斯倫貝謝公司 (SLB) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Schlumberger earnings conference call.

(Operator Instructions)

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

With that, I will turn the conference over to the Vice President of Investor Relations, Mr. Malcolm Theobald.

Please go ahead.

Thank you, John.

Good morning, and welcome to the Schlumberger Limited fourth-quarter and full-year 2013 results conference call.

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 Paul.

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 welcome your questions after the prepared statements.

Now I will turn the call over to Simon.

Thank you, Malcolm.

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

Fourth-quarter earnings per share from continuing operations, excluding charges and credits, was $1.35.

This represents an increase of $0.06 sequentially and is $0.31 higher when compared to the same quarter last year.

During the quarter, we recorded a $0.09 charge relating to a provision of accounts receivable in connection with a client in Brazil who filed for bankruptcy in the quarter.

Fourth quarter revenue of $11.9 billion increased 2.6% sequentially.

Of this, $298 million sequential increase, the vast majority came from the year-end search in software, product, and monthly client sales that we typically experience in Q4.

Oil field services pretax income of $2.6 billion increased 4.3% sequentially.

Pretax operating margin increased by 37 basis points to 21.9%, largely due to the positive effects of the previously-mentioned seasonal year-end sales.

Sequential revenue and pretax margin highlights by product group were as follows: Fourth quarter Reservoir Characterization Group revenue of $3.2 billion, increased 1%, while margin improved 132 basis points to 31.7%.

These increases were driven by traditionally strong end-of-year software and multi-client sales, offset in part by the seasonal decline in WesternGeco marine activity and the conclusion of several higher-margin exploration projects.

Drilling Group fourth-quarter revenue of $4.5 billion increased 1.9%, while margin declined by 69 basis points, to 19.6%.

The revenue increase was largely attributable to overall M-I SWACO and IPM activity in the Middle East and Asia area, while the margin decline was finally due to an over less favorable revenue mix.

Fourth quarter Production Group revenue of $4.2 billion increased 4.8% as a result of stronger completion and artificial lift product sales.

pretax margin declined by 27 basis points to 17.3%, as the impact of strong results from our Schlumberger production management projects and end-of-year product sales was more than offset by continued pricing pressure in US land.

Now, turning to Schlumberger as a whole, the effective tax rate, excluding charges and credits was 22.3% in the fourth quarter, compared to 22.7% in the previous quarter.

Net debt at the end of the quarter was $4.4 billion, representing an improvement of $1.2 billion as compared to end of Q3.

Most notably, we spent almost $1.1 billion on our stock buyback program during the quarter.

We have repurchased 11.9 million shares at an average price of $89.67 during the quarter.

In addition, during the quarter, we took advantage of the low interest rate environment by issuing $1.5 billion of 3.65% 10-year notes, and EUR500 million, 1.5%, 5-year notes.

Other significant activity events during the quarter included $1.2 billion of CapEx, and an improvement in working capital of approximately $1.2 billion.

We were quite pleased with our working capital performance during the quarter.

From a cash-approved perspective, we generated approximately $10 billion of cash accrual from operation during all of 2013.

This strong cash generation has allowed us to continue to invest in growth opportunities, which we did by completing various acquisitions and investments in other companies.

Most significantly our investment in OneSubsea, and investing $4.3 billion in CapEx and market clients, while at the same time returning $2.2 billion of cash to our shareholders in the form of dividends and stock repurchases during the year.

During the full-year 2013, we repurchased 31.3 million shares at an average price of $82.82, for a quarter total of $2.6 billion, while paying out $1.6 billion in dividends.

As it relates to 2014, CapEx is expected to be approximately $3.8 billion, in 2014, as compared to the $3.9 billion we spent in 2013.

We expect the ETR for the full year 2014 to be in the low to mid-20%s.

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

Yesterday, our Board of Directors approved a 28% increase in our annual dividend, to $1.60 per share.

This follows last year's 13.6% increase, and increases of 10% in 2012 and 19% in 2011.

This new level of dividend reflects our confidence in our ability to deliver this growth and at the same time generate superior cash flows and return excess cash to our shareholders.

And now, I turn the conference over to Paal.

Thank you, Simon.

Our fourth-quarter results, which ended a very successful year for Schlumberger, were driven by continued growth in the underlying activity, as well as strong year-end product sales, partly offset by the temporary shutdown of our operations in south Iraq in November and the expected seasonal slow downs in our businesses in North America, Russia and China.

Fourth-quarter multi-client seismic sales were slow in the first two months of the quarter, but we saw very strong sales in December driven by high demand for the latest surveys in our library, which are based on our unique acquisition and processing technology.

Sequentially, overall revenue was up 3% with top line growth posted in all four operating areas, while pretax operating margin expanded by 37 basis points to reach 21.9%.

Compared to the same quarter last year, pretax operating income was up 23%.

New technology sales remain strong in all three product groups, and this together with further the market share gains, as well as focused execution and cost controls, contributed positively to the quarter's results.

For the third quarter in a row, we also posted commendable sequential incremental margins, this time at 36%.

While we generated $2.5 billion of free cash flow, boosted by our ongoing efforts to improve asset utilization and reduced consumption of working capital.

