斯倫貝謝公司 (SLB) 2013 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the Schlumberger earnings conference call.

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

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

  • (Operator Instructions)

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

  • Please go ahead.

  • - VP, IR

  • Thank you, Greg.

  • Good afternoon and good morning, and welcome to the Schlumberger Limited second quarter 2013 results conference call.

  • Today's call is being hosted from Paris, 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 would like to remind the participants that some of the information in today's call may include forward-looking statements, as well as non-GAAP financial measures.

  • A detailed disclaimer and other important information are included in the FAQ document which is available on our website or upon request.

  • We will welcome your questions after the prepared statements.

  • And now, I will turn the call over to Simon.

  • - CFO

  • Thank you, Malcolm.

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

  • Second quarter earnings per share from continuing operations, excluding charges and credits, was $1.15.

  • This is an increase of $0.18 sequentially and is $0.14 higher when compared to the same quarter last year.

  • During the quarter, we completed the wind-down of our operations in Iran, and as a result, we have now classified this business as a discontinued operations.

  • All of the prior period amounts have been restated.

  • As previously disclosed, we completed the formation of our One Subsea joint venture with Cameron prior to the end of the quarter.

  • We recognized a $1 billion gain in connection with this transaction, which equates to $0.77 in terms of EPS.

  • We also recorded $0.26 of charges relating to the impairment of drilling related equity investments.

  • From an operational perspective, we had a very strong quarter.

  • Oilfield Services second quarter revenue of $11.2 billion increased 5.8% sequentially, pre-tax operating income increased 15.9% sequentially, while the pre-tax operating margin improved 178 basis points to 20.4%.

  • Sequential highlights by product group were as follows.

  • Reservoir Characterization revenue of $3 billion increased 9.6% and pre-tax income grew by over 25%.

  • This resulted in margins improving by 380 basis points, to 30.1%.

  • This growth was driven by very strong performance in both wireline and WesternGeco, combined with the seasonal rebound in SIS software sales and maintenance.

  • Drilling Group revenue of $4.3 billion increased 4.4%, and margins improved by 97 basis points, to 18.7%.

  • These increases were largely attributable to the Drilling and Measurements and M-I SWACO on robust international activity.

  • Production Group revenue of $3.9 billion increased 4.4%, while pre-tax income increased 12.6%.

  • This resulted in margin expansion of 116 basis points to 15.9%.

  • Growth was led by Well Services as strong performance internationally and in US land more than compensated for the impact of the spring breakup in Canada.

  • Completions and well intervention were also significant contributors to the growth.

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

  • We continue to expect the effective tax rate for the full year of 2013 to be in the mid-20%s.

  • However, this can vary on a quarterly basis due to the geographic mix of business.

  • Yesterday, our Board of Directors approved a new $10 billion share repurchase program to be completed at the latest June 30, 2018.

  • Our strong projected cash flow over the next five years allows us to increase the level of share buybacks while also maintaining enough flexibility to continue to take advantage of growth opportunities.

  • Let me take this opportunity to remind you how we manage our cash flow.

  • Our first priority is to reinvest into the business to drive growth.

  • We do this through CapEx and the investment we make in R&D and future revenue streams.

  • From a dividend perspective, over the past 10 years, we have increased our dividend on average by 13% per year.

  • We will continue to review this on an annual basis with our Board.

  • After that, we will continue to be strategic when it comes to M&A.

  • Then the balance will be spent on the stock buybacks.

  • For the first six months of this year, we have generated $3.4 billion of cash flow from operations.

  • Net debt at the end of the quarter was $5.6 billion, as compared to $5.3 billion at the end of the first quarter.

  • Significant liquidity events during the quarter included $906 million of CapEx, $600 million payment to Cameron for the One Subsea transaction and $500 million of stock repurchases.

  • During the quarter, we repurchased 6.84 million shares at an average price of $73.07.

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

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

  • - CEO

  • Thank you, Simon.

  • Our second quarter results were strong.

  • As international activity recorded significant progress and North American results benefited from solid execution on land, and increasing deployment of new technology in deepwater areas.

  • Sequentially, revenue was up 6%, margins expanded by 178 basis points, which together yielded a 16% growth in operating income.

  • Compared to the same quarter last year, operating income was up 12%.

  • The results were driven by solid activity levels in all our main markets, as well as market share gains for a number of our product lines on the back of new technology sales, and our strong execution and integration capabilities.

  • I am pleased with the overall results, and even more so with the consistency in our business performance throughout the Company, seen for instance in the margin levels of our four main operating areas which are all at or above 20%.

  • The focus on the quality and efficiency of our execution is also reflected in our incremental margins which were north of 50% sequentially as well as the cash flow from operations which was $2.3 billion, driven by both improving asset utilization and reduction in the use of working capital.

  • The strength in our international business was again evident in the second quarter, with year-over-year revenue growth of 12%, and margin expansion of 173 basis points, to reach 22%, making up over 70% of the operating income of the quarter.

  • Activity and customer plans confirmed our expectations for the year in all our major growth markets, while revenue per rig continued to steadily increase as a function of new technology sales, increased integration-related activity, and a favorable business mix.

  • Our ability to consistently execute remains critical in the international market, and is a driver for both our market share gains, and superior margin performance.

  • While we continued to replace competition on contracts where they are unable to deliver, we are becoming more and more selective in terms of where and when we do so.

  • In Latin America, revenue was flat sequentially, despite a 2% drop in rig count, while margins increased 107 basis points, to 20.6%.

  • On a year-over-year basis, revenues increased 3%, while margins expanded 153 basis points.

  • Our Latin America business showed commendable resiliency this quarter, by maintaining laser focus on execution, technology sales, and cost control, overcoming both activity headwinds and new contract mobilizations and startups.

