斯倫貝謝公司 (SLB) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Schlumberger earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Simon Farrant.

Please go ahead.

Thank you, Greg.

Good morning, and welcome to the Schlumberger Limited first quarter 2014 results conference call.

Today's call is being hosted from Abu Dhabi where the Schlumberger Limited Board meeting took place earlier today.

Joining us on the call 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.

Then Paal will discuss the operational and technical highlights.

However, before we begin with the opening remarks I'd like to remind 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 including 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, Simon.

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

First quarter earnings per share from continuing operations, excluding charges and credits, was $1.21.

This is $0.14 lower sequentially, but $0.24 higher when compared to the same quarter last year.

As a reminder, during the second quarter of last year, we wound down our operations in Iran, and classified the results of the business as a discontinued operation, and all the prior period amounts have been restated.

Oilfield Services first quarter revenue of $11.2 billion decreased 5.6% sequentially, while the pre-tax operating margins declined 18 basis points.

Approximately half of the $667 million sequential revenue decrease was a result of the absence of the year-end surge in the product software and multiclient sales that we experienced last quarter.

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

These factors also accounted for the sequential decline in margins.

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

Oilfield Services revenue increased 6.3% year-on-year, while pre-tax operating margins grew by 248 basis points.

Highlights by product group were as follows.

Reservoir characterization revenue of $2.9 billion increased 1.8% while margins grew by 129 basis points to 27.3%.

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

Drilling Group revenue of $4.3 billion increased 6.6% and margin improved by 249 basis points to 20.3%.

These improvements were due to increased technology integration and robust drilling and measurement and M-I SWACO activities in the Middle East and Asia.

Production Group of $4.1 billion increased 9.5% while margin grew by 313 basis points to 17.9%.

This growth was driven primarily by a very strong performance by well services in North America land despite the severe weather.

Now turning to Schlumberger as a whole, the effective tax rate excluding charges and credits was 22.6% in the first quarter, compared to 22.3% in the previous quarter.

We generated $1.6 billion of cash flow from operations.

Net debt increased $610 million during the quarter to $5.1 billion, reflecting the consumption of working capital that we typically experience during Q1, driven by the annual payments associated with employee compensation.

At 18% of last 12-month revenue, working capital was lower both in absolute terms as well as percentage terms against the same quarter of last year.

Additionally, we spent $899 million on our stock buyback program during Q1.

We repurchased almost 10 million shares at an average price of $90.31 during the quarter.

As you know, back in July of last year our Board approved a new $10 billion share repurchase program.

To date, we have repurchased $2.6 billion of shares under this program.

During the quarter, we spent $864 million on CapEx.

We generated $688 million of free cash flow, compared to $127 million in the same period last year.

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

Now, I will turn the conference call over to Paal.

Thank you, Simon.

In spite of severe winter weather impacting activity in our Russia, China, and North America land operations, our first quarter results were solid and fully in line with our expectations.

Sequentially, revenue dipped from the fourth quarter as a result of seasonal slowdown in activity and lower product and multiclient seismic sales, but grew year-over-year by just north of 6%, while pre-tax operating income increased by 21% to yield an incremental margin of 60%.

The driving force behind these results is further market share gains on the back of growing new technology sales and expanding integration-related activity, as well as our relentless focus on operational excellence and efficiency.

In terms of revenue progression by customer group, our year-over-year growth was driven by the NOCs and independents, which now represent more than 70% of our revenue, while overall activity for the IOCs was more or less flat.

In the first quarter, we generated close to $700 million of free cash flow, which is an improvement of almost $550 million compared to the same quarter last year.

Based on the growing strength of our free cash flow, we have decided to accelerate our current $10 billion stock buyback program announced in July of last year with the aim of completing the program in 2.5 years versus the original target of 5 years.

This does not change how we intend to use our cash where the priority continues to be a reinvestment in the business to drive growth, while we remain opportunistic when it comes to M&A, and also plan to renew dividend levels each year.

The acceleration of the buyback program is more a reflection of the confidence we have in our business performance and outlook, and a signal of our commitment to return excess cash to our shareholders.