Our international business progressed well in the fourth quarter, with revenues topping an all time high exceeding $8 billion and representing a year over year growth of 8%.

At the same time, year over year margins expanded by 349 basis points, to reach 23.5%, which is only around 350 basis points below the previous high peak recorded in Q3 of 2008.

Sequentially, international revenue was up 3%, and margins expanded by 23 basis points.

In terms of pricing, the international market continues to be highly competitive, and we are not seeing any signs of a general pricing inflection.

Still, the current market condition suits us as well, as we are able to drive our effective pricing upwards through strong new technology sales by commanding a premium on our execution capabilities, as well as from the growing demand for integrated services.

These factors are also reflected in our revenue per bid pricing indicator, which in 2013 improved by 5% over the previous year.

In Latin America, revenue was up 3% sequentially, while margins expanded by 69 basis points to reach 21.2%.

Compared to the same quarter last year, revenue was down 3%, while pretax operating income was up 13%, driven by excellent margin improvement in the region, in spite of the market headwinds faced in several key countries.

The sequential results were driven by strong performances in Ecuador, where the Shushufindi SPM project continues to exceed expectations; by Argentina, where we are very active with the shale-related work in the Vaca Muerta; and by Mexico, where we saw strong activity on land.

In Mexico, the energy reform was signed in December and we expect the first license round to be held late in 2014, with the earliest impact on our activity in 2015.

The early indication from the Pemex mega tenders, which were submitted and opened earlier this week, are very positive for us, suggesting a solid gain in market share.

In Venezuela, activity was flattish in the fourth quarter, after solid growth in Q3.

Our working relationship with PDVSA is excellent and we continue to receive payments in line with the agreement we signed in May last year.

So we stand to further ramp up activity in the country in 2014.

In Brazil, the business environment remains difficult, with lower activity in the fourth quarter for Petrobras, as well as the local independents and the national oil companies.

We have adjusted our cost base in the country and are prepared to manage what appears to be a challenging 2014, before activity growth likely resumes in 2015.

In the Middle East and Asia, revenue grew 5% sequentially, while margins were flat at 26.1%.

On a year over year basis, revenues increased 18%, while margins were up by 404 basis points.

In the Middle East, sequential growth was driven by Saudi Arabia, where we continue to move in resources to keep pace with the additional work we are taking on.

And by the United Arab Emirates where activity is at a record high, following our recent contract win.

In Iraq, our activity is back to normal following the shutdown in November, leading to the security incident in our Rumaila base.

We received excellent support from the local and central authorities during and after the incident, and in 2014, we see strong growth in North Iraq while activity in the South will likely remain flattish in the first half of the year.

Asia also posted strong sequential results driven by seismic activity in Malaysia, and land and offshore activity in Australia.

In China, we signed a strategic cooperation agreement with CNPC during the fourth quarter and we continue to ramp up activity on our typecast SPM project with Yangchang Petroleum in the Ordos basin.

In Europe, we have an effort to our revenue was up to 1% sequentially while our margins were sequentially flat.

On a year over year basis, revenue grew 9%, and margins were off 298 basis points.

Russia and Central Asia was again a major contributor to the results, posting a strong quarter both in terms of revenues and operating margins, in spite of the seasonal headwinds on land.

Going into 2014, we are continuing to invest actively in the region, and we see strong growth potential going forward.

In the fourth quarter, we also saw solid growth in Arbora, driven by both deepwater exploration and development growth.

While activity in the rest of sub-Sahara Africa was down sequentially due to rate schedules and operational delay, as well as lower exploration activity in some of the frontier countries.

In the northeast, we saw the expected seasonal impact on activity, driven by winter weather, and the end of the seismic season.

While in North Africa, business continues to be challenging due to recent operational delays, as well as ongoing security challenges.

Looking at the 2014 outlook for the Europe and Africa region, we still expect growth to be driven by sub-Saharan Africa and to a certain extent the North Sea.

While we expect ongoing challenges in North Africa and Continental Europe to continue in the coming year.

In North America, we posted a solid quarter with revenue up 1% sequentially, while margins were down 57 basis points to 19.6%, driven by the expected seasonal impact.

On a year over year basis, revenues grew 7%, and margins were up 46 basis points.

In the Gulf of Mexico, deepwater activity remained high in the fourth quarter, and the offshore recon is expected to show strong growth also in 2014.

In the land market activity was solid, with the fourth quarter US rubicon remaining flat sequentially, while the seasonal activity recovery in Canada, stayed in line with 2012 levels.

The main challenge in the North America land market is still pricing.

And we saw further downward pricing pressure in most product lines in the fourth quarter, partly amplified by the renegotiation and rollover of several key contracts.

In hydraulic fracturing, we continue to gain share in the fourth quarter, driven by new technology sales and operational efficiencies.

We took the opportunity to land add another frac fleet to our operation in addition to the four fleets we added in Q3.

During the quarter, we progressed further on the fee testing of our new fracturing diversion technology and we have now tested the technology in both new and existing wells with very promising production results.