  • In Mexico, the third big round for production intensive contracts was concluded where we ended up bidding for only one of the six blocks.

  • Drilling activity remains soft in the north and east regions of the country, following the budget shifts announced in the first quarter, while the business offshore continued to ramp up.

  • In Venezuela, we signed a new agreement with PdVSA at the end of May and we are now in the process of ramping up our activity in the country while payments are on plan.

  • Elsewhere in Latin America, the Shushufindi SPM product in Ecuador is progressing well with production levels well above the agreed targets, while in Argentina we continue to be active in reservoir studies and well spud operations relating to the Vaca Muerta shale development.

  • In Brazil, we continue to mobilize resources during the quarter for the new contract signed with Petrobras although overall activity levels were down sequentially.

  • We have several new IPM projects starting in the second half of the year.

  • However, the overall activity level is expected to remain flat to slightly down for the rest of the year.

  • Overall, our outlook for Latin America remains unchanged, with 2013 being a transition year in terms of activity for the region.

  • And we remain comfortable with our position, our plans, as well as the actions we have taken to handle the somewhat challenging business environment.

  • In the Middle East and Asia, revenue grew 11% sequentially, on a 3% rig count increase, while margins increased 178 basis points to 24.6%.

  • On a year-over-year basis, revenues increased 28%, while margins were up by 330 basis points.

  • In the Middle East, growth was again spearheaded by Saudi Arabia and Iraq, but our United Arab Emirates and Oman geo markets also posted strong results.

  • Common to all of these markets is that we have gained noticeable share in the past quarters.

  • Our business in Saudi Arabia continues to grow through a diverse portfolio of projects, on both land and offshore.

  • And driven by both drilling and rigless activity.

  • In Iraq, we have, on the back of an unmatched execution track record, built up a significant business that is now starting to yield excellent results.

  • Activity levels continue to increase both in the north and in the south of the country and with our business footprint and contract portfolio, we have clear leadership in what is shaping up to be a very interesting market for us.

  • Asia also contributed strongly to the area results by delivering record revenue in four geo markets, driven by robust market share and new technology sales.

  • China led the Asia growth on a rebound from seasonally low land drilling and stimulation activity in the previous quarter, and also helped by an upswing in offshore activity.

  • We also posted very strong growth in Australia, driven by continued growth in unconventional activity on land, as well as offshore and deepwater activity in the Northwest and in Papua New Guinea.

  • In Europe, CIS and Africa, revenue was up 10% sequentially and margins increased 275 basis points.

  • On a year-over-year basis, revenues increased 7% while margins increased 33 basis points.

  • As expected, Russia led the growth in the second quarter, as the high volume land, as well as the offshore business, entered the most active phase of the calendar year.

  • E&P investment and activity levels in the country remain very strong in terms of offshore and land activity, as well as for exploration and development.

  • And Russia will be one of our fastest growing markets in 2013.

  • In the North Sea, WesternGeco saw strong activity as the seismic acquisition season started while the offshore drilling rig count stayed more or less flat.

  • In North Africa, rig activity in Algeria started to rebound following the security incident in the first quarter while rig activity in Libya remains flat due to delays and ongoing security challenges.

  • In sub-Saharan Africa, activity in the Gulf of Guinea as well as in East Africa was robust.

  • On the other hand, activity in Angola was subdued in the second quarter due to project delays.

  • However, the activity outlook for the second half of the year remains strong, driven by both exploration and development projects.

  • In North America, revenue was up 2% sequentially, while margins increased 65 basis points to reach 19.7%.

  • On a year-over-year basis, revenues were flat, while margins were down 83 basis points.

  • In the North America land market, the rig count dropped 14% sequentially, driven by the Canada breakup, and also impacted by the June flooding in Alberta, while the downward pricing trend in US land continued in the areas of drilling, stimulation, and wireline, although this slowed in pace during the quarter.

  • However, continued strong drilling efficiency resulting in solid growth in horizontal wells and frac stages completed partly offset these headwinds.

  • Looking at our land performance, we continued to execute very well in all our product lines, and we also see a gradual improvement in the uptake of our new shale technologies throughout the Characterization, Drilling and Production groups.

  • In the US Gulf of Mexico, the deepwater rig count is now at 17% above pre-Macondo levels and on a year-over-year basis, activity has increased by 30%.

  • The call for reliable and efficient service delivery, in addition to risk mitigation technologies, continues in this growing market, and is yielding very strong results for a number of our high margin and high market share product lines.

  • In addition, to the dual coil fleet operating in the Gulf of Mexico, WesternGeco also started isometrics operations in eastern Canada during the quarter.

  • Turning next to technology, during the quarter we closed the One Subsea joint venture with Cameron and the JV is now operational.

  • Cameron, with its long history of innovation and firsts in the subsea market, is an industry leader in design capability, manufacturing excellence and successful installations.

  • In addition to this, Schlumberger brings a deep understanding of the reservoir, as well as industry-leading well completions, subsea processing and integration capabilities.

  • Through the combination of these strengths, One Subsea will offer best in class subsea solutions, optimizing the complete subsea production system and helping our customers improve production and recovery from their subsea developments.

  • In other areas, we saw growing customer interest in a number of our new or recently commercialized technologies.

  • In wireline, the Saturn 3D fluid sampling probe is enjoying one of the most rapidly growing deployments of new formation evaluation technology for a number of years.

  • Its ability to acquire reliable pressures and high quality samples in difficult reservoirs has been impressive.

  • Elsewhere in Characterization, the SIS Studio Manager software which went from concept to market release in only eight months is enabling an increasing number of customer geoscientists to access data, collaborate with peers and share best practices within Petrel workflows.

  • Within the Drilling Group, new and innovative drill bit technologies recorded significant progress.