Our international business continued to perform well in the first quarter.

The seasonal impact of weather and lower product sales resulted in a sequential drop in revenue of 8%.

However, pre-tax operating margins were resilient at 22.8%, down only 73 basis points from the fourth quarter.

Compared to the first quarter of last year, revenue was up 5% on the back of strong growth in the Middle East and Asia, while pre-tax operating margins expanded by 286 basis points driven by new technology sales and strong focus on costs and resource management.

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

However, our latest technology and our best-in-class service quality continue to carry a premium which together with the growth in integration-related activity is reflected in our revenue pricing indicator which is up, compared to the first quarter of last year.

The improvement in effective pricing together with our ongoing transformation programs focused on reliability and efficiency puts us in a very competitive position in the international markets, which we are using to drive both market share gains and to expand our margins.

In Latin America, our revenue was down 12% sequentially, while operating margins were essentially flat at 21.1%.

Compared to the same quarter last year, revenue was down 8%.

However, pre-tax operating income was flat due to proactive cost and resource management, and also supported by our broad and diverse contract base in the region.

The year-over-year reduction in revenue was predominantly driven by Brazil where both activity and pricing were significantly down compared to last year.

Still, introduction of new technology and swift actions to right-size the resource base in the country has enabled us to minimize the negative financial impact from the lower activity.

In Mexico, revenue was also down compared to the first quarter of last year, driven by lower budget spend from Pemex both on land and offshore.

The Pemex mega-tender process was concluded during the quarter, and we have signed contracts worth $1.9 billion, which represents nearly half of the awarded work scope covering all of the major projects in the South and North regions.

The resource mobilization for the additional project is ongoing and will be concluded during the second and third quarter as we gradually ramp up the activity.

In Argentina, year-over-year growth was strong, driven by rig-based activity in the Vaca Muerta shale where we also actively engage in with a number of customers on subsurface studies and on projects to improve drilling and completion efficiency.

In Venezuela, activity was also up year-over-year, and we continue to work closely with PdVSA to help them grow production and improve operational efficiency.

In Ecuador, we posted strong growth compared to the first quarter of last year, as we continue to progress on the Shushufindi SPM project where we again set the new production record during the quarter.

We also secured a right to negotiate for two additional blocks of fields in the country in the latest production incentive [bid bound] that took place in the first quarter, and these commercial discussions have already started.

In the Middle East and Asia, revenue decreased 3% sequentially while operating margins were essentially flat at 26.3%.

On a year-over-year basis, revenue increased 19%, and margins were up by 349 basis points.

In the Middle East, year-over-year growth was again driven by Saudi Arabia where we continue to move in resources to keep pace with the additional work we are taking on, and also by the United Arab Emirates where activity is at a record high.

In Southern Iraq, activity was down significantly compared to the same quarter last year, as contract awards are delayed due to ongoing discussions between the IOCs and the government.

Based on this as well as the upcoming elections, we do not expect any significant recovery in activity in Southern Iraq in the coming quarters, and we have therefore already taking actions to right-size our resource base.

Activity in Northern Iraq, on the other hand, was solid in the first quarter, and we expect strong growth there in 2014 leaving full-year revenue for the country flat for 2013 and with operating margins approaching the average of the region.

Southeast Asia posted strong first quarter results, driven by high deepwater activity throughout the region; solid SPM performance in Malaysia; and very good drilling performance in our IPM project in Queensland, Australia.

In China, we continue to ramp up activity on our tight gas SPM project with Yanchang Petroleum in the Ordos basin, and we are operating a total of 12 rigs at the end of the first quarter.

In Europe, CIS and Africa, revenue was down 11% sequentially, and operating margins were down by 220 basis points.

However, compared to the same quarter last year when the majority of the [Framo] activity was still included in the ECA numbers, revenue grew by 1% and margins were up by 253 basis points.

The year-over-year revenue growth in the region was also negatively impacted by severe winter weather in Russia, as well as the weakening of the rouble that took place during the quarter.

Still, the underlying activity both offshore and on land in Russia remains firm for the year.