The results from these fee tests, together with a series of other fee experiments we have conducted over the past 12 months have led us to two clear conclusions:

First, that high-precision fracturing where we ensure that each perforation cluster is properly addressed, holds clear upside production potential for the industry as a meaningful percentage of the perforation clusters today are not defective in the project.

And second, that fracturing fluids which enable the control of solid settling within the fracture can allow more of the fracture height to be effectively propped and thereby further enhance the production from the well.

To address these opportunities, we will introduce in the coming quarters the broadband family of fracturing services, which would include new engineered cooling systems and corresponding hardware completion solutions.

We are very excited by the production enhancement potential of these technologies and we will share more information as we complete the remaining fee tests and commercialization milestones.

Another market we are focusing on, in North America land, due to a significant growth potential, is the artificial lift market.

In line with this, we have in the past quarters acquired a number of rubicon companies, covering key liquid-producing shale basins in the US and Canada.

We will now combine the offering from these strong basin-specific companies with our existing artificial lift business in North America land, to provide a life-of-well lift solution to our customers, using our production engineering expertise and extensive monitoring and data integration capabilities.

Let me now take a few minutes to summarize our full-year 2013 results, and achievements before we turn to the 2014 outlook.

In terms of financial performance, 2013 was a very strong year for us where we continued to out-perform our competitors in terms of top-line growth, margin expansion, earnings per share growth, and free cash flow generation.

The results were driven by strong new technology sales, and a relentless focus on flawless execution and constant resource management throughout our organization.

Building on this, we also laid out a multi-year plan detailing how we will further control the quality and efficiency of our global operations, and hence better leverage the significant advantage of our sites.

And finally, we made a number of strategic moves to strengthen our business portfolio, including the OneSubsea gain with Cameron, the rubicon acquisitions in North America land and investments in new SPM projects covering both North America shale liquids and China pipe gas.

While these achievements are now clearly in the past, they serve as a demonstration of our ability to formulate and execute plans that drive our Company forward, and should also instill confidence in our ability to continue the current trend of financial out-performance.

Let's now turn to the outlook for 2014 where we expect the global economy to continue to improve, building on the positive data points seen in the past quarters, and translating into both a higher GDP growth rate and higher growth in global oil demand compared to 2013.

Correspondingly we also expect the global oil market to be well supplied in the coming year, driven by completed growth in North American liquids production, leaving supply and demand relatively well balanced with spare capacity, excluding Libya, in the range of 4 million barrels per day, and the continued support for brand crude prices around $100 per barrel.

The international gas market is also expected to remain stable supported by strong demand in Asia, and improving demand in Europe.

In the US, we are assuming production levels and strong competition with coal, indicate that a meaningful recovery in dry gas drilling activity continues to be pushed out in time, although a recent storage withdrawal levels have been higher than previous years, driven by the cold weather.

In terms of total E&P spend, we expect investment levels to grow around 6% in 2014, with North American growth somewhat below this level and international growth somewhat above.

We further see well-related E&P spend growing at the faster rate than the total E&P spend in the coming year, indicating a shift away from heavy infrastructure projects which we see as less positive for us.

Translating this macro picture in activity, in North America, we expect strong growth in the Gulf of Mexico driven by an influx of additional deepwater rigs.

And on land in North America, we expect solid growth in activity but further pricing pressure will likely have some impact on how much of this activity growth is translated into revenue and margin progression.

In the international markets, we expect growth in Latin America to be led by Argentina, Ecuador and Venezuela.

In ECA, the main growth markets will again be sub-Saharan Africa and Russia, while in MEA, growth will be spear-headed by Saudi Arabia, Iraq, the United Arab Emirates and China.

Overall we remain positive and optimistic with respect to the coming year as we again aim to post solid double-digit growth in earnings per share, shared firstly by further market share gains on the back of our new technology, and secondly by our ability to generate superior incremental margins through the cost and resource efficiencies of our execution.

In terms of how 2014 will unfold, we expect the second and third quarters to again show the strongest sequential growth, while the first quarter similar to previous years, will see a decline in earnings and margins due to the normal seasonal slowdown and lower product and multi-product sales.

We are all proud of the progress we have made over the past several months and our entire organization is ready and motivated to further improve on our achievements in the coming years.

That concludes my remarks but before we open up for questions I would like to make a brief announcement.

After more than six years in charge of Investor Relations, Malcolm Theobald will on February 1 take on a new role in the Company as President of our [visvid] business.

I would like to take the opportunity to thank Malcolm for his support and contributions as Head of Investor Relations, and wish him the best of luck in his new assignment.

Malcolm well be replaced by Simon Farrant as head of Investor Relations.

Simon was previously in charge of our North Sea geomarket.

With that, we will open it up for questions.

Thank you, Paal.

John, we will now take questions.

(Operator Instructions)

First go to the line of Ole Slorer with Morgan Stanley.

Please go ahead.

Thank you very much.

And congrats with a very well-executed quarter.

Thank you, Ole.

You have made a big push and emphasis on returns on capital and capital efficiency of your previous two quarterly calls in particular.

We can see the results in a pretty strong cash flow as a percentage both of sales and EBITDA.