  • Drill bits equipped with Stinger conical diamond elements that add stability and improve drilling speed have now made more than 650 runs in North America alone since their introduction in the first quarter and have achieved an average improvement of 15% in rate of penetration.

  • And in the second quarter, we commercialized the ONYX 360 rotating cutters that we believe will lead to dramatic improvements in bit run lengths in abrasive formations.

  • Lastly, at the Production Group, joint deployment of LIVE slickline with active coil tubing services demonstrated clear benefits in the efficiency and effectiveness of our well intervention services both on land and offshore, and units were active in the quarter in both Latin America and the Middle East.

  • Let's now turn to the macro environment, where the business outlook for 2013 has remained largely unchanged since April, as expansion in the global economy remains soft.

  • In summary, the US has shown little or no impact of the financial sequester.

  • The Euro zone is still in a two-year recession, although the risk of any country to leave the monetary union appears reduced.

  • And recent Chinese data has been mixed with the outlook for a long and progressive soft landing remaining unchanged.

  • The oil market picture is also largely unchanged.

  • The market is more comfortably supplied than it was in 2012 but spare capacity remains below pre-Libya conflict levels.

  • The year on year increase in North American supply is enough to face both increasing global demand and the production decline in other non OPEC producing countries.

  • The call on OPEC remains unchanged and is in line with the group's production target of 30 million barrels per day.

  • Overall the market continues to support Brent prices over $100 per barrel.

  • For natural gas, the apparent rebalancing of the US market is still fragile as gas production remains steady, and as the power sector has already switched back to coal in some regions on higher gas prices.

  • Internationally, Asian LNG prices eased on weaker Chinese demand trends, but remain close to oil parity, while in Europe, regional supply decline from the North Sea and very cold weather supported high spot prices.

  • Despite the overall slow progress in the economic environment, the latest releases of the third party E&P spending surveys saw upwards revisions of upstream CapEx estimates making 2013 the fourth consecutive year of double digit worldwide spending gains, driven by the international and offshore investments noticeably in the Middle East and Asia regions, while the North American spending remains flat to slightly up.

  • These estimates are further confirmed by the rig count outlook that shows double digit growth in the number of both shallow water and deepwater rigs active worldwide, and a 6% growth in the international land rig counts in 2013.

  • In this market, we continue to focus on what we control, which is the quality, efficiency, and integration aspects of our operational execution.

  • Through this focus, which permeates our entire organization, we continue to demonstrate our ability to deliver tangible results today, as can be seen by our revenue market share gains, unmatched operating margins, strong cash flow, and consistent double digit growth in earnings per share.

  • We also remain confident in the outlook of the industry, in our strategic position within the markets we operate in, and in our ability to further improve all aspects of our performance going forward, which remains the over arching objective of the entire Schlumberger team.

  • That concludes my remarks.

  • I will now land the call back to Malcolm.

  • - VP, IR

  • Thank you, Paal.

  • Greg, we will now open the call for questions.

  • Operator

  • (Operator Instructions)

  • Kurt Hallead from RBC Capital Markets.

  • - Analyst

  • Hey, good morning.

  • Or good afternoon where you are.

  • A question, Paal, for you, on the North American market, you continue to show some differential performance on the margin front, despite the fact that -- and show improvement in terms of activity, revenue, and margins, despite an anemic rig progression, and a lot of discussion here about the well count and so on.

  • So I was just wondering if you can give us a little bit of additional color as to what product lines that you see will be benefiting from the shift in the type of drilling that is taking place in the US marketplace?

  • And what kind of technology that Schlumberger has that will continue to enable Schlumberger to show differential margin performance going forward.

  • - CEO

  • Well, I think if you look at what enables us to show differentiated margins, I think it is several things.

  • Firstly, our ability to I think execute very well on land.

  • Whether that is on drilling, or on pressure pumping.

  • But also, the fact that we have a very well-balanced portfolio in between drilling and production-related activities on land, as well as in between land and offshore.

  • So we obviously have a very strong offshore business, both rig-related as well as seismic, but what we have done in recent years, starting off in 2010, was to restructure the business on land, which in previous years, I would say it had underperformed.

  • And through that restructuring, I think we are performing on par with the best if not better in most of our product lines.

  • So if you look at the trends of drilling, in the North America land market, now going towards more and more horizontal wells, predominantly focused on liquids, all of our drilling segments obviously benefit from that.

  • At the same time, our pressure pumping business through new technology and deployment such as highway are also benefiting from this.

  • And we are also introducing to the markets our own multi-stage completion technology, which has been a gap in our portfolio in recent years, which also should enjoy quite significant growth going forward.

  • So I think it is a good balance between land and offshore.

  • Good balance between drilling and production on land and overall very strong focus on execution.

  • - Analyst

  • And as a follow-up, Paal, on that, with respect to the overall margin performance of Schlumberger, especially in the international marketplace, are you getting the sense that we're starting to see a shift in the industry that will demonstrate Schlumberger's relative product and services strength, whether it is deep water or otherwise?

  • Do you think we're at kind of an inflection point in the marketplace to where we're going to see the strengths of Schlumberger?

  • - CEO

  • I think if you look at our margin performance, in international over the past couple of years, I think we have been highly differentiated continuously.

  • So I think we've done well in our contract strategy.

  • What contracts we prepare to take on.

  • And the ones that we see more as must-wins.

  • We have continuously introduced new technology and we are also leveraging very well I think our overall science and infrastructure, so to your question, whether it is an inflection, we don't see any imminent inflection in bid pricing at this stage.

  • We are seeing a continuous uptick in another pricing indicated that we track which is revenue per rig, and that is continuing to grow and going upwards and that obviously helps our profitability.

  • And what drives that up is new technology sales.

  • It is our integration capabilities, where we do more and more services and products on each rig, and it is also down to the nature of the work that we take on.