There were also several positive activity signs in parts of Europe and Africa that helped offset the first quarter headwinds in Russia.

In Norway, we posted solid year-over-year growth driven by market share gains for our drilling services, and we expect to see further growth in the second quarter as the seismic season starts, and [where we will] this year, we'll have particular focus on the Barents Sea.

We have also been awarded a five-year integrated well construction contract by Det norske for exploration and drilling activity, where we will play an integral part to both the planning and execution process.

In West Africa, we also posted strong year-over-year growth driven by both exploration and development work in several of the Gulf of Guinea countries, and we still expect strong growth in 2014 in the region, in particular from Angola, Gabon, and Chad.

In North America, we posted a strong quarter with revenue up 1% sequentially while margins were down 107 basis points to 18.5%, driven by pricing pressure and severe winter weather on land as well as drilling delays in the Gulf of Mexico.

Compared to the same quarter last year, revenue grew 12% while margins were down 53 basis points.

On land, we posted strong year-over-year growth in revenue driven by market share gains and new technology uptick in pressure pumping, as well as solid growth in our artificial lift business where we continue to expand our market position in the rod lift market.

Our margins on land were impacted by lower pricing in pressure pumping as we rolled over several key contracts at end of last year, and we also chose to incur additional sand transportation and fuel costs during the periods of severe winter weather to avoid any disruption to our customers' operations.

In the Gulf of Mexico, deepwater drilling activity was down compared to the first quarter of last year, due to a series of operational delays, longer completion times, and more workover activity, and this impacted several of our product lines.

However, the situation is expected to normalize again in the second quarter, and the outlook for deepwater drilling activity in the Gulf of Mexico remains strong for the full year.

Turning to technology, in 2013, we saw further growth in the rate of high-impact commercializations from our R&E organization.

This together with significant improvements in the out-of-box performance of our new products had a clear impact on our financial results, as presented in last month's Howard Weil conference in New Orleans.

In 2014, we expect this trend to continue with a wide range of new technologies scheduled for introduction to the market at the rate that will even surpass 2013.

We will showcase a number of these new technologies in our Investor Event that will take place June 24 and 25 in New York.

In addition to the latest technologies from reservoir characterization and drilling, we will present a range of new production-related technologies, including a revolutionary intelligent completion system, our latest multistage completion technology, and new fracturing fluid innovation, and we will give you an update on our North American land artificial lift business where we see strong growth potential for both ESP and rod pump sales.

Together with these technology presentations, we will review progress on our ongoing transformation programs and also provide an updated financial outlook for the coming three-year period.

Moving on to the macro picture, the global economic data has been mixed so far this year, with the US suffering an unusually harsh winter, China showing some signs of slowdown, although still projected to grow 7.5% in 2014, and the situation in Ukraine adding a new risk to the outlook.

However, the fundamentals of the global recovery remain intact as the above factors are likely to only have a temporary impact.

In contrast to this, the oil markets have been significantly tighter than anticipated as strong demand trends in the OECD and the Middle East, together with continuing supply disruptions in various regions have led to lower spare capacity figures and pushed OECD stocks down to the largest deviation from historical averages since 2003.

The North American supply surge continues to be just enough to equal the world's growing demand, while all other growth regions including Iraq, Brazil, and the Caspian are struggling to meet their production targets.

This should continue to support oil prices around $100 a barrel, and therefore encourage oil directed investments in both North American and international markets.

US natural gas demand reached a new all-time record in Q1, due to the severe winter weather pushing prices to a six-year high.

However, US supply trends remain strong on the back of the Marcellus, and as the weather normalizes over the spring and summer months, we expect the North American market to return to a balanced supply-demand situation for natural gas.

International gas markets remain relatively tight, largely driven by Chinese demand which continues to grow at double-digit rates, while European gas demand has eased in the past months on a mild winter.

Based on these market conditions, we continue to expect well-related E&P spend to grow by more than 6% in 2014, with spend growth relatively balanced between North America and the international markets.

We further expect our year-over-year growth in 2014 to be driven by the NOCs and the independents.