But could you talk a little bit to how much more efficiency, as it is squeezed out of the system now, because you seem to have come a quite a long way already.

Well, as you see from our numbers, as you point out, we have stepped up our focus on cash generation this year.

And we have put a lot more emphasis in that, throughout the entire management team and it is starting to pay off.

Now in the first three quarters of 2013, we generated around $3 billion of free cash flow, and in Q4 alone, we generated $2.5 billion on top of that.

Which is a new quarterly record, right?

So the key drivers are simple.

It is management focus on working capital and asset utilization.

And we are going to continue to push forward with that into 2014.

We indicated that on CapEx for next year is going to be around $3.8 billion, and with continued growth in the top line and the bottom line.

I'm optimistic that we can further step up the generation of free cash flow.

Now in terms of how we manage our cash flow, Simon, do you want to mention a few things on that?

So Ole, basically, if you looked at our cash flow generation, the last couple of years we suffered a bit from the increase in working capital.

And the increase in working capital, as we mentioned before, was our way of setting up all the Smith acquisitions that we made in order to distribute the product further worldwide.

The current performance that we've seen is back to normal and I think we will continue to be performing very well, as far as the working capital efficiency.

And as Paal mentioned, we finally got to a point where our CapEx, as a percentage of revenue, at the manageable level.

I think the cash flow generation will continue to be strong as you have seen it in 2013.

And what is it in your business that gives you confidence that you can take CapEx down while your revenue is increasing?

I mean that is something that no other company has historically been able to do.

By scrubbing down so many other elements that we have, it helps with the internal transformation.

There is a lot of focus and a lot of things that we are doing to drive asset efficiency or asset utilization that evolves around better sharing between locations, quicker turn-around in maintenance and a better consultation network set up as well.

So yes, we are going to continue to grow in 2014, and we are taking CapEx slightly down.

And I think I'm quite comfortable with the investment levels we are making.

In the event growth will be higher than what we anticipate, we have the option of further increasing CapEx.

But as of now, the $3.8 billion number that I'm indicating, I'm quite comfortable with.

Just a little more clarification, Paal.

You didn't sound particularly upbeat about general pricing trends, either in North America or international for commodity and the type services.

Yet you highlight that in your Ks.

If I heard you correctly, you had a 5% positive pricing indicator, because of technology and IPM.

Could you elaborate a little bit on exactly what you mean by that?

Well, the revenue per rig indicator is basically the source of revenue we generate per the unit rig activity.

But getting more revenue per rig, obviously that helps.

But also, by substituting existing basic technology with new technology, where we command a pricing premium, that basically helps drive that indicator up.

So on average in 2013, that revenue per rig pricing indicator grew by 5% over 2012.

Which is obviously helps both on the top line and on the bottom line.

You also highlighted the higher price contracts rolling off.

How do you see 2014, a headwind there and a tailwind on your technology and ability to push more value through your product offering?

Well, if you look at 2013, it is one of the highest years we've had in new technology sales.

More of the new technologies that were introduced over the past years, which we track very closely.

And also the technologies that were introduced in the past five years, which we also track very closely.

So we have a number of new technologies that came on in 2013.

And the singular number is not even higher coming up in 2014.

So we will continue to leverage what we have introduced in the past year.

And also old ones actually, a significant number of new technologies coming up in 2014.

But I'm quite positive and optimistic that through the new technology introductions, we can continue to drive the effective pricing up.

Now big contracts, like for instance we saw in Mexico recently, is going to continue to be bid quite aggressively on, and competitively on the dated pricing.

But by having a number of new technologies that we are introducing, we should be able to continue to improve that revenue per rig pricing in our favor

Sounds good, Paal.

I will hand it back.

Thank you very much.

Thank you, Ole.

Our next question is from Michael LaMotte with Guggenheim.

Please go ahead.

Thank you.

Good morning.

Malcolm, congratulations on the new role.

We will miss you, but I'm sure this is a good move for you.

Thanks, Michael, appreciate it.

Paal, can I follow up on the comment that you made about the new technology on the fracturing side?

You commented that the lesson of two things, one, just fracture stage effectiveness and two, in propagation.

But the technology platform that is looking to be rolled out this year, looks to be more than just fluids, involving hardware, et cetera.

Can you expand upon that?

I think we'll wait with further commentary on the Broadband family until we have completed the pretesting and the commercialization milestones.

The two things I mentioned around high precision fracturing, where we properly address each perforation cluster, as well as having fluids which better controls the solid doubling, there will be technology in this family that will address those.

There might be some other things as well, but we will talk about that when we have firmed up the P testing and we are ready to roll it out.

Okay, but it's fair to assume at this point that it is really is an end to end solution as opposed to a single point solution, the way HiWAY was introduced, is that a fair characterization?

That is fair to assume, yes.

Okay, great.

And Simon, a quick one for you.

The working capital, frankly I have never seen a $45 billion revenue company use almost no working capital over the course of 12 months.

First of all, congratulations on that.

And second of all is, that something we can expect to continue in 2014?

And what would have been the major levers that have brought that about this year?

So as I mentioned, thanks, Michael, for the comment, first of all.