  • Typically we take on the more complex and more intense work because it is more difficult to do.

  • And if you perform well in that, that also is quite accretive to margins.

  • So bid pricing, we still don't see any imminent inflection, but we continue to drive revenue per rig upwards through new technology, through integration, and just very solid execution.

  • - Analyst

  • Okay.

  • That's great.

  • Thank you.

  • - CEO

  • Thank you.

  • Operator

  • James West from Barclays.

  • - Analyst

  • Good morning, Paal.

  • You mentioned in your prepared comments the third party surveys which of course you're well aware that we do a very large survey, and what we saw when we re-ran the numbers here in May, and early June, was that international spending was creeping up about 300 to 400 basis points.

  • So curious if you are seeing the same things from your customers, who you're having the same conversations that we are with, and then secondarily, which markets -- do you agree with what we showed as the biggest growth areas of kind of the Middle East, eastern hemisphere, in general, and what seem like markets that are in kind of Schlumberger's backyard.

  • Do you see those as the best growth markets this year?

  • - CEO

  • Okay.

  • To the first part of the question in terms of the spend, yes, if you look at the average of the spend surveys, and we look at several, I think for the international, it was about 9% early in the year.

  • I think it was generally all of them revised upwards, lately, to average about 13%.

  • So we generally agree with that upwards revision.

  • We see continued strong activity levels in the international markets and those spend surveys are also I would say confirmed from the rig count outlook, and also the rigless outlook, in terms of activity that we have for the second half of the year.

  • So yes, we are in agreement that that upward revision seems to be reasonable.

  • Then the second part of the question was?

  • - Analyst

  • On the specific regions where the spending is increasing, particularly the Middle East.

  • - CEO

  • Yes, so we highlighted going into the year five major growth regions, so we said that international would grow north of 10% this year.

  • We would see growth in Latin America, but due to the kind of transitional nature both in Mexico and Brazil as we indicated earlier in the year, we weren't expecting a lot of growth coming out of Latin America which is being confirmed.

  • - Analyst

  • Sure.

  • - CEO

  • And we said that the main growth markets would be sub-Saharan Africa, Russia, Middle East, in particular Saudi and Iraq, China and Australia.

  • Those were the five main drivers.

  • So basically ECA and EMEA were the main drivers of growth in the international market.

  • - Analyst

  • Okay.

  • And then just a follow-up for me, the market share gains that you also highlighted in your prepared remarks, are those happening in those markets that are growing the most rapidly?

  • - CEO

  • I think in general, that is fair.

  • I would say in particular, in EMEA, we are gaining quite good market share.

  • - Analyst

  • Okay.

  • Great.

  • Thanks, Paal.

  • - CEO

  • Thank you.

  • Operator

  • David Anderson from JPMorgan.

  • - Analyst

  • Paal, just staying on the subject real quick, was saying that they thought that the Saudi recount, about six months behind schedule, do you concur with that and does that have any impact on some of your outlook for the next 12 months?

  • - CEO

  • Well if you look at our view on the Saudi rig count, we are still expecting the total rig count, both drilling and work over, to reach about 170 rigs by the end of 2013 or early 2014.

  • So the rig count evolution in Q2 was flattish, but this is all about when new rigs arrive and how they're commissioned and so forth.

  • But we're still expecting that we will reach the number that we have indicated earlier, roughly by the end of the year, or early 2014.

  • - Analyst

  • Okay.

  • And then on the subject of Mexico, you touched on the two contract bids from last week, I was just curious what was it about those contracts that kept you away?

  • Was it location of the work?

  • Was it the contract structure?

  • Or are you guys just holding out for another set of tenders there?

  • - CEO

  • Let me just give you a little bit of background on our view on these production incentive contracts.

  • We've been very clear about our interests in production incentive contracts.

  • But we also stressed the importance of picking the right projects with the right terms.

  • So we evaluated all of the six field offered in the first round in Mexico and based on the very detailed technical and commercial evaluations we did we only found one field interesting.

  • We bid at this field at a price that would give us the returns that we required and this is really factoring in the additional risks associated with these contract terms.

  • The winner bid at a fee close to fee per barrel, and basically we're not interesting in doing that.

  • So we did not win it.

  • - Analyst

  • Okay.

  • One last quick question on some of the buyback you announced today.

  • Can you give us a sense on your philosophy on the pace of that buyback?

  • You talked about the cash flow you're generating over the next couple of years.

  • Should we expect the majority of that to go towards share repurchase?

  • I heard you on some kind of broke down in terms of the view, but it seems like you have an opportunity here to kind of accelerate that, over the next, call it, I don't know, three or four quarters here, am I right, in my assessment?

  • - CFO

  • So okay, well, thanks, David.

  • But as I mentioned, in my remarks, that we will -- the buyback is basically a balancing number for us, when it comes to utilization of the cash flow.

  • And you are right in your assumption, with the cash flow, that's why we said latest by 2018, so if the cash flow proved to be significantly better than what we have factored in the 5 year scenario in making the $10 billion program, we will accelerate it.

  • We did this in the past.

  • We look at our excess cash over a period of time.

  • Taking into consideration the growth that we are anticipating in terms of CapEx and as I said, investment in future revenue stream activity, be it multi-client or production incentive contracts.

  • And any balance will go into the buyback.

  • Yes.

  • - Analyst

  • Okay, great.

  • Thank you very much.

  • - CFO

  • Sure.

  • Operator

  • Judd Bailey from ISI group.

  • - Analyst

  • Thanks.

  • Good morning.

  • I wanted to ask a couple of questions on Mexico, if I could.

  • The first is that is obviously a big market for you guys.

  • Are you there?

  • - CEO

  • Yes.

  • - Analyst

  • Sorry.