After several years of strong growth, our revenue from the IOCs has dropped over the past [three] quarters, and was in Q1 flat compared to the same quarter last year.

However, the first quarter should be the low point for IOC revenue this year, as our latest activity outlook indicates sequential revenue growth from this customer group in the coming quarters, and with full-year revenue expected to be flat with 2013.

Equally important the level of E&P spend and the way we translate this into revenue is our ability to convert the top-line growth into profits.

While we plan to deliver solid incremental margins on the challenging market conditions in North America, we see potential for higher levels in our international business as demonstrated by our first quarter year-over-year incremental margins of 86%.

We are not likely to maintain these levels throughout 2014, but our international incremental margin potential should offer strong support to our earnings growth in the coming year.

Furthermore, our broad geographical footprint, our balanced technology portfolio, and our agile organization provides us the insulation from market down sides as recently seen in Latin America, and allows us to swiftly capitalize on market opportunities, whether in North America or anywhere else in the world.

We therefore remain positive and optimistic with respect to the 2014 outlook, as we continue to aim for solid double-digit growth in earnings per share, fueled by a combination of top-line growth, margin expansion, and the acceleration of our current stock buyback program.

That concludes my remarks.

We will now open up for questions.

(Operator Instructions)

David Anderson, JPMorgan.

Thanks.

Good morning, Paal.

I was wonder if you could expand on your comments with the IOCs, 30% of your business, it looks flat.

We're seeing a lot of headlines about IOCs cutting CapEx.

I was wondering if you could put that into context for us a little bit.

Can you help us understand how you see this progressing?

Is it simply a function of day rates, and when day rates come down the projects start moving ahead?

I wonder if you can help us how you see that progressing throughout the year.

Let me first clarify one thing.

I said that the IOCs are now making up well below 30%.

It has dropped over the past couple of quarters.

We have already seen a reduction in their spend.

What we're saying is that it's already flat now year-over-year.

The forecasts we have from the various geomarkets and [are rolled up] indicates progression in the next couple of quarters.

And we see the full year basically being flat year-over-year.

Now, what's driving that, as we said before, we believe that the primary focus of the CapEx cuts from the IOCs will be on projects that are heavy on infrastructure, and probably less so on well related CapEx, although we have seen some impact of this as well.

If I think about the exploration spend side of that, that's the part I wonder the most about.

It seems that might be a little bit more at risk than the development CapEx.

Can you talk about that from that standpoint, and how that could impact the WesternGeCo?

Obviously, you have more exploration risk.

Can you help us quantify, is that a risk for you going forward this year?

Are you feeling pretty good about that exploration spend even with this chatter about the cuts out there?

We haven't changed our view on exploration spend, or the seismic spend since the January call.

We still expect to see growth in exploration spend in 2014.

It's going to be lower than 2013.

Within the exploration spend, we see flattening or flat seismic spend, and the growth is going to come through well related spend through price and exploration type of drilling.

We haven't really changed the view on either exploration or seismic from the January call.

That was already factored into the plan.

Okay, thank you, Paal.

James West, Barclays.

Good morning, Paal.

I wanted to step into North America for a second.

Clearly, the rig count trends have been a little bit better than I think most people anticipated early in the year.

How do you see the progress for your business in North America going forward?

Is it more that you're going to gain margin and share from technology, or do you actually see some pricing power development?

If you look at Q1 first of all in terms of our performance, we saw very strong year-over-year growth, as I said, with revenue of 12%.

This is a combination of market share gains and new technology uptick.

We continue to gain share in pressure pumping.

This is on the back of efficiency gains and new technology uptick.

We added another two fleets in Q1 from our idle asset program.

In terms of the activity outlook for North America on land, we expect solid activity growth in US land in 2014.

We see this being lead by South and West Texas.

In addition to the number of wells, we also see support by, again, by efficiency gains and further uptick of new technology.

In terms of Canada, the breakup is going to have the normal impact on Q2.

We see Canada slightly up compared to 2013.

The Gulf of Mexico, Q1 was slow for us because of lower deepwater drilling activity.

