斯倫貝謝公司 (SLB) 2013 Q3 法說會逐字稿

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

For the conference, all the participant lines are in a listen-only mode.

There will be an opportunity for your questions.

Instructions will be given at that time.

(Operator Instructions)

As a reminder, today's call is being recorded.

With that being said, I'll turn the conference now over to the Vice President of Investor Relations, Mr. Malcolm Theobald.

Please go ahead, sir.

Thank you, John.

Good morning and welcome to the Schlumberger Limited third quarter 2013 results conference call.

Today's call is being hosted from New York City and 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.

Third-quarter earnings per share from continuing operations, excluding charges and credits, was $1.29.

This is the highest earnings per share for a quarter in the history of Schlumberger.

It represents an increase of $0.14 sequentially and it is $0.25 higher when compared to the same quarter last year.

As a reminder, last quarter we completed the wind down of our operations in Iran and as a result, this business was classified as a discontinued operation.

All the prior period amounts have been restated.

Third-quarter revenue of $11.6 billion increased 3.8% sequentially with 7% growth in North America and 3% international.

As you will recall from a financial reporting standpoint, we do not consolidate the one subsea joint venture.

As such, this was the first quarter we did not record any revenue from the subsea business that we transferred to the venture.

Excluding this effect, revenue grew by over 5%.

Oilfield Services pretax operating income increased 9.6% sequentially while pretax operating margins improved 114 basis points to 21.5%.

Sequential highlights by product group were as follows.

Reservoir characterization revenue of $3.2 billion increased 7.3% and pretax income grew by just over 8%.

This resulted in margins improving to 30.4%.

This growth was driven by very strong international performances in both wild land and testing services, most notably in Russia.

Improved vessel utilization at WesternGeco also contributed to the growth.

Drilling group revenue of $4.4 billion increased 2.8% and margin improved by 154 basis points to 20.3%.

These increases were largely attributable to the drilling and measurements and M-I S WACO on robust offshore activity.

Production Group revenue of $4 billion increased 2.5%, while pretax income increased 13.1%.

This resulted in margin expansion of 165 basis points to 17.6%.

Excluding the effects of the transfer of our subsea business to one subsea production group, revenue grew over 6%.

This growth was led by well services on a strong recovery following the seasonal spring break-up in Canada last quarter.

Increased activity for completion in Artificial Lift as well as continued increasing profitability in SPM were also significant contributors to the growth.

Now turning to Schlumberger as a whole, the effective tax rate excluding charges and credits was 22.7% in the third quarter compared to 23.3% in the previous quarter reflecting the business mix between North America and international.

The year to date effective tax rate for 2013 is 23.2%.

From a cash flow perspective, we have generated approximately $6 billion of cash flow from operation during the first 9 months of this year.

This strong cash generation has allowed us to continue to invest in the growth opportunities while at the same time returning over $2.7 billion of cash to our shareholders in the form of dividends and stock repurchases during this period.

Net debt at the end of third quarter was $5.6 billion.

This is unchanged from the end of Q2 despite the fact that we spent $833 million on our stock buyback program during Q3.

During the quarter, we spent $953 million on CapEx and repurchased 10.1 million shares at an average price of $82.61.

Total year for 2013 CapEx is still expected to be approximately $3.9 billion as compared to the $4.7 billion spent in 2012.

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

Thank you, Simon.

Our third-quarter results continue to show good progress driven by solid performance in both the international and North American markets.

Our strong focus on integration quality and efficiency remains core to our execution, and I am pleased with the response we are seeing from our organization in addition to the impact the efforts are having on our results.

Sequentially revenue grew by 4% excluding our subsea business, which in Q3 is included in the one subsea JV, while margins expanded by 114 basis points to yield a 10% growth in pretax operating income.

Compared to the same quarter last year, pretax operating income was up 20%.

New technology sales coupled with further market share gains contributed strongly to the quarter's results and this is also reflected in our revenue per rig indicator which improved again sequentially.

The size and breadth of our operations and the quality of our execution allowed us to once again show widespread consistency in terms of financial performance with all four operating areas posting operating margins north of 20%.

In addition, and for the second quarter in a row, we posted sequential incremental margins over 50% while free cash flow progressed from the already solid levels of Q2 to reach $1.5 billion driven by improving asset utilization and tight management of working capital.

Our international business continued to strengthen in the third quarter with year-over-year revenue growth of 12% and margin expansion of 134 basis points to reach 23%.

Sequential revenue growth was 3%, dampened by operational delays in some regions, but proactive management and disciplined execution allowed us to generate 73% incremental margins on this growth.

In spite of the operational delays experienced in Q3, we have not seen any structural changes to customer plans and we continue to maintain a positive outlook for our international business.

In terms of pricing, we are not seeing any signs of an inflection point.