  • Obviously, a big market for you guys.

  • You're pretty diverse.

  • Pemex still has pretty ambitious growth expectations the next few years.

  • They have obviously pulled back activity in the north.

  • I wanted to get your thoughts, they have a lot of tenders coming up and tenders in process and it would look like you could see pretty strong growth in that market next year.

  • In your view is, there any view for skepticism that Pemex maybe would not follow through or is there anything else going on down that would give you caution in terms of the growth opportunities down in Mexico?

  • - CEO

  • No, I don't see any reason for that.

  • I think Pemex has signaled there is a number of bids coming out for the remaining part of this year and probably into next year.

  • We are going to actively compete for all of that work, and we continue to see Mexico as a very interesting market for us.

  • - Analyst

  • Okay.

  • All right.

  • And then next question, just on North America.

  • Obviously, very strong margin results, factoring in Canada and everything else going on in that market, with the continued growth in the Gulf of Mexico, and let's just say that the US land market kind of continues at this methodical pace, with very little pricing traction.

  • How should we think about Schlumberger's margins in terms of -- we would assume you get some more market share gains, you benefit from a very strong Gulf of Mexico and a rebound in Canada, can you help us think about maybe in the near term, and the long term, margins for Schlumberger, and then the North America market?

  • - CEO

  • Well, I would say that we, over the past year, when there has been significant struggles in the project pumping business I think we've shown commendable margin resilience and again as I alluded to earlier, it's down to how we execute on land as well as the balance between land and offshore.

  • So in terms of what the margin progression is going to be, the main uncertainty is still what is going to happen in terms of pricing on land.

  • As I mentioned in my prepared remarks, we still saw pricing pressure, both in the drilling stimulation and wire line product lines in the second quarter.

  • But that was slowing somewhat in pace.

  • So assuming that the pricing is reasonably behaved and drilling efficiency continues to be the main activity driver going forward, I would expect us to show continued margin resilience.

  • And obviously we are looking to drive up margins in any operating areas, I can't promise you exactly how that is going to progress but we have a lot of focus on margins in every part of our business and we will continue to look to drive it up in North America.

  • - Analyst

  • All right, great.

  • Thank you, Paal.

  • - CEO

  • Thank you.

  • Operator

  • Bill Herbert from Simmons and Company.

  • - Analyst

  • Thanks.

  • Good morning.

  • Paal, I was wondering if you could sort of reconcile on the one hand sort of double digit E&P capital spending growth, not so much for this year, but on a structural basis perhaps going forward, internationally, and reconcile the tension between on the one hand the increasing need on the part of the customer base to reinvest simply to keep production flat and on the other hand increasingly challenged cash flows in a range bound oil price environment and rising cost environment.

  • What do you think ultimately happens over the next several years, assuming range bound oil prices, does the rate of E&P capital spending growth decelerate?

  • Or what happens?

  • - CEO

  • Well, I think we are still optimistic about the further need to increase overall E&P spending going forward, right?

  • So we saw the upward revisions of the spend surveys this year and at this stage, although it is early to conclude on next year, the customers need to go through their planning process, but we are still optimistic about the initial projections for 2014.

  • The resilience in the spend as you say is linked to, partly the work intensity linked to fighting decline.

  • But also due to the overall size and complexity of the projects that are undertaken, in particular in the international marketplace.

  • So I think for the company, for the E&P companies that potentially are or will be facing cash flow issues, we expect them to be likely to shift more of the spend within the E&P spend from more infrastructure-related products towards more well CapEx.

  • So that obviously would be good for our business, because that is sort of where we make most of our money on, right?

  • So I think a general shift from infrastructure towards well CapEx is what I expect to happen for those E&P companies that are facing cash flow issues.

  • - Analyst

  • Okay.

  • And then secondly, switching gears, at the reservoir level, I'm curious as to what your views are with regard to the outlook for US oil production growth.

  • I mean clearly it has been extremely vigorous, we're up about 1 million barrels a day on a leading edge basis, that's 15% to 20% year over year.

  • Yet I think there is a healthy debate here with regard to the prospects going forward, the prospect of the Bakken growth flattening out and filling that production growth vacuum with other basins, perhaps not as easy as some contend.

  • Where do you fall out with regard to the domestic production outlook going forward?

  • Stronger for longer?

  • Or decelerating?

  • Or too early to make a case either way?

  • - CEO

  • That is a good question.

  • First of all, I would say that the overall production increases that we've seen out of North America liquids have been very impressive.

  • We have always maintained that it is too early to extrapolate the early production trends, in terms of how great they see.

  • And also, I think it is too early to conclude on whether the trends we're seeing on the Bakken is something that is also sustainable, right?

  • So for the early production trends, I think we need more information to look at the production of these wells over a longer period of time.

  • And this think we also need to look at the initial rate for the inflow performance for the wells that the operators are starting to drill outside of the fairways.

  • As they step out on the acreage.

  • So I am going to have to go for option three of your multiple choice there.

  • I think it is too early to say both whether we can extrapolate the initial overall trend from North America or whether there is any significant impact of the recent trend that we've seen in the Bakken.

  • - Analyst

  • Okay.

  • Thanks, Paal.

  • Operator

  • Scott Gruber of Bernstein.

  • - Analyst

  • Thank you.

  • Paal, I found your comment becoming more selective regarding when and where you choose to replace piers interesting.

  • Is this a reflection of capacity restraints, desires to avoid problematic contracts, some of both?

  • Why is the sand shifting?

  • - CEO

  • I think obviously if a customer calls upon us, and wants us to divert generally we will do our utmost to serve them.

  • At the same time, we also have to make sure that we prioritize putting our equipment into the customers that have initially selected us.