We see this coming back in, in Q2 and onwards, so strong outlook again for Gulf of Mexico.

You do (inaudible) in the Gulf.

I think you said 11 or so deepwater rigs scheduled to enter the Gulf in the second half of this year.

You did see all those rigs come in, going to work, and seeing the big uptick in the second half of this year?

Yes, we do.

Also, the number of rigs in Q1 wasn't really the problem.

We generate less revenue, although we have completion work there.

The amount of revenue per day in completion versus full drilling mode is obviously significantly less.

It was not a rig count issue.

It was an activity type of issue in Q1.

Okay, got it.

Thanks, Paul.

Ole Slorer, Morgan Stanley.

Thank you.

Paal, just taking one step back, I wanted to have you clarify a little bit, a high-level question.

You mentioned that the oil markets are tighter than once anticipated.

I know you don't like talking about client production or anything like that, but once you made the statement, I feel I can ask you to elaborate a little bit more on it.

I think consensus has probably never been more divided over where oil prices are going, and this year and next year is meant to be the big surge in production.

You highlighted Brazil and Iraq here, Caspian, of course, North America.

What is it do you see here that you don't think that all that positive to make that statement?

If you want to build a bullish case on production, I'm sure you can do that.

It's just that if you go back and look at the previous years, there is always an element of project delays and production disruption.

What we said in January is that we expect there to be a normal dose of that in 2014.

So far this year, we have seen that.

The market is still relatively tight.

OECD stocks are down.

OPEC spare capacity is down.

There's nothing dramatic in it, other than that all the things aren't lining up as maybe the bull case was at the beginning of the year for production.

Can you tie that to what you see at the customer level of increased project delays now with IOCs being more capital disciplined, or taking a step back, having to borrow for their dividends?

Is this something that you think is permanently delayed?

How have you changed your view on, let's say 2017 longer term supply growth as a function of what's going on at a CapEx level at the moment?

I think what's going to happen at least over the next couple of years is that the IOCs will focus more of their spend where they can drill wells and generate production from existing infrastructure, or from an infrastructure that costs less.

Huge infrastructure projects, I would expect to be lower in frequency.

Some of them might be postponed as we've already seen.

While the focus, again, is going to be generating production which generates cash.

So the ability to do that at the lowest possible investment, I think, is going to be the focus which is still good for us.

Does that mean that you're more that positive on the areas like the North Sea let's say, [metro areas], Gulf of Mexico, than you would be on frontier exploration like Arctic Russia or Barents Sea?

I think for the frontier areas you will still see exploration.

I think there is a push towards delineating and trying to assess what these frontiers contain.

Although there's lower growth in exploration this year, I still think there's going to be a lot of interest to try to assess what kind of potential these areas have.

Now, how the economics of the project will stack up and when development starts, that I think is going to be a function of what they find and what the economics look like.

I still think there will be a push towards doing exploration in frontier areas, yes.

Thank you.

Finally, back to the US again, you had a very impressive growth.

You highlighted that this was market share gains due to new technology.

Could you help us understand a little bit more how much was market share gains on new technology, and how much did the underlying market grow by in your view?

If you look at the overall rig count, it was up 4.5% year-over-year.

I would say partly offsetting that growth also was inefficiencies due to the weather.

A fair bit of this, I think for us is market share, as well as new technology.

I'm not going to give you a detailed number, which I'm sure you know, but I'm quite pleased with how we are continuing to progress, in particular in the pressure pumping market.

We added four fleets in Q3, one fleet in Q4, and another two fleets in the first quarter of this year.

This is all at a decent incremental margin.

We are pleased with how we are progress.

Anything on the technology that you can share?

Or do you want to wait to do it?

I already said a lot more than what we normally do.

I think that's going to be it.

Okay.

Thanks a lot.

Kurt Hallead, RBC Capital Markets.

Thank you.

Good afternoon, Paal, where you are.

Good morning, where we are.

A follow-up question, you addressed a lot of the concerns that investors have had with respect to the outlook on IOC spend and so on in great detail.

Thanks for that.

A question I would have would be how do you risk assess from this point forward?