However, the current operating environment, with highly competitive pricing on basic services and slow but steady activity growth where we can get a premium for new technology and for the quality of our execution, suits us very well as it plays to our strengths and allows us to continue to generate superior financial results.

In Latin America revenue was up 1% sequentially while margins were flat at 20.6%.

The sequential results were driven by strong performance throughout the area with the exception of Mexico and Brazil where continuing challenges tempered growth.

While we see the current headwinds reducing somewhat in 2014, we expect the situation for our overall business in the region to remain more or less unchanged in the fourth quarter.

On a year-over-year basis, and in spite of the ongoing challenges, revenues were up 4% while margins expanded 273 basis points.

In Mexico revenue was down sequentially driven by the completion of contracts in the north and lower product sales offshore which were only partly offset by the ramp-up of activity in the south.

In spite of the challenges we have faced in Mexico this year, we remain optimistic on the longer-term outlook for this market and we are actively positioning ourselves for the future opportunities.

In Brazil revenue was also lower sequentially due to the start of our new contract with Petrobras as well as due to lower activity for both independent and international customers.

Based on the latest customer plans we expect activity to remain flat in the country in the fourth quarter.

Elsewhere in Latin America our business is progressing well driven by Ecuador where the Shushufindi project continues to perform better than planned, by Argentina where we are actively involved in the Vaca Muerta shale work and by Venezuela where we are still ramping up activity following the signing of the payment agreement in the second quarter.

In the Middle East and Asia, results were particularly strong with sequential revenue growth of 5% while margins increased 151 basis points to 26%.

On a year-over-year basis revenues increased 25% while margins were up by 330 basis points.

In the Middle East sequential growth was again solid in Saudi Arabia and Iraq while the highest growth rate was seen in the United Arab Emirates and Qatar where we also have very strong market positions.

We are currently in the process of transferring in additional people and equipment to Saudi Arabia to keep pace with the additional work that we are taking on, while in the United Arab Emirates we have just completed a large mobilization link to a recent major contract win.

Asia also posted strong sequential results headed up by China where conventional and tight cap activities on land were the main drivers.

We also signed our first SPM project in China during the quarter and the team that will manage this tight gas project in the Ordos Basin will be on the ground in Q4.

Elsewhere in Asia, Indonesia and Malaysia also showed strong growth in the third quarter driven by offshore exploration and development work while activity in Australia was flat sequentially.

In Europe, CIS and Africa revenue was up 2% sequentially and margins increased 189 basis points.

On a year-over-year basis, revenues increased 7% while margins were up 83 basis points.

Russia was again a major driver for our performance, posting a record quarter with strong sequential activity growth as well as excellent incremental margins.

Our wide footprint in the region provides a solid foundation for our business which is essential for addressing such a large and diverse market.

The sequential results were driven by Russia land and Sakhalin on high exploration and development drilling and going forward we continue to see Russia as one of our fastest growing markets.

In the North Sea sequential growth was driven by strong WesternGeco seismic activity and solid drilling activity in Norway while our UK business was impacted by summer rig maintenance.

In North Africa we had another challenging quarter in terms of top line growth due to operational delays in Algeria and continued security challenges and lower rig activity in Libya.

In Sub-Saharan Africa activity was mixed as a result of project delays linked to the influx of new rigs to the region.

Still the overall activity outlook remains robust as the surge of rigs into the market continues and as customers firm up exploration programs in frontier countries.

In North America we had a very strong quarter with revenue up 7% sequentially to set an all-time high and with margins expanding by 57 basis points to reach 20.3%.

On a year-over-year basis, revenues were up 9% and margins were up 176 basis points.

In the land market the US rig count remained flat sequentially while the seasonal recovery in Canada was more or less on par with last year.

The downwards pricing pressure continued in most product lines in the third quarter including pressure pumping, although at a slowing rate.

Looking at our land performance, I am very pleased with the quality and efficiency of our execution as well as with the teamwork within our organization which is a key driver for our results.

We have come a long way since we started the transformation of our North America land business three years ago to the point that we are now setting the pace in North America land just as we do in the rest of the world in terms of both new technology deployment as well as financial results.

As an illustration of this, we activated four additional hydraulic fracturing fleets in US land during the third quarter following a number of recent contract wins.

As a result our third-quarter stage count increase by 7% sequentially.

Looking at the North America offshore markets, we also posted solid sequential growth driven by new technology sales and the quality of our execution.

Offshore Eastern Canada we successfully completed an isometric survey in early September.

And activity continued to be strong in the US Gulf of Mexico with minimal impact from the hurricane season so far this year.

Let's then turn to technology where I will give you an update on our ongoing progress in the shale markets in North America.

Over the past 12 months we have continued to actively promote our shale reservoir work flow to the market with a strong focus on optimizing both well locations as well as completion design.

As part of these efforts we have introduced a data consortium business model where multiple customers with neighboring acreage can contribute reservoir and production data and then co-fund field and well studies as well as the construction of 3D reservoir models for the shale plays.