  • And if we are going to go and replace a competitor on one of their contracts, we obviously need a significant pricing increase from the initial rates that our competitors took the work on for, all right?

  • And there is also other strategic considerations as to where do we put our capacity, what is the priority in terms of the customer mix as well.

  • So I can't really go into the details of how we select what we do.

  • I would say that we will always look to serve our customers as best as we can, but at the same time, we are continuing to look at how we optimize our business mix and how we maximize the return from the resources that we have in operations.

  • - Analyst

  • Okay.

  • And then an unrelated follow-up can you discuss the efforts internally to improve the working capital management?

  • You look over the last six months, you guys have held the line here on receivables and other current assets, but I assume that you're not completely satisfied in the working capital at this point.

  • And then if you have any year-end targets that you could share with us, that would be greatly appreciated.

  • - CEO

  • Well, maybe I will say a little bit about what I think the investment community calls self help initiatives, right?

  • So first of all in Schlumberger, we believe that in order to maintain and extend our market leading position, we always need to do better tomorrow than what we did today.

  • So Company-wide programs addressing execution improvement, they're not really sporadic or episodic with us.

  • They are a way of life.

  • So we have in recent years, in the recent year, put more focus on working capital, on cash generation.

  • In the past we probably had more focus on more cost and resource management.

  • We are trying to balance the focus on both cost and resource management with cash management.

  • So we have specific programs around, focused on capital efficiency, around receivables, and also around inventory management, and we build this into our business plans and we also build this into the incentives of the entire management team.

  • So this is really how we try to put focus on it.

  • And what we put focus on in Schlumberger, we generally do quite well.

  • So I mean --

  • - CFO

  • I would like to add a bit to what Paal said.

  • The last couple of years, since the acquisition of Smith, you probably noticed that the working capital as a percentage of our sales has gone up a bit.

  • And this is what was all planned.

  • I mean as a result of expanding certain segments or the product lines of Smith internationally, which are more inventory intensive, intensive segments or product line, we had to increase inventory to meet the expansion that we have done internationally.

  • One of the main reasons for acquiring Smith and integrating it with the rest of Schlumberger is also to use the footprint of Schlumberger, which meant that some of those segments that were mainly US focused, we took them overseas and therefore increased the inventory.

  • We have managed to do this now and going forward, this will be -- we will not have to increase it at the same pace that we have done before.

  • - Analyst

  • Great.

  • I appreciate the color.

  • Operator

  • Ole Slorer from Morgan Stanley.

  • - Analyst

  • Thank you.

  • First of all, congrats on your decision to return a greater party of cash flow to shareholders.

  • I think there is a very clear difference at the moment between the valuation of companies that do that and those that don't, in the slower growth environment that they're in.

  • But first of all, what were the biggest technologies that drove your share gains?

  • - CEO

  • In terms of specific technologies, let me elevate it and maybe focus in on the product lines, so I would still say we gained the most share in wire line and Drilling and Measurements.

  • Those are the kind of spear heading segments for these efforts, right?

  • So there is a number of new technologies that we have introduced in both these product lines over the past year or two, and the off take of them is good.

  • And what we also find now, as you know, we restructured our engineering manufacturing, and sustaining organization about five years ago, and this is really starting to pay dividends now, because the new technology that comes out is performing much better than the initial technology that came out 5 or 10 years ago.

  • There were a lot more teething problems which we are basically now avoiding.

  • So the new technology which is commercialized within its first year is now actually now growing significantly faster than what it did maybe 5 or 10 years ago.

  • So I would say wire line and Drilling and Measurements are still the ones that are gaining the most share.

  • - Analyst

  • So, just say that this is largely driven by offshore?

  • - CEO

  • No, I think it is on both land and offshore.

  • - Analyst

  • Okay.

  • And a follow-up question would be what market share changes are you seeing in the offshore market?

  • You're having one of your largest competitors continuously make claims that they're gaining share across all offshore technologies?

  • - CEO

  • I don't know who they're gaining share from because it isn't us.

  • In the offshore market we obviously already have quite a high share but we referenced the Gulf of Mexico in some of these discussions and we continue to gain share in the Gulf of Mexico in several of our high-end product lines.

  • - Analyst

  • Okay, just finally, how far away do you think from being a new pricing cycle in North American pressure pumping?

  • - CEO

  • I would say there is still significant capacity of horsepower in the -- sitting on the sides today.

  • So I don't see that happening in 2013 at least.

  • I think we're still going to have over-capacity as we exit this year.

  • - Analyst

  • Finally, just about some of the technologies that are reducing the pressure pumping intensivity of shale oil and gas in North America?

  • - CEO

  • What technologies do that?

  • - Analyst

  • Yes.

  • - CEO

  • Well HiWAY is obviously one of them.

  • We use significantly less proppants and also generally less water in the operations that we do with HiWAY.

  • The other part, the other way of reducing, or lowering the intensity of these operations is to use much more of the sub-surface approach, prior to actually defining the jobs, right?

  • So having a much better understanding of the subsurface will allow you to design the completion of the well and the amount of horsepower, water and proppant you use by being more selective in what stages you frac and also using more sophisticated frac fluids like HiWAY.

  • - Analyst

  • Are you seeing a change in aptitude there with the shale oil game becoming more and more of a large company game?

  • - CEO

  • Not a dramatic change but I would say we are starting to get several key customers that we are collaborating much closer with than what we have in the past and where we engage all the way from characterization to drilling and production and taking a much more sophisticated approach to how we go about working with them on their developments, right?

  • So it is still relatively slow.

  • But through some of the contracts we've won over the past 12 to 18 months, we have established as part of those contracts very strong technical collaboration agreements, which are also benefiting technology penetration.

  • - Analyst

  • So on Forest Oil, the contract in the Eagle Ford, how would you characterize that in the context of what you said?