But as I mentioned the last couple of years, we were getting up the acquisition of Smith in terms of strengthening the level of inventories, et cetera.

So it consumed more than the normal in terms of the working capital.

The working capital performances here obviously resulted also from collecting and improving our receivable performance.

Going forward, it should be back to normal.

It should be less than the previous two years.

But I cannot promise you it will be the performance of this year over again, or that we will maintain it, but growth always consumes a bit of working capital.

So you can assume it will be back to normal, not be levered with the last couple of years' consumption.

And it will continue to be efficient, because the entire organization is basically focused on sharply to improve the working capital performance.

Okay.

So when you say back to normal, it is still 1% of revenue plus or minus?

That would be, yes, more or less the case.

Okay.

Great.

Thanks.

I will turn it back.

Thank you.

Next, we will go to David Anderson with JPMorgan.

Please go ahead.

Hey, Malcolm, same here.

Congratulations on your new role.

I can understand why you are so chipper this morning.

You don't have to deal with us any more.

Best of luck.

Thanks, David.

Paal, were you talking about your expectation for, I think you said 6% overall E&P spend, guidance of earnings up double-digits.

Can you talk a bit about how much of that earnings improvement in 2014 is going to be related to the internal transformation on the efficiency and the asset trends?

Well, if you look at the double-digit growth in earnings per share, it is going to be a combination of the two, so we aim to grow our top line faster than the growth in the E&P spend.

This is going to be driven by new technologies which we just talked about, but also, the quality of our service to higher integration capability.

But we also aim to continue to expand margins even in a challenging pricing environment.

And that's going to be driven by our execution efficiency and our ongoing transformation program.

How much is going to come from each, we obviously have a very clear view on.

I am not going to go into the details of it, but both will be very good contributors.

In your outlook, I was just curious, the market's been focused on some of the IOCs having some budget cuts out there, I think Total and Shell.

Some of the other IOCs, their cuts have been feeding into market concerns about offshore and development spending.

Can you help us put into perspective?

I heard you say about the infrastructure, but can you talk how that is looking like there in terms of their pure upstream spending.

And collectively, would you think that the offshore spending would be up at least mid single-digits?

It just seems like we're hearing different stories in different parts of the market.

If you look at the comment I made on total E&P spending, this is expected to be around 6% and that is really based on the third-party surveys, the average of that, they're all coming in around that level.

Within the 6%, as I said, you see international growth somewhat north of the 6% and NAM growth somewhat below.

But while the industry focuses on the total E&P spend, what is really driving our business is the weather-related E&P spend.

So we actually have our own spend models, which is entirely focused on weather-related E&P spend.

And it is a global model and it is based on well come, well tied, well cost, by customer, by country, where we do a complete rollout as part of the planning process.

And this model suggests that the well-related spend will grow faster than 6% and that is really what I'm basing my comments on.

Within that outlook, offshore and the quarter continues to look solid.

And in this model the valuation and send growth from the super megas to the IOCs to the independents and NOCs is all parceled in.

So in these comments those variations are now captured.

Great.

Thank you, Paal.

Thanks.

Our next question is from Brad Handler with Jefferies.

Please go ahead.

Thanks.

Good morning all.

Good morning.

If I could follow-up on that but perhaps you can give us some perspective.

Because part of what I think has raised concern among the investment community is the lack of contracts recently for deepwater rigs, for example, casting somewhat of a shadow on what had been a fairly obvious trajectory for deepwater activity growth.

Do you have any thoughts on the nature of that?

And then presumably there is a release of a lot of the contracts that you would envision happening soon.

First of all, we saw a strong hold from deepwater activity in 2013, and we expect to see also solid growth in 2014.

But as you point out, the drilling activity and the rig schedule for deepwater could be impacted by some of these ongoing commercial discussions.

There is a number of re-contracts coming up for re-negotiation, as you indicate.

And also some of the new arrivals do not yet have a contract.

But the re-contractors that we talked to seem confident that the new rigs will be contracted basically because of the higher operating efficiency that they have.

But that the contract discussions could have an impact on the day rates for the older generation rigs out.

Now, we have factored these elements, again, into our outlook.

So we are not overly worried about what that would mean from an operational perspective for us.

Understand.

Okay.

Maybe it is a related follow-up.

Maybe it isn't.

But the conversation has shifted to the overall level of spending from what had been a mixed conversation a little bit ago.

But I wouldn't mind coming back to that, the mix of exploration versus development.

In your modeling, as you see 2014 playing out, so a two-part question.

First is there a discernible mix that you look for?

And then in a sense the second part of the question is, does it matter?

As we look at some of your, what I think are some of your, higher margin businesses on the exploration side, if there is to be a move away from that, how much, and seismic was mentioned by your colleague earlier, how much does any of that matter, that mix shift, if you see it coming for 2014?

Well basically, we have a very broad and well-balanced portfolio.

So these shifts, they might have small impact, but overall, I'm not overly worried about that going into 2014.

With respect to exploration, we still see growth in exploration in 2014.

It is going to be lower than the roughly 10% growth that we saw in 2013 but still decent growth.