You put out your targets.

You took a look at what's going on with the offshore elements.

It looks like the offshore rig market is still on this slide downward.

From this point forward, Paal, if you were to look at the offshore market, how would you risk assess it from here?

What do you think is the biggest driver?

What's the risk on activity is really is what I am asking you from your standpoint.

Is it Brazil?

Is it outside of Brazil?

How do you see that dynamic splitting up?

If you focus in on deepwater where I think the biggest discussion has been, this is where the biggest projects are, and this is where the biggest discussion around rigs are.

We looked at it in detail.

If you look at the deepwater market, it's really two separate stories.

You have you Brazil, and you have the rest of the world.

In 2013, Brazil represented around 30% of the global deepwater drilling activity.

In Q1 of 2014, Brazil was 20% down in activity while the rest of the world was up 3%.

Now, for the full year of 2014 we expect Brazil to be down more than 20% versus last year while the rest of the world we see as being up high single-digits.

As we previously indicated in January, the growth in the rest of the world deepwater is going to be driven by sub-Sahara Africa and Gulf of Mexico, so really no change to that.

We also see decent growth in both exploration as well as development for deepwater.

Then if you take that information, Paal, and you roll that up into your outlook for 2014 from a total international revenue growth standpoint, how should we think about that?

Is that mid-single digit or still double-digit growth?

How would you look at the international revenue dynamic for the year?

If you look at the activity outlook or revenue outlook for us in the international market, again, we see well related CapEx spend growing north of 6%, and it's going to again be driven by both land and offshore.

There are a few offsetting factors versus what we said in January.

If we quickly go through those, we do see solid growth in deepwater drilling activity, excluding Brazil.

In Latin America specifically, we now see this as being flat driven by lower revenue in particular in Brazil but also to a certain extent in Mexico.

In Europe and Africa, we are still showing good growth and basically in line with the previous outlook.

In Russia, the activity outlook is unchanged, but the revenue will potentially be lower due to the currently weaker ruble.

What's going to happen with the ruble as the year progresses, we'll have to see.

If it stays where it is now then revenue is going to be somewhat lower than what we initially expected, while activity is the same.

Middle East and Asia is stronger than we initially expected and is driven by several countries in the Middle East as well as Australia.

That's how we see overall international.

Great.

Then one follow-up, one of the key drivers for the margin performance and earning performance over the last couple of years has been this internal dynamic for technology and excellence in execution and everything else.

As you look out at the North American market going forward, you've now established firm leadership versus your peer group.

Do you expect the excellence in execution program and technology, if your peer group were to grow margins by 100 or 200 basis points, is that something that you think you can keep pace with or exceed given the dynamics in play right now?

If you say we have outperformed our competitors in terms of both top-line growth and margins [evolution], now since mid-2012, at this stage I'm quite pleased with our position both on land and offshore in North America.

We expect to main our margin leadership, at the same time grow faster in revenues.

If our competitors can grow by 100 and 200 basis points, I don't see why we cannot do the same or exceed it.

Okay.

Paal, thank you so much.

Bill Herbert, Simmons and Company.

Thanks.

Good morning.

Paal, so at a recent industry gathering you offered some interesting commentary about industry challenges, and you referenced the fact that E&P CapEx over the last 10 years had grown 400%, whereas oil production was up only 15%.

You mentioned the fact that in the E&P value chain, the oil companies were the ultimate integrators of all the technical work associated with finding hydrocarbons, and the collective oil services community was accountable for not delivering on required performance progress.

You also mentioned that the required improvement was not going to come from yet another round of procurement driven price reductions across the E&P value chains.

along those lines, as the industry is in an introspective mood with where the IOCs and deepwater NOCs in term of getting their deepwater costs in alignment, apart from the mix shift from infrastructure to well CapEx, what structural reforms are your clients contemplating, implementing, and the discussions you're having with your clients along those lines?

I think if you look at short-term actions they're taking today, they are looking at bringing the deepwater rig rates down.

If you look at what's happened on deepwater day rates over the past three, four, five years, they have increased significantly, and they have been completely disconnected from the other deepwater oilfield services.