  • - CEO

  • I can't really comment on that.

  • Forest will release their results I think in a couple of weeks, we will need to defer you to them.

  • - Analyst

  • Okay.

  • Well done, Paal.

  • Thank you very much.

  • - CEO

  • Thank you, Ole.

  • Operator

  • Michael LaMotte from Guggenheim.

  • - Analyst

  • Thanks.

  • And good afternoon, guys.

  • I wanted to just follow up on the North American onshore market and a little bit on the Forest Oil as well as SPARK.

  • And let me ask the question just from the context of shift in business model, in North America.

  • I think both with Forest, as well as SPARK, you have tried to introduce a new model, to the US land market, and I was just wondering, now that you have been out-marketing concepts like that for a while, what the perception has been, and what you think the uptake and penetration rate might look like?

  • - CEO

  • Well, on SPARK, we have seen a reasonable uptake on it.

  • Nothing dramatic, which we weren't expecting, either.

  • It is mainly focused on customers that are vertically integrated.

  • They have their own horsepower with very limited capabilities in terms of pumping more sophisticated fluid systems.

  • So we continue to do SPARK-related activity, but it is not a significant part of our business, which we weren't really expecting, either, but it has progressed reasonably well and we're happy with the performance from this.

  • We are mainly doing SPARK in North America, but we also are doing SPARK in China for some of the frac operations there.

  • The other part of your question, in terms of the Forest Oil type of deal, initially as we said when we closed the Forest deal, our main motivation for doing that type of a deal was actually to get a display window for our shale technology capabilities.

  • So we haven't really been actively out promoting SPM or production incentive type of contracts in North America, beyond trying to get that deal done so we could demonstrate our capabilities for the technologies that we have developed.

  • So really no other progress, or we haven't really been pushing that model beyond that one deal we struck.

  • - Analyst

  • Great.

  • Thanks Paal.

  • - CEO

  • Thank you.

  • Operator

  • Bill Sanchez from Howard Weil.

  • - Analyst

  • Thanks.

  • Good morning.

  • Paal, two questions.

  • One, I wanted to follow up on just how things were progressing on the SPM side.

  • In the first quarter you mentioned you had 10 projects, the goal was to add two or three a year.

  • I didn't see anything in the press release with regards to another announcement there.

  • Perhaps you can just update us on your thoughts.

  • And maybe perhaps just size for us on a revenue basis annually what SPM is kind of contributing to the top line for Schlumberger?

  • - CEO

  • You're correct, we didn't sign any SPM projects in the second quarter.

  • Our goal of adding two to three projects a year basically stands firm.

  • But again, as I mentioned on my comments on the Mexico bid round, we will only sign the projects that we believe are right for us.

  • This is all about portfolio management.

  • It is about picking the right projects, the right fields, with the right terms and we have very stringent return criterias in terms of what we will engage in.

  • So our goal is two to three fields.

  • If we can get the right ones, we will do it and if we can't find the right ones we won't do it.

  • In terms of the impact on the business, it is still a relatively small part of our overall revenue stream.

  • But by picking the right projects, it is a highly accretive part of our revenue stream.

  • And we will continue to focus in on maintaining it as highly accretive.

  • - Analyst

  • Right.

  • Your view has been is that these projects are accretive to margins in essentially every geo market in which you have rolled it out.

  • Is that correct?

  • - CEO

  • That is correct.

  • - Analyst

  • Okay, great.

  • My second question was just a follow-up on the North American margins, specifically as they relate to Geco, which was called out in the press release, but you didn't specify, perhaps I missed it in earlier comments, whether or not Geco really was being driven in the Gulf more by the marine side of the business or whether we saw multi client or maybe a combination of both?

  • And then maybe you can just address Gulf of Mexico Geco as we think about the balance of '13.

  • - CEO

  • In the Gulf in terms of ongoing operations, we have one dual coil fleet operating, it continues to operate in the Central Gulf.

  • It's got a good backlog of things to do there on the multi client side.

  • Acquisition.

  • And we have an ongoing multi-client late sales business where we had some revenue progression, which is seasonal basically from Q1 to Q2.

  • And we don't break out what that revenue progression was in the multi clients, you can see what the total is.

  • The total for Q2 worldwide was [$250 million], up from [$175 million] in Q1, so a part of that was North America.

  • But I would say, as a general comment, on the multi client performance in North America, in Q2, it was below our expectations.

  • We were expecting more sales of multi client than what we actually realized.

  • And in addition to the multi client business in terms of late sales and acquisition, in the Gulf of Mexico, we also had started a third party survey, offshore Eastern Canada, and this is with the isometrics.

  • So those are basically the WesternGeco business in North America.

  • - Analyst

  • And that sounds like that continues in the second half of the year, should be accretive to overall North America margins?

  • - CEO

  • It should.

  • - Analyst

  • Okay, thanks Paal, for the time.

  • - CEO

  • Thank you, Bill.

  • Operator

  • Angie Sedita from UBS.

  • - Analyst

  • Good morning guys, or afternoon.

  • It hasn't been said so I will say congratulations on a great quarter.

  • Very impressive, to you and the term.

  • - CEO

  • Thank you.

  • - CFO

  • Thank you.

  • - Analyst

  • On Mexico, Paal, I appreciate the color on the production incentive contracts and the bidding there but your thoughts on I believe the next round of awards will be IPM, potentially as much, I've heard, as $8 billion to $10 billion in contracts, you view that as the better and more attractive opportunity in the region?

  • And then along with that have you had conversations with Pemex on the potential timing and isn't it multi-year for Mexico to open up, and the opportunities there?

  • - CEO

  • What we know about the bids coming out is that there are a series of bids.

  • There will probably be single service bids that will be IPM well construction bids and there will probably be more production intensive type of bids coming out as well over the next couple of quarters.