In terms of the nature of the growth in exploration, we expect this to be more well-related again.

So we are pretty clear that the flattening of the seismic spend is happening.

There's been a lot of data acquired in recent years.

So the growth in exploration is going to be more well-related than exploration-related.

And while that means that is a more challenging environment for WesternGeco, it still bodes well for our wireline, wirecasting and drilling pipeline.

So for us it goes up in the balance.

I understand.

Okay, thanks.

I will turn it back.

Thank you.

And next we will go to James west with Barclays.

Please go ahead.

Good morning, Paal.

Good morning.

And Malcolm, congratulations from me as well.

Thanks, James.

So Paal, as I think we have beat up the E&P spend numbers globally, and it is clear that you guys intend to grow faster than that 6%, maybe if I turn to one of the markets that has been more troubling for the industry, which is North America.

We're looking at least at some acceleration or some increase in spend in North America.

Pricing obviously still weakish.

But do you think with this pickup in activity that is envisioned, you will be at a point where these product lines that have been out of balance can start to come back into balance?

And maybe pricing is no longer that much of a concern?

Well, we would like for that to happen.

(laughter) But if you refer to the fracking, or hydraulic fracturing, there is still today significant industry over-capacity of horsepower.

So at this stage we do not expect the market to reject delivery in 2014.

Now in terms of activity for North America, we expect solid growth in activity on land in 2014.

A lot of this is still going to be driven by further improvements in drilling and fracking efficiency.

As I mentioned in my prepared remarks, we do not see any significant comeback in dry gas activity either.

So if you look at the trends we saw in 2013, I think they are continuing into 2014.

In North America lands, it is going to be I think more of the same.

Okay, fair enough.

And then maybe perhaps an unrelated follow-up, but talking about your technology pipeline, it sounds like there is an acceleration in new technology introductions.

Are these more focused on the US land market as you highlighted some of the stuff you're testing right now?

Or is this global and you just chose to highlight the North American technologies?

It is more the latter, James.

I chose to focus in on North America, because this is where I think technology will have a significant impact in terms of how the market is going to be shaped going forward.

We have talked about that on previous calls.

The other thing, we have a broad, I would say, portfolio of new technologies coming out, also addressing the international markets, with the range of the businesses we operate in.

But I chose to highlight North America land and the fracking on the Gulf.

That's what I figured.

Thanks, Paal.

Thank you.

Our next question is from Bill Sanchez with Howard Weil.

Please go ahead.

Thanks.

Good morning.

Paal, appreciate the comments, especially on the near-term outlook for 1Q and the minus on the seasonality.

I was curious though, if we think about adding back the negative impact you saw in fourth quarter for Iraq, and we talk about first quarter Middle East Asia margins, let's say, should we assume that add-back of revenue and the attendant profitability at least offsets whatever year-end product sales that you lose traditionally in first quarter?

So perhaps revenue flattish, margins flattish as opposed to down in Middle East Asia for 1Q?

With respect to Q1, I'm not going to give you the specific number or go much more detail than what I did.

I would just say that the change, the change both in revenues and margins both, I think is going to be more or less in line with what you've seen as an average over the past couple of years.

So there are a lot of moving parts in our business.

And the way we see Q1 at this stage is that it is going to be more or less the normal seasonal drop that we see.

Okay.

My follow-up, Simon, will be for you.

With the dividend raise now, by looking at consensus numbers for 2014, the dividend is currently about 28% of net income.

Is there a target range that you guys have, as a management team, or as a Board, that we should be thinking about longer term here, in terms of where that dividend potentially can go as a percentage of net income?

If you look back on several years now, we look at our dividend every year in January.

And we decide based on the level of activity, the cash flow, where are we going to be as far as the dividend is concerned.

The 28%, it is on the higher side and reflects the new level of cash flows that we are at and we will continue to be.

But will there is no target number for the dividend.

We look at it every year and we will reflect basically on the condition of the business and the growth in the cash flow.

But there is no target number.

Okay.

And Simon, should we view the assumption of debt during the quarter specifically just to fund the share repurchase program?

And is that something that we should expect to continue in what is still a low interest rate environment?

Frankly, we are going to need to borrow to fund the repurchase of -- We did the borrowing to take advantage of the lower interest rate, which as you know, climbed a bit during the quarter.

So we did it at the right time.

And we have some maturing debt that is coming in the first half of 2014, which we will use as excess cash to bring it down.

Okay.

I appreciate the time.

I will turn it back.

Sure.

Thank you.

Our next question is from Bill Herbert with Simmons.

Please go ahead.

Good morning.

With regard to 2014, I'm not sure if you made mention of this or not yet.

But with regard to your international margins in 2013, incrementals were 40% to 45%, in that range, from last year.

Should we expect much the same in 2014, with regard to international incremental margins?

Well, we are going to try.

I can't promise you.

But we have a lot of drivers that we are working on which pushes us to try to repeat that.

But now it is going to come down to a number of things.

But the new technology introduction and a further improvement in efficiency and quality are going to be key drivers.

So I can't promise you but we are certainly going to try.

Okay.