In return each customer receives all the findings and conclusions from the consortium studies in addition to the reservoir model covering their acreage.

We have so far conducted three such studies with very interesting findings and conclusions and these studies together with our technologies and work flows has helped to significantly improve the well performance for the participating customers.

One major conclusion we have confirmed is that in order to optimize production recovery and costs of the shale developments there is a clear need to shift focus from the level of a stage down to the level of the individual perforation exhausters that make up a stage.

The reason for this is that the studies, including production logs, show that in traditional completions on average between 30% and 70% of the perforation clusters do not contribute to production.

This means that we are not effectively addressing the available shale reservoir throughout the entire length of a stage and that we generally over-fracture a subset of the perforation clusters.

Based on these findings, we are actively working on a number of technologies that target this opportunity.

During the third quarter we started field testing one of these new technologies; a novel solid space diversion technology.

The diversion pill is added to the fracturing fluid at various times during the pumping of a stage and this effectively seals off the clusters that are currently taking frac fluid.

This allows us to access the perforation clusters that have yet to be properly fractured.

This new diversion technology has two primary applications.

First, in improving in production and recovery by ensuring that more perforation clusters are accessed within a traditional stage.

And second, in lowering completion costs by increasing the length of a stage, thereby reducing the number of frac plugs installed and subsequently milled in the well.

Diversion technologies are not new to the fracturing market.

They have been around in the industry for a while in various forms, however so far without showing tangible or consistent results.

The novelty of our approach is in the robust design and engineering of the diversion pivot and the fact that field results so far are showing very promising results.

We plan to continue our field testing of this technology in the coming quarters and in addition we will also evaluate the technology as a potential way to refracture existing wells that are underperforming in terms of production.

In parallel with our growing new technology penetration of the North America shale market, we have been gaining market share in hydraulic fracturing in recent quarters at what we consider acceptable incremental margins.

These market share gains led us to activate the four additional frac fleets I referred to earlier in my comments.

In terms of the equipment, the four new fleets were mobilized from pumps made available from our existing fleets that are in operation due to steadily improving asset utilization and [hans] represents a zero net capacity addition to our field operations.

This significant achievement is a result of ongoing R&D work focused on improving the reliability, extending the maintenance intervals and reducing the maintenance costs of our hydraulic fracturing fleet.

The strategy driving these R&D efforts has been to improve the design of the consumable part of our pump rather than building a new pump that requires additional capital investment.

These innovations have already helped improve reliability and reduce the maintenance cost of our asset base.

Currently only a subset of our fleet has been upgraded, but we expect that through our normal maintenance schedule we will have the entire fleet upgraded by the end of 2014.

This upgrade will be fully covered through ongoing operating costs and involves no capital investments.

Let's now turn to the macro environment where we in recent months have seen a number of positive signs in the world economy.

The euro zone is now out of its longest recession on record, the US continues to show favorable trends in spite of the fiscal debate and the most recent data from China suggest a lower risk of a significant slowdown.

Overall these factors are offsetting lower growth expectations in some of the emerging economies.

These trends are currently expected to continue in 2014 translating into both a higher GDP growth rate and increasing global oil demand compared to 2013.

On the supply side, spare capacity including the shut-in production in Libya, remains stable at around 4.5 million barrels per day.

And even with an unlikely increase of Iranian crude exports in 2014, spare capacity will likely remain in the range of 5 million barrels per day in the coming year.

At this stage we therefore expect continued support for brent crude prices around $100 per barrel going into 2014.

However, the makeup of the risk premium is likely to shift somewhat with lower supply uncertainty and potentially lower geopolitical risk offset by more resilient demand and lower macroeconomic concerns.

The international gas market is expected to remain stable supported by strong demand in Asia, while in the US resilient production levels and strong competition with coal indicates that a recovery in dry gas drilling activity continues to be pushed out in time.

In terms of E&P spend the second half of this year is unfolding in line with expectations.

Visibility of 2014 is still limited as our customers are in their planning process, but at this stage we foresee a continuation of the overall trends seen in 2013 which should yield another year of steady activity growth.

In this environment our entire organization continues to focus on both new technology sales and the quality and efficiency of our execution.

In parallel with our ongoing operations we are actively pursuing our internal transformation programs focused on leveraging the size of our operations and the breadth of our offering and with a clear goal of further elevating our performance in terms of top line growth, margin expansion, and cash generation.

That concludes my remarks.

I will now hand the call back to Malcolm.

Thank you, Paal.

John, we will now open the call for questions.

(Operator Instructions)

James West, Barclays.

So Paal, clearly good getting this strong momentum in the international markets.

I know you touched on how the year should end up here and gave some broad guidance for 2014.

I was hoping you could dig in a little bit further on 2014 and just give us your view of -- we had obviously -- we're going to have strong growth this year probably low double digit growth internationally on E&P spending.