  • So as I said earlier, we are very interested in the Mexican market.

  • It is going to be highly competitive.

  • It has always been highly competitive.

  • But it is about, as I said before, being able to bid strategically, picking, trying to pick up the right contracts and the right opportunities, and having a plan for how you would create value for Pemex and at the same time create value for Schlumberger as we engage in these contract, right.

  • So I gave you a quick summary of our view on the third round of the SPM contracts, and we will continue to evaluate every opportunity for gaining more work in Mexico, and we will engage in it with a view to make returns for the Schlumberger shareholders.

  • - Analyst

  • All right.

  • And then on the US market, thoughts on the pace of activity for Q3 and Q4, are you seeing, based on your conversations with the customer, still steadily higher in Q3 as far as activity?

  • And Q4, on the seasonal decline, or are we going to run into the spent budgets that we did last year?

  • - CEO

  • Well whether Q4 is going to see the same as last year, I think it is too early to say.

  • Obviously WTI ticking up a little bit over the past month or so could be a positive preventing that from happening but I still think it is too early to say what will happen in Q4.

  • Our overall view on the second half of the year for US land is, I think rig count is going to remain relatively flattish.

  • But drilling efficiency is going to be the main activity driver, again generating reasonable growth in stage count sequentially.

  • Looking at Canada, we expect the age to rig count at this stage to come in -- the recovery in the age two stage rig count to come in lower than in 2012.

  • While the stage count we expect to be more or less flat with last year.

  • And then again continued strong activity in terms of offshore Gulf of Mexico, both shelf and deep water.

  • - Analyst

  • And then finally, you mentioned Russia being one of your strongest geo markets in 2013.

  • Is that in part driven by the Eurasia deal or is it outside of that project?

  • - CEO

  • Well, the Eurasia deal is part of our business and it is an important part of our business in Russia, but it is only part of it.

  • We have significant other activities, both on land, and offshore, both in Sakhalin and the Caspian and in the barrens and the Arctic, so we are very well I think diversified in terms of both customers and regions that we operate in Russia and that's why I think we manage to sustain very high growth rates.

  • Thank you.

  • Operator

  • Jim Crandell from Cowen.

  • - Analyst

  • Good morning.

  • Paal, one of your competitors was indicating in the marine seismic business, relative softness in bidding activity for the fall/winter season.

  • Are you seeing that -- let's say, what are you seeing in the fall/winter season relative to the spring/summer season and how does pricing look for that season right now?

  • - CEO

  • Well, for the marine market, we maintain our positive outlook, which we have basically conveyed over the past couple of quarters, right?

  • The way we see it supply and demand appears to be relatively well balanced.

  • We have, in terms of bookings for Q3, we are basically already fully booked.

  • And also Q4, in terms of backlog, is filling up quite well.

  • So activity-wise, things are looking quite good for us.

  • In terms of pricing, in the second quarter, we didn't see any significant further traction in terms of basic bid pricing.

  • But we also track another pricing indicator which is revenue per streamer and our revenue per streamer was up about 10% sequentially, and that's mainly at the back end of new technology, and the type of service we conduct, and also some seasonality effects.

  • That is basically where we stand.

  • - Analyst

  • Good.

  • That's helpful.

  • And one follow-up question about WesternGeco.

  • When you used to break it out, this would of course be obvious, but could you give us some indication where margins are relative to let's say the oil service average at WesternGeco?

  • And I'm just trying to get a handle on how much margin leverage there is there going forward.

  • - CEO

  • We are not breaking out what any individual product line is doing in terms of margins.

  • I can't really comment on that.

  • But given where pricing stands, and given the very significant new technology portfolio we have, and just putting into operation, both on land, in terms of processing, as well as marine, we obviously see margin upside potential for WesternGeco.

  • - Analyst

  • Okay.

  • Thank you, Paal.

  • - CEO

  • Thank you.

  • Operator

  • Jeff Tillery from Tudor Pickering.

  • - Analyst

  • Hi, good morning.

  • One of my questions I have around the US land business, you mentioned improved well service and pressure pump utilization several times in the release.

  • What are your thoughts around bringing some of the never deployed equipment into the market given where your margins are?

  • How do you see that as an opportunity in the second half of the year?

  • - CEO

  • So we will look at bringing equipment in from what we have parked when we can get the utilization that we require for the overall fleet.

  • And at this stage, we are not looking to bring anything back in that we have parked and I don't expect that to happen in 2013.

  • - Analyst

  • Great.

  • Thank you.

  • And then last question, just around the Reservoir Characterization business, with the significant margin increase there, I mean obviously multi-client helped, but when I look back historically, there doesn't really tend to be a falloff in multi client sales in the third and fourth quarter relative to the second quarter.

  • So any reason we should think about margins perhaps stepping backwards in the Reservoir Characterization business in the second half of the year?

  • - CEO

  • Nothing fundamental.

  • There is always, it is a huge business and there are mixed effects, depending on what region grows and there is exploration and development type of mixes even in Characterization.

  • But overall, I expect the Characterization group to continue to post very strong margins.

  • - Analyst

  • All right.

  • Thank you guys very much.

  • - CEO

  • Thank you.

  • - VP, IR

  • Okay, on behalf of the Schlumberger Management team I would like to thank you for participating in today's call.

  • Greg will now provide the closing comments.

  • Operator

  • Thank you.

  • Ladies and gentlemen, this conference will be available for replay after 10.00 AM central time today through August 19.

  • You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 291800.

  • International participants dial 320-365-3844.

  • Those numbers once again are, 1-800-475-6701 or 320-365-3844 with the access code 291800.

  • That does conclude your conference for today.

  • Thank you for your participation and for using AT&T executive teleconference.

  • You may now disconnect.