Today, the rig rental makes up around 50% of the deepwater well costs.

So our customers have really been looking for the opportunity to get the rig rental rates down.

The opportunity is here in form of the high number of new arrivals, all contracts expiring, and a significant reduction activity in Brazil.

I think this is the opportunity in the short term they're trying to get some relief on cost.

Now, my comments in terms of a procurement-driven exercise across the industry is more focused in on we need to basically drive off the technical performance as an industry, whether that is process efficiency or reliability of the projects that they execute.

What some of our customers are doing is they are approaching us a lot more than in the past in terms of doing fully integrated projects, where we are a lot more engaged in the upfront planning and design of the work, and where we have more performance-based contracts in terms of how we execute the work as well.

These are some of the short-term actions that they're taking.

Beyond that, I think the service industry needs to take responsibility in terms of finding ways of transforming themselves to drive both their internal efficiencies and their technical performance versus the customers'.

That is how we can create more value and support our customers.

Okay.

Secondly, coming out of the last quarter you offered some helpful parameters for the first quarter earnings possibilities.

Do you have just high-level, broad commentary with regard to what we should be focused on with regard to second quarter earnings possibilities?

If you look at Q2, we should see seasonal recovery in Russia and China and also less weather impact in US land.

Now, this is going to be partly offset by the normal spring breakup in Canada, which has already started.

Beyond this, we are expecting steady growth in the underlying business as per the other discussions we've had so far today.

Our aim for the second quarter is to bring Q2 EPS back to the level of Q4 of last year.

That is, for us, a good target.

Okay.

Thank you, sir.

Jim Wicklund, Credit Suisse.

Good morning.

Bill Herbert, thank you for asking the question, and Paal, thank you for the answer on the integrated projects.

Let me carry that on.

You mentioned several times in the press release about integrated projects, their accretion to margins.

Can you talk about performance-related contracts and what those returns look like relative to the rest of your business?

In general, Jim, the performance-based contracts are accretive to our margins.

We take on performance-based contracts where we have a pretty good handle on the environment that we operate in.

We have a very good handle on how our customers are operating and are interfacing and supporting our operations, and also what kind of controls we have to drive performance.

I would say, in general, our performance-based contracts, and a lot of them are within the Drilling Group if you take away the production incentive contracts, they are generally accretive to our margins.

If you look at the Drilling Group margin evolution over the past two, three years, you see a very steady improvement from the time we took over Smith back in 2010.

Okay.

Thank you for that.

My follow-up question is your self-help efforts, your transformational efforts internally, those mean a lot and they're structural, and they'll last for a long time.

Which markets do you see those efforts having the biggest impact in over the next two to three years?

I think they will have impact globally.

We piloted some of these things in North America when we did the initial restructuring on North American land, we started back in 2010.

That has been some of the basis for our improvements in North America over the past three, four years.

But what we are doing is now starting to pilot in small scale in various other parts of the world.

This is going to take several years before we get fully implemented.

At the end of the day, the transformation programs that I have been talking about publicly over the past year will impact all parts of the Company, both geographically and in terms of technology.

Okay.

When we look at a globe of the world, what area, what region do you think has the best upside to margins over the next two to three years?

Difficult to pinpoint.

I would say that, as I said in my prepared remarks, if you look at incremental margins, we are going to focus in on driving incremental margins throughout our business.

With some of the, I would say, challenges in particular in North America land that we've been facing on pricing, it is still more difficult to drive very high incremental margins in North America, although we are going to try.

But the overall international markets I still think has a significant incremental margin potential.

I also mentioned year-over-year Q1 we had 86% incremental margins in international.

Thank you very much, gentlemen.

I appreciate it, Paal.

Jim Crandell, Cowen.

Thank you.

Paal, if well-based CapEx is up 6% globally, is that an environment that you can grow your revenues in double digits?

That's a difficult question to answer.

Is it possible?

Yes.

Are we going to get to double digits?

I can't really say, and I wouldn't commit to it.

But the fact that we have the potential of growing our revenues higher than the 6% I think is very clear.