Do think that's going to be steady, more of the same, is it going to accelerate or is there potential for some slowdown in E&P spending?

Well as I mentioned, James, in my prepared remarks I think it's still early to comment on specific numbers on what the international growth is going to be next year.

But as I said, from where we stand today I think a continuation of the trends that we've seen this year is our most likely bet.

That means reasonable growth in the spend levels, but that the market dynamics that we play in will continue to see steady activity growth but competitive basic pricing.

But as long as we can get a premium for new technology and the quality of our execution we are comfortable that we can continue to generate solid incremental margins without an inflection in pricing.

Understood.

Okay, and then just a quick follow-up for me on the international markets.

You mentioned Russia as one that looks to be good for 2014.

What other key large markets are you looking at to drive this growth?

Well I would probably name the same five that, as I've been talking about throughout this year.

So that is basically Russia, sub-Saharan Africa, Middle East with particular focus on both Saudi Arabia and Iraq, but the UAE we are also gain significant share in recent quarters and I see the UAE also to be a strong growth driver in 2014.

And then in addition China and Australia as we talked about again this year.

Okay, great.

Thanks, Paal.

Kurt Hallead, RBC.

Paal, I was just curious your thoughts around the North American market and your ability, as you said, to utilize your efficiencies to increase the number of frac crews operating.

I was wondering what's your concept in terms of the implication?

You already have 20% excess capacity of equipment and if you're getting more efficient in utilizing your existing assets in the marketplace?

Do you think it takes a lot longer for the supply demand lines to cross with respect to frac?

Well I can only speak for us, but I would say that we still have upside in terms of the operational efficiency of how we conduct our business, which we show with the activation or basically creation of four additional fleets out of the existing asset base that is currently in operation.

So, yes, at least for us I would say that in general it would take us most likely longer to consume the over-capacity we have unless we gain significant share to the point that we choose to activate some of the fleets that we have in the idle asset program as well.

But as of now we are continuing to focus in on the operational efficiency of the assets we have in operation and if we can get decent incremental margins on additional work that we potentially take on, we will primarily look to create fleets out of assets currently in operation before we look to the idle asset program.

So from your standpoint then if I were -- and if I understand what you're saying correctly is that irrespective of the excess capacity in the marketplace that may exist, that may continue to exist, given your internal drivers, you feel very confident about your ability to get margin improvement?

Well in the pressure pumping business not dramatically because pricing is actually still going down, but as long as we can offset that with new technology and operational efficiency, there is potential to get some improvement in margins in pressure pumping.

But obviously what helps our margins as well is a strong offshore business and also a good drilling and characterization business on land where the pricing pressures have been less than what we've seen in the pressure pumping.

Okay great.

And then my follow-up question would be, in the context of the level of optimism that you expressed in your commentary here on the call and in the written commentary, how do you feel about the progression from an earnings standpoint?

I think the industry has tended to get out in front of itself a little bit too much and put you guys in a tough position where you had to talk numbers down.

How do you feel about the earnings progression as it sits right now as you head into 2013 and even more importantly into 2014?

If we start looking at Q4 first as you know we do not give guidance but I would say a couple of things about the fourth quarter.

Firstly that the fundamentals of our business remains intact going into Q4 but there are some seasonal effects that I think everyone should factor in.

On the negative side of these effects is that we are likely to -- or we will see seasonal slowdown in some of our highest growth markets this year, such as Russia and China, which will have an impact.

We will see the normal seasonal slowdown in marine seismic and we also expect to see some impact from the holiday season in North America.

While on the positive side we the year-end product sales which will offset some of this.

But overall if I look at where the current consensus for Q4 is now I would say it is about right.

Now, looking into 2014, obviously very early to look at specific EPS targets other than that again the fundamentals of our business remain strong and our overall target is going to be to continue to deliver double-digit growth in earnings-per-share and that will be for the fourth year in a row.

David Anderson, JPMorgan.

Paal you've been highlighting the new efficiency and reliability efforts that you've been implementing throughout the organization.

I was just wondering if you could talk a little bit about how this is already attributed to margin improvement?

Specifically I was kind of looking at Europe, Africa, CIS margins.

Over the last two years they have gone from mid-teens to low twenties now and Middle East margins took a step up.

Could just talk a little bit about how much of that was due to these efficiency efforts that you have in place?

And how much is left in there do you think over the next couple of years?

Well I would say that the progression we have shown in these operating areas over the past year is partly down to very strong management focus on managing both working capital and costs in general.

So that on basic activity growth without pricing we can generate quite significant incremental margins.

So, our transformation programs are looking at some structural changes to how we are staffed up and how we conduct and run our business.

I would say that there is not a significant part of the structural changes that are taking place so far.

So a lot of what we are doing now is just managing with particular focus on driving both cash flow and incremental margins and that over time we will see more of the impact of these structural changes as part of the transformation.

So there's little structural changes impact on our results as of yet.

So in other words even without pricing you should still see margins continue to improve in the Eastern hemisphere?

Well that's what we are going to work towards.

Yes.

Okay.

On the US side I was just curious you talked a lot about the technology and particularly on the perforation clusters.

I think in the release you had talked about whiting.

I was just curious if you could compare and contrast the E&Ps versus the majors in the resource plays that you're working in.

Seems to us that the E&P is a lot closer towards true development phase where as the majors are a little bit further behind.

Just curious in terms of the technology that you're talking about.

Are we talking more of your conservation of the E&P side or are the majors sitting back watching and then they will implement this later?

How do you see this playing out?

Well I think generally we talk to all our customers about these things so I don't see a huge difference between what the independents do and what the IOCs do in this marketspace, right?

I mean it is all about the acreage, the challenges and the main focus on priorities that they have.

So we are openly discussing the whole range of capabilities and new ideas and innovations that we have with all our customers and I can't really separate I would say who is doing what.

I think they are all eager to look at what can be done better and the way they implement things obviously various depending on what their priorities are.

Bill Herbert, Simmons & Company.

Back to your margins, Paal, for a second and your internal transformation.

So I was struck by the fact sort of the breadth and sweep of the internal transformation with regard to structural change which you're trying to prosecute.

This is the second consecutive quarter that you've generated incremental margins in excess of 50% and yet you say thus far that has very little to do with the internal transformation that you're trying to prosecute?

In general, yes.

These -- we always are doing pilots.

We are trying things out at a small scale in various places around the world.

But that's in its -- it's still in its early phase.

So, yes, there has not been significant structural changes as to how we operate our international business.

Obviously in North America we started our transformation about 3 years ago so a significant part of the structural changes have already taken place there.

But in the international business no, there has not been any significant impact of structural changes yet.

Okay.

And I think you mentioned that one of your objectives along with these internal transformational initiatives was to get back to prior cycle peak consolidated operating margins which I think were something like 26% or 27% thereabouts.

You are at 20% today on a consolidated basis.

Over what time frame should we expect that evolution to take place roughly?

I'm not going to give you a time frame here.

I mean we have a horizon of these transformation objectives over plus minus five years.

Exactly when we're going to hit or if we're going to hit these targets it is too early to say.

But we set out a quite an ambitious target and that is to get back to previous cycle operating margins.

And I'm still optimistic and relatively confident that we are going to get there.

Okay, and last one for me.

Recently Total came out its analyst day and announced a fairly significant reduction in capital spending over the next two years and we've talked about this before.

The IOC is in deepwater, NOC is -- are cash flow constrained and on the one hand and opportunity rich on the other hand.

So, two questions in that particular regard.

One, the outlook for seismic and two, the outlook for deepwater capital spending in terms of rate of change going forward.

Well that's a lot of questions wrapped into one but I'll start out with the seismic.

So maybe I would say a little bit about our seismic results in Q3 and then on the outlook and then we can go on to the next part of your question.

Right?

Q3 results for us were solid.

Multiclient was down a bit, about 9% sequentially, which was in line with our expectations.

In marine we had a good quarter as expected; fully booked, good pricing from the new technology.

But really no further traction on basic pricing.

And also in land we had a very good quarter.

We have restructured our land business over the past year focusing now entirely on UniQ deployed in Middle East and North Africa and we are now generating very solid operating margins on land, which is a long time since we've done it.

Now in terms of the outlook for seismic, as you can see from our disclosure, our backlog is now at $856 million, which is down 12% year-over-year, but this backlog includes all four parts of our business; the marine, the land, the data processing, and the multiclient.

So actually the main driver for the year-over-year growth in the backlog is actually land and that is basically due to the fact that we have downsized our business and focusing more narrowly on UniQ and Middle East and North Africa.

So the marine backlog was slightly up year-over-year, but the visibility on Q1/Q2 is lower than what we had at the same stage last year.

It doesn't mean that there are not surveys out there, but our customers are now in their planning cycle and they have been reluctant to make early commitments as to these surveys that they have on the table.

So I would say that we basically expect to gain further visibility on marine seismic activity during the fourth quarter, so there's a bit of uncertainty over that as of now.

But I can't really conclude what that's going to mean for next year.

So overall the outlook for seismic for data processing land and multiclient looks solid with some lower visibility on marine.

Now, in terms of deepwater, there is -- we are still quite I would say bullish and optimistic on deepwater.

There are a number of new rigs coming into the market in Q4 and also going into 2014 and that is going to grow -- that's going to drive deepwater spend in 2014.

So we are still optimistic on deepwater.

Ole Slorer, Morgan Stanley.

Paal, I wonder whether you could elaborate a little bit more on what you said on the efficiencies in the North America pressure pumping markets.

Your pitch sounded a little bit increased productivity from the well and reducing number of stages needed.