And secondly, back to the first quarter relative to the fourth quarter, if I look at that, what you guys have done over the past five, six years, on average earnings per share, is down a low double-digit percentage, quarter on quarter.

Is that what we should be expecting or modeling for the first quarter?

What number did you say?

A low double digit percentage, quarter on quarter.

Yes, I would say 10% is a good average of the past three, four years, yes.

So about a $1.20, $1.21.

I know you are not endorsing a specific number, but that is not necessarily an implausible place to start for Q1?

It is not implausible, but I will stick to the number that I gave you more, which is look at the previous years, and do an average of that.

Okay.

Thank you, sir.

Next, we will go to Angie Sedita with UBS.

Please go ahead.

Good morning, guys.

Good morning.

Paal, could you give us little further color on the North American price weakness?

Obviously we had seasonality in Q4, and what are you seeing in Q1?

Is it too early to tell?

Or do you think we will see continued price weakness into 2014?

Well, speaking for us, we will have a further impact on pricing in Q1, that is mainly due to the renegotiation and rollover of the term contract that we have.

So we did a few of them during Q4, with some impact in Q4.

We will get the full impact of those in Q1.

And there will be other contracts as well that will probably impact Q1 to a certain extent.

So that to date is for the kind of pricing comments that I already make.

And then on the over-capacity, in reference to James's question, certainly going to be over capacity in 2014, is your thoughts that we will certainly see that in 2015 as well, based on the market conditions as we see it today?

Well, I think I will focus my comments on 2014 for now.

Things can move fast in the North America land, but we are pretty confident that we will not reject delivery in 2014.

And then as an unrelated follow-up on Mexico, congratulations apparently, on the market share gains.

Some color there on when you expect to mobilize equipment or actually start activity in Mexico.

And then comments on Mexico longer term.

Obviously, expectations for the region are fairly high.

Is it still too early to tell how meaningful Mexico will be?

Or are you becoming more confident on Mexico?

As I said in my prepared remarks, the early indication from these mega tenders is that we will have a pretty solid market share gain.

Now, these contracts are not finalized yet.

They will be finalized during the first quarter.

We expect to mobilize the additional resources that we need to take on the additional work during Q2.

And that we will get into full operation on these contracts in the second half of the year.

So we still see H1 activity to be somewhat challenging, partly due to the Chicontepec slowdown.

But I think H2 will be better for us given market share gains.

Now with respect to the energy reform, obviously that is a net positive for the industry abroad in Mexico.

But the earliest impact on our activity will be 2015.

Great.

I will turn it over.

Thank you.

Thank you.

Our next question is from Jim Crandall with Cowen.

Please go ahead.

Good morning.

Paal, the Chinese companies, CNOOC, Sinopec, PetroChina seem to be estimating a lot lower growth in the E&P CapEx in 2014.

Do you expect that as well?

And can you characterize what you're seeing now in terms of awards and business coming out of the Chinese companies?

Well, we continue to see strong growth in activity for us in China on land.

And this is driven by both conventional price gas and to a certain extent, shale gas.

So probably it's just further market penetration for us.

There is a lot higher demand now for our new technology, for our fracking expertise and also project management capabilities.

Overall, I am still listing China as one of the fastest growing geomarkets for us in 2014, as it was in 2013.

So I have a pretty positive outlook on China for the coming year.

Okay.

And then my follow-up is if you could comment on Brazil.

You had some cautionary comments about Brazil.

I assume you are forecasting a lower level of business out of Brazil?

If that's true, what kind of drop do you see in business there for either drop in the market or drop in business for Schlumberger in 2014?

Well, I will just say, the overall rig activity we expect it to be flat in 2014 which means it's going to be another challenging year.

Exactly what is going happen to our business, I am not going to go into detail, but it will be a challenging year.

Coping with the flat activity, which is going to be lower that what we were expecting going back the past 18 months.

Okay.

Thank you.

And we will go to Jeff Tillery with Tudor, Pickering, Holt.

Please go ahead.

Hi, good morning.

In the release, you mentioned a couple of operational startup delays in the drilling group.

Can you give us some color on which geomarkets that may have been impacted?

As well as the timing of those startups, and when you see some effect on the projects?

I don't have the details of those, better not be faced, so I can't comment on that.

We will follow up with you, Jeff.

Okay.

And then how should we think about, from a top-down standpoint, measuring the progress Schlumberger makes on some of the costs and efficiency initiatives in 2014?

Do we watch that through the margin line?

Or through incrementals?

Or what is some external measuring sticks we can use to judge you by?

I think both the margin side is going to be a good measure of it.

And I think also it will have some impact on our ability to generate free cash flow.

So I think both of those are good yardsticks to look at.

All right.

Thank you, guys.

Thank you.

We will go to Scott Gruber with Bernstein.

Please go ahead.

Thanks.

Just one quick one for me.

Simon, can you provide some color on the CapEx trends in North America versus the rest of the world?

Will your spending be down equally or is it more weighted toward one region?

It is really in line with the rest of the world.

Last year it was lower, because obviously the pressure pumping is consuming less as we have consumed some of the excess equipment.

The Exact figure, I don't have it ready for me.

We can follow-up with you on this.