Okay.

Second question, Paal, is getting back to North American pricing for today's technology, not newer technology, but is a 6% increase in well-based CapEx in the US in 2014 sufficient to drive pricing anywhere in the US, in any product lines, for again today's technology?

I don't think 6% is going to be sufficient to have a widespread price increase in commodity type of technologies.

Now, you might have small pockets where there is a surge of activity, and there is insufficient capacity to deliver.

You might have situations where new technologies are introduced or where efficiencies are stepped up where you can drive your effective pricing.

At this stage, I would say that we are expecting North America land pricing, overall, we are hoping it's going to flatten from where it is now.

That's going to be the forecast that I would say we have going forward, and then we are looking on top of that to drive up our effective pricing through a new technology introduction and by driving efficiency of our operations.

Okay.

Good answer.

The last question, Paal, you talked about Brazil.

What is the risk, in your opinion, of continued slides in activity in Brazil throughout this year and even into 2015?

It seems like every rig that's coming off contract there, they're releasing.

Yes.

As I already said I think Brazil activity, Brazil revenue for us this year, is going to be significantly down versus 2013.

It's a combination of both activity, as you say, as well as the pricing on the new contracts that we took on during 2013.

There's no surprise that Brazil revenue is going to be down significantly, and that's already factored into these discussions and the outlook that I've been giving today.

Thank you.

Waqar Syed, Goldman Sachs.

Thank you.

Paal, you mentioned before China, there was some weakness in the quarter.

Where do you see the outlook?

Is this temporary?

What's going on there for the year and beyond?

We still expect solid growth in China in 2014.

It's going to be a bit lower than 2013, partly due to some of these budget reductions that we have seen from the NOCs.

But our focus in the China land market is very much on penetrating it further.

If you look at our overall penetration of that market, it's still very low.

We aren't immediately impacted significantly by these budget reductions.

We are seeing significantly high demand for our new technology, for our technical expertise, and also for project management.

That's why we're still quite optimistic about China.

Growth is going to be driven by land both in terms of conventional type gas and shale gas, also will continue to be solid.

I would say solid growth in 2014, a bit lower than 2013.

Great.

Then in the Middle East, it seems to be a pretty active area, as you mentioned.

Is there a way to quantify what kind of revenue growth could be possible from the Middle Eastern areas, Saudi Arabia, UAE, Kuwait, that area?

There is a way, yes, and we have done it, but I'm not going to share the outlook with you in great detail.

Other than, we saw it as a major growth driver for 2014, and it has confirmed its potential.

It might even be slightly up in April versus where we thought it would be in January.

Could it be in the upper teens growth rate there, mid-teen growth rates, in that kind of range?

I'm not going to give you a number.

You can look at the Q1 year-over-year number which was pretty solid.

Okay.

Thank you, sir.

Bill Sanchez, Howard Weil.

Thanks.

Good morning.

Paal, I found your comments on Southern Iraq interesting.

I know Iraq had been one of the five counties I think you had outlined previously as the highest growth markets for you.

Has there been any change in terms of your thought on Iraq in general here, and how that proceeds for Slumber J as you think about going forward, and maybe just on a year-over-year basis?

For 2014, the main change has been that the activity in the South is going to be down.

This is mainly driven by ongoing discussions between the IOCs and the Ministry.

There are things that they need to sort out and agree upon before they will move forward and award some of these lump sum turnkey contracts that are pending.

Until that happens, there isn't going to be a lot of work awarded in the South.

With the upcoming elections, we don't think that that situation and these bids are going to be awarded in the next couple of quarters.

We think that is probably a late year event before it happens.

So that's why activity in Southern Iraq for this year is going to be down.

Now, offsetting this is very strong activity growth in Northern Iraq, and here we have an excellent market position.

It's a lot focused on high-end exploration.

We are able to offset the reduced activity in revenue in the South with growth in the North, so that 2014 Iraq revenue is going to be flat year-over-year.

The margins are also now quickly approaching the average for the region.

Overall, somewhat downgrading of the growth in Iraq, but