Sounded pretty much like the pitch around the introduction up HiWAY a little while back.

Is there something more than HiWAY getting foothold?

The HiWAY is one technology that obviously has applications in the market.

As I've been saying over the past year or so we continue to work on other technologies as well.

So there is -- well HiWAY increases conductivity in the fractures that we create, this new technology I talked about today, the diversion technology, has a different objective which is basically to ensure that we access all the perforation clusters along the horizontal section.

Which the industry basically today does not do.

So it is another technology which in conjunction or in parallel with HiWAY can help drive production and reduce costs.

Okay, thanks for clarifying.

Also, on FRAMO, did you account for anything at all this quarter or is it the one quarter delay on how you report the equity income?

Simon here.

We report it on a one-month lag, but it is -- we didn't report anything during this quarter from FRAMO.

Okay.

So that would've added a couple of cents?

Quarter to quarter, it's basically in the Q2 we have FRAMO and then the third quarter it is part of the venture and it will be reported by the one subsea as they consolidated by Cameron.

Okay.

What did you say, Ole?

No, that's clear.

Thanks, Paal, for clarifying.

Angie Sedita, UBS.

On the North America markets clearly your strengths in technology and execution have led to very impressive efficiencies.

And you noted the deployment of additional frac crews in the US.

Do you think -- on existing equipment and not using capital, which I think is very interesting.

Do you think you will be able to continue this in 2014, where in essence you are adding additional frac crews into the market without adding any or unstacking any capacity or adding any capital?

Yes, we don't plan to add any capital in 2014 based on where we stand now.

So, if we -- it's all going to be a function of the amount of work that we will win.

And the first priority will be to try to invest that work through the equipment we already have deployed.

And beyond that, we are prepared to activate assets from the idle asset program if we cannot address the work with the assets already in operation.

But I think there is still -- there is still upside in terms of the efficiency and utilization of the assets we already have in operation.

Right, fair enough.

And then as a follow-up to that.

Clearly, you are seeing significant efficiency gains through execution on the pressure pumping side.

Are there other product lines outside of pressure pumping that are particularly apt to be able to drive additional product efficiencies through execution?

Or are there specific regions that you would think you could see more of it as you go into 2014 internationally?

Well internationally we continue to drive efficiency throughout our operations, right.

There is no one item that I would single out.

I think every product line that we have, all 15 of them, have specific programs and targets where they drive both the efficiency of our work force as well as the utilization of our assets in all aspects of our operations.

So that's a key part of what you see in terms of the incremental margins that we are generating in the international market.

Great, I'll turn it over.

Bill Sanchez, Howard Weil.

Paal, I just had one question as it relates to your longer-term outlook on Brazil.

I know you hadn't always felt like this would be a transition year in the country, and you remarked 4Q you see activity flat versus third quarter which was down.

Can you just give us your more longer-term thoughts on Brazil as a whole and how we should expect about that unfolding for Schlumberger here next year?

Yes, I would say that our view on 2014 overall in Brazil is that it is going to be another challenging year.

And it is mainly down to the activity levels that we see at this stage, which is relatively flat from where we stand now.

That is a function of, obviously, of what Petrobras is planning to do.

But also there is some impact in this in lower activity projected for both the Brazilian independence as well as from the IOCs in Brazil in 2014.

2015 is likely to be higher when the expiration broke link to the large license round is likely to kick in.

But the majority of the activity in Brazil next year for us is going to be centered around Petrobras, who are not looking to significantly grow activity at least from what we can see at this stage.

Okay.

And for you, you feel like you are pretty well balanced in terms of service and equipment capacity in Brazil?

Yes, we are well set up in Brazil.

We have a strong focus on both quality and efficiency and also introduction of new technology for these long-term contracts.

So I am comfortable with our position and our set up in Brazil.

It is challenging, but we are executing well.

Okay.

That was it for me.

I'll turn it back.

Michael LaMotte, Guggenheim.

I wanted to follow-up, Paal, on the transformation program and in particular ask you about some of the metrics we could be looking at over the next five years.

We tend to focus on top line growth and incremental margins and obviously the margins should improve and you've given some good guidance there.

But if I think about capital efficiency, can you give us some sense as to where you think ratios such as reinvestment rates, CapEx to revenue, asset turnover, some of the key utilization metrics that might better reflect the doubling of asset utilization and some of the other elements of the program?

Yes, I would reiterate the main indicators that I gave you during my talk in this conference in Q3.

We are aiming at doubling asset utilization, which by itself means that we should be able to reduce the CapEx relative to activity in terms of growth going forward.

So, I'm not going to give you a specific CapEx as a percentage of revenue, other than that we reduced CapEx in 2013 while we were still growing.

And my initial I would say indication for 2014 would be flat to slightly down on CapEx, and that is assuming that we are still going to grow in 2014.

So, the folks at utilization should help us reduce CapEx relative to growth going forward.