But thinking of the international side, there is no bigger drop on the international side versus domestic at this point?

If you look at 2013, we obviously scaled back significantly in North America, due to basically hardly any CapEx required for pressure pumping.

So I think what you see going into 2014 is a more even increase, North America versus international.

And obviously we included in North America, the Gulf of Mexico, where we see quite significant growth.

And these services are also quite capital intensive.

Got it.

Thanks.

And we will go to Judd Bailey with ISI group.

Please go ahead.

Thanks.

Good morning.

I wanted to follow up on Latin America.

That was a difficult market for Schlumberger and for the rest of the industry in 2013, although you were still able to grow margins.

With the Mexico work ramping up, with Argentina growing, how much of a pickup in growth can we see in 2014?

If you grew low single-digits last year, is that a market that can grow high single-digits with Mexico coming back and Argentina growing?

Or is that a stretch?

Well, we typically don't give comments on details, growth outlooks for regions.

But I would say that we are aiming to grow in Latin America, in 2014.

What level, I can't really comment on.

Okay.

That's fair.

And another question.

You were able to, as I mentioned, grow margins, pretty nicely, despite a difficult market, in Latin America last year.

You mentioned cutting costs in Brazil, getting your cost structure down.

Can you comment on how to think about margins in Latin America for 2014?

Do they stay soft until activity mix starts to pick back up?

Well, I think the first couple of quarters, given the challenging activity levels, both in Brazil and Mexico, throughout the mobilization that we are probably taking in Q2 in Mexico, there'll be challenges.

Now we are going to work very hard on keeping the margins where we are but there are some things we are dealing with.

Now on the flip side of that, we have very strong businesses in terms of growth perspective in Argentina, Ecuador and Venezuela.

So while we have headwinds that continue in New Mexico and Brazil, we obviously are going to do what we can to try to offset those with strong performances in those three countries.

Great.

Appreciate it.

Thank you.

Our next question is from Robin Shoemaker with Citi.

Please go ahead.

Thank you.

Paal, you mentioned that you have seen price weakness across most product lines in North America.

I wonder, among all of your product service lines, and drill bits, and fluid, and LWD and MWD, et cetera, where you are seeing relative pricing stability, in contrast to areas that are weakening?

In North America.

In North America, yes.

I thinks for most of the product lines, we are seeing continued pricing challenges.

I would say the only one that has stood out as a positive, and that's very much driven new technology introduction, is actually Brisbane.

But the other ones, given the market conditions are also facing pricing challenges.

Okay.

And you highlighted artificial lift as an area of focus in the shale plays.

Now, obviously in a lot of the shale plays that have lower productivity wells, ESP technology is not generally employed.

So what is Schlumberger's solutions working, what solutions are you working on for lower productivity wells?

What we have done over the past couple of quarters, which I had in my prepared remarks, is basically that we are both a number of smaller RevConned companies for these key liquid shale basins, both in the US and Canada.

So our plan is to combine the operating from these RevCon companies with our existing artificial lift business.

And then the objective is to provide a well lift solution to the customer base.

So we will do that by looking at what is the ideal mix of ELPs and broadband technologies to optimize production.

And we are going to obviously leverage our production and drilling expertise and our ability to monitor and integrate production base from these wells.

Okay, right.

Appreciate it.

Thank you.

Thank you.

Our next question is from Edward Muztafago with Societe Generale.

Please go ahead.

Hi, guys.

Thanks for sneaking me in here.

I did have one follow-up question on the incoming rigs and specifically as it relates to the Gulf of Mexico.

There has been a little bit of chatter recently that while there is a fairly large influx of rigs coming in, we may see a little bit of exodus out of the Gulf as well.

And so what I'm wondering is, on a net basis, does the exodus of lower specification, shower water rigs, have a material effect on Schlumberger?

Or do you think that because you're a little bit more deepwater focused, that that is less of a concern?

When I comment on the Gulf of Mexico, my comments are generally focused on deepwater rigs, obviously a large part of our overall operation there.

So while there might be some outflow rigs, we are staying quite optimistic in terms of the rig projections and the rig outlook for the Gulf of Mexico and deepwater in particular for 2014.

And that's what I'm basing the growth outlook on.

That's kind of what I thought was underlying that.

And as a follow-up to the revenue per rig discussions in North America, obviously, one of the things that we have seen is the well count go up fairly dramatically in relation to rigs.

I haven't run the numbers, I'm hoping maybe you all have.

If we were to actually look at revenue per well as probably a better metric, do we see the same trend between Schlumberger's revenue, as you would with rigs, but maybe to a lesser degree?

That is, the technology up-sales has driven some atypical improvement in that metric?

Well, so far for the revenue per run in North America on land, I don't have data available at this stage.

I would still say that that is probably not up as much as the 5% in terms of international revenue per rig that I was referring to.

So there is continued negative pricing pressure in North America.

I would say revenue per well is probably more challenged than that revenue per rig number I quoted.

Okay, thanks.

That's very helpful.

Thank you.

Okay, that's all the time we have for questions today.

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

I would like to also personally thank you for your support.

John will now provide the closing comments.

Thank you.

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