The key thing here is that we are expecting to finalize this payment agreement in the near future, and we are basically ready to ramp up activity to meet the needs of PdVSA.

The magnitude of that, we are still discussing.

They have a significant resource base in Venezuela, and they have a need for our products and services, and when we get this payment agreement in place, we are very much ready to support them with what they need.

Waqar Syed, Goldman Sachs.

Paal, could you describe your current outlook for WesternGeco in terms of activity and also in terms of pricing, if you have seen any change there?

Yes, if I first look at Q1, in marine, the Q1 [vessel] utilization improved sequentially, so that was good news.

And going forward, we are still quite, I would say, optimistic in terms of how the year is evolving.

In marine seismic, we have now the majority of our capacity booked for Q2 and Q3.

In terms of pricing, we are still operating at more or less the same pricing levels that we saw in 2012, which is about 10% to 15% higher than what we saw in 2011.

So, for the small remaining part of the capacity that has yet to be filled up for Q2 and Q3, with levels we continue to test pricing further, but overall, we are looking at strong utilization for the next couple of quarters.

Pricing hasn't moved significantly from where we were last year, but it is still looking quite good.

Okay.

Great.

And in terms of new supply coming in over the next two to three years, are you seeing any red flags, any other signs of stability?

Are you feeling confident about the longer term and near-term outlook, given some of the capacity adds?

Are you talking about marine seismic?

That is right, yes.

Well I'm not overly concerned about any overcapacity at this stage.

There are new builds being planned that will enter into the market.

We have two new vessels under construction, but these are generally high capacity vessels I think for the overall industry, meaning 12 or more streamers.

And generally these will likely replace smaller vessels or six streamer vessels.

So I'm not really overly concerned about over capacity at this stage.

Our new vessels remain on schedule, we'll get delivery of the two of them in 2014.

Okay.

And then just one finally on your deal with Forest.

What is your capital commitment in the coming years for a development program there?

I don't have the details of what the capital commitment over the coming year is.

I think we're going to have to get back to you with that.

But the overall deal is not very significant, in terms of size.

So like I said, the main motivation behind the deal is to create a showroom of what we can do in terms of shale technology and shale growth roads in the US, so I think the overall headline [today is getting versus] the size of it and the impact to Schlumberger, I think is a little bit overdimensioned at this stage.

Mostly over services.

And what we will contribute is generally going to be in kind, in terms of value of our products and services.

Robin Shoemaker, Citigroup.

Paal, I wanted to ask you about the number of deepwater rigs being delivered here in the balance of this year, in 2014, is sizable.

Something like 64 rigs if you exclude the rigs to be built in Brazil ultimately.

But, in terms of bidding for work on those rigs in the predelivery stage, are you preserving your market share gaining?

How competitive is that bidding in your view?

Are you talking about bidding the global deepwater rig market?

Yes, the global deepwater rig market, the rigs coming out of shipyards later this year, and in 2014.

I'm quite pleased with how we are maintaining share now.

We have separate teams that are aiming at securing, I would say, contract and capacity on these rigs for the services that this is relevant for.

A lot of it has to do with the cementing obviously.

So we have teams dedicated that basically pursues the new-build owners to make sure that we get our share of the market for whatever we can capture prior to these rigs are coming out in the market, and where we enter into the traditional bidding sequence.

Okay and I was also curious about the pricing dynamic here.

Is it super competitive?

Are you pleased with the pricing levels you are achieving in all these deepwater related contracts?

Yes, I think if you look at the overall performance of our deepwater operations, both in terms of growth, in terms of market share, in terms of margin, it is all highly accretive to the overall business that we have.

So, it really comes down to the broad technology offering we have, and the highly differentiated execution capabilities we have for this type of environment, which is really what Schlumberger is all about.

So I'm quite pleased with how we are progressing in deepwater, and it's a highly accretive part of our business.

Turner Holm, RS Platou.

My question was partially answered, but I just wanted to question you on the seismic fleet utilization.

It looks like you have been running at about 70% in Q4, and that makes you about 75% in Q1?

[Can you validate these?

Currently I was wondering about] ballpark correct?

And so is that utilization, that low utilization relative to your peers function of switching over to isometrics?

I guess what I'm getting at is, would you expect utilization to improve from these low levels here as you move throughout the year and when you combine that with the price increases in the isometrics premium, could you see seismic have a meaningful impact from here?

Firstly, I don't think I would validate all your utilization numbers.

Our Q1 utilization is higher than what you indicated.

Although in Q1, we did have a fair bit of transiting, we had docking and also some permitting delays.

But overall utilization in Q1 was reasonable, and it was higher than the number that you indicated.

In terms of isometrics, it is still early days in terms of where we stand with isometrics.

We have one vessel fully converted to isometrics today, and it started its first survey in South Africa during the quarter.

And we actually have still downtime on the vessel there.

So further plans for isometrics is that we will convert another vessel this year and further two vessels in 2014.

We have a service plan for both vessels this year.

The one that did the survey in South Africa is now shooting a survey up in the Bering Sea, and we want to lease it in Canada after that.

Beyond that, we also a fair bit of North Sea work for the other vessel lined up.

So, the uptake is quite strong, but I think it is also important that we get the full set of results analyzed, together with our customers, before we really start talking about what the pricing premium should be, but the fact that there should be quite a decent pricing premium on these type of measurements I think is beyond -- it is very clear.

So, it is still early days, but we are progressing quite well and in line with our plans when it comes to isometrics.

Okay and just one quick related follow-up.

On the multiclient outlook, I guess we saw multiclient sales tick down to $175 million this quarter.

I believe first quarter last year was about $215 million, and I know multiclient answers around a bit, but what can you say about 2013 relative to 2012 on the multiclient side?

Well at this stage, we expect that it will be good progression in overall multiclient sales in 2013 over 2012.

These things vary a bit from quarter to quarter, and Q1 was obviously down sequentially, but it was also as you indicate, somewhat down from Q1 of last year.

But overall, we had a very strong library, and I am quite convinced that the overall sales from our library in 2013 is going to be up from 2012.

Okay.

Thank you.

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

Thank you.

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