Okay.

And then one other point on the financial focus areas.

You mentioned cross training of the workforce particularly in remote areas.

I'm wondering what that means in terms of new recruitment and thinking about training of -- cross training of existing employees as opposed to the recruitment program, University program, et cetera and overall headcount growth?

Right, so we are not looking in a near term to change significantly the level of recruiting because this whole cross training and ensuring that we got proper competencies for the people that we do cross train is going to take a little bit of time.

So, in the near-term there is no change or no significant change to the level of recruiting that we are planning to do.

Brad Handler, Jefferies.

I guess Paal in your comments you've spoken optimistically, bullishly, about deepwater development.

I understand that and we're looking at the rigs coming in and perhaps thinking similarly.

I guess I'm curious if you have pause related to a couple of the events that seem to be at least percolating anecdotally, which is in the Gulf of Mexico a bit of swapping out of new in place of older rigs even if they're still deepwater, even if they are still DP and then perhaps in West Africa and Angola and Nigeria which seems like it's a bit of a backlog in terms of getting some of those new rigs signed and under contract.

So, I guess I'm curious for your thoughts about that and I imagine you are calibrating that into your comments, but I guess I'm curious if that gives you pause if there is an element where you are a little less encouraged perhaps because of those kinds of developments?

Well, I'm aware that some of the new arrivals that are coming into the market in 2014 still do not have contracts, but based on what we're hearing from the drilling contractors they appear confident that these rigs are going to get contracts by the time they arrive.

To the other point that you are making, maybe some of the older generation rigs will be replaced by the newer generation, but either way we have a positive view on the market.

There was significant growth in deepwater drilling activity in 2011 and we expect a continuation of that trend into 2014.

Fair enough.

Okay.

An unrelated question.

You mentioned in your -- the written commentary about Statoil, a couple of nice multi-year contracts I guess on the fluid side as well as cementing.

I think that there are one or if not more of those contracts still outstanding.

I wonder if you could speak to us about the lay of the land there?

If you expect there are some awards that might still come, and if you can at all calibrate, if the implications for you given the fact that you've won the ones that you've announced?

You are talking about Statoil in Norway?

Yes.

I'm not aware of any major outstanding contracts beyond the ones that we have -- that's already been awarded earlier this year as well as the ones that we are referencing now.

But I would say overall our position in Norway and our position with Statoil is strong from where we see it and we are well-positioned there.

Very good.

Okay.

Thanks, I'll turn it back.

Robin Shoemaker, Citi Investment Research.

Thank you.

So Paal, could you give us idea now of what percentage of your fracturing stages are employing the leading edge technologies such as HiWAY and this recent innovation that you mentioned on the diversion of perforation clusters?

What kind of percentage are we talking about here of total stages fracked?

So we haven't disclosed what percentage of our stages are done with HiWAY.

The only thing I would say is that we've seen continuous growth in HiWAY stages throughout this year and the year-over-year growth is very significant as well.

So we continue to penetrate the market on HiWAY, but we haven't been disclosing what percentage of our own stages we are doing HiWAY on.

And on the other technology I referenced this is a technology that is p-test.

So it is very limited what the deployment is and it's not yet commercialized.

So I would say this is something that we are trying out.

There is still fair bit of field testing done before we are potentially going to commercialize it, but I wanted to share with you this technology because it is interesting and the early field test results are showing great promise.

Okay.

And just staying on that theme, you had mentioned in some of your earlier outlines of the evolution of HiWAY and other fracking technologies that you could eventually come to a point where you might not be necessarily providing the fracturing fleets themselves, but more providing technology for the fracking operations.

Is there any -- how far have we advanced toward that possible goal and is it in the foreseeable future?

What you are referencing is what we call the spark model.

This is basically where we provide the fracturing fluid, the engineering, the blending, while we have a third party providing the horsepower.

So we have deployed this business model with a number of customers who are vertically integrated in North America.

But the overall business volume is, I would say is not significant but it's continued to grow this year from where it was last year when we introduced it.

And similarly, we have also deployed this business model for part of our operations in China.

I see, okay.

Thanks very much.

Waqar Syed, Goldman Sachs.

Paal, just following up on HiWAY.

Are there any particular basins in North America where HiWAY has had the best penetration and could you outline which ones are those?

Yes, I would say the basin where we have had the most success and where the penetration is the deepest is in the Eagle Ford.

So we have a significant number of wells in stages done there over the past couple of years.

And also I think a fair bit of data indicating the results that HiWAY can bring both in terms of a higher production and recovery and lower cost in terms of pumping less proppant.

But is it something to do with the geology of the basin or the structure of the formation, or is this technologies applicable in or effective in every basin?

Well in generally, we believe it's applicable in every basin.

I think what you find is that there are two main applications of HiWAY.

One is to increase conductivity so you thereby increase production and recovery.

And the other one is that you reduce costs, because in general we pump about 40% less proppant per job which is a cost saving.

So what we have found is that in Eagle Ford, we have both a significant production and recovery increase together with the cost savings, while the production increases we have not seen the same level of production increases in some of the other basins which is partly down to -- down to the geology as you reference is, right.

But in general we have not seen -- we have always seen I would say flat to higher production and we generally always see lower costs.

So it is just a matter of the technology uptake taking a bit of time when you look at a large market like North America land.

Sure.

And then just on -- in terms of your efficiency improvements, how they are having an impact on the margins, could you quantify for us what the margin impact has been in North America because of these efforts?

And if you'd didn't have those efforts where the margins would have been?

Well I can't really give you a number on that, right?

The efficiency improvements going all the way back 3 years to when we started restructuring the land business is obviously a key part of the performance that we continue to post quarter after quarter.

But at the same time we have a very strong offshore business, both in the Gulf of Mexico and east in Canada and we also have a very strong business in Alaska.

So, it's a combination of everything.

Where we needed to improve the most going back 3 years was in North America land and there has been a significant improvement there.

But at the same time we have continued to progress on our offshore and high-end business as well.

Okay.

Great.

Thank you very much.

Jim Wicklund, Credit Suisse.

Paal, geographically and product lines, I mean your incrementals are through the roof and that's fabulous.

Where geographically and what product lines typically generate the highest incrementals?

Well I think if you're talking about international market, I think we had great results basically in all regions.

I would say take away Latin America at this stage in terms of incrementals, right.

We managed to keep margins flat in Latin America in a very challenging business environment and mainly driven by the headwinds or challenges in Brazil and Mexico while the business in the other countries in Latin America progressed very well.

So, the incremental margins were driven by ECA and the Middle East and the Far East.

In terms of product lines, obviously characterization continues to do well.

I mean their incremental margins were not that high this quarter, but they have been progressing very well year-over-year and so far this year.

But both drilling and production continues to do very well.

So I can't really single out one specific product line internationally, other than that all of them are doing very well and together they come together extremely well.

Okay.

My follow-up if I could is Brazil has been a difficult year for everybody this year.

And it may be next year.

What percentage of your Latin American revenues generally come from Brazil these days with the contract wins you've had?

We haven't disclosed that, so --

Is it your biggest market in Latin America?

It's not our biggest market in Latin America.

Okay.

Thank you very much.

Holm Turner, RS Platou Markets.

Just a question on the operational delays you guys mentioned in this quarter.

It sounds like a bunch of that came in offshore Africa.

I was just curious if you could give us a bit more color on that.

Was it delays and new builds coming out of yards or was it more on the operator side?

And related to that do you think you can get most of that work back in 4Q and if so maybe see a bit stronger sequential progression that you would typically expect seasonally?

Well I think the Q3 operational delays was really the sum of all the things you mentioned.

Some of the rigs delayed coming from the yard, then you've got to commission them and get them started up and then it is having everything ready from the customer side to start operations.

Right?

So no one thing impacting it, but there was a significant planned influx of rigs and there were delays with several aspects of it, which is not uncommon for these type of markets.

In terms of Q4, there will be some improvement in Q4, but I think it is going to go into Q1, Q2 before everything is ironed out.

Okay.

All right.

And just to change gears a little bit.

I'm just wondering if you could comment on the growth in the Arctic market?

There's a lot of things going on there.

You have Exxon and Rosneft kicking off a drilling campaign in the Kara Sea next year, there's increasing activity in the Norwegian side of the Barents and talk of doing some work on the Russian side and of course there's Cairn and Greenland and also some Alaska work.

So just curious if you can talk about the opportunity in the Arctic in terms of service intensity and your expectation for how quickly that market can become significant for Schlumberger?

That's a good question.

I think we see Arctic as an interesting market and a good opportunity going forward.

We are I think very well-positioned to take part in that, in particularly in Russia.

We are already involved in one Arctic project there, Prirazlomnaya.

At the same time we are also actively pursuing the other projects that are coming up both in, like you say, Greenland as well as other places in Russia and North America and Norway.

So, in terms of overall impact in activity I think it is going to take a bit of time before it comes -- becomes really material, but there is a significant potential there that we are going to actively position ourselves to take part in.

Okay thanks.

And last thing is your two largest competitors talking about their 10% E&P spending growth next year in North America.

Would you echo that sentiment and if so just curious if your position in the Gulf of Mexico would give you the expectation that you might grow a bit faster than whatever the E&P spending comes in in North America next year?

Like I said earlier in my prepared remarks I think it's too early to comment on specific growth numbers for any part of the world next year given the fact that our customers are still in their planning cycle.

I am optimistic though that we will see growth in North America in terms of spend next year and potentially higher than we saw this year.

But beyond that I'm not ready to give you a number at this stage.

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

Thank you, and ladies and gentlemen this conference is available for replay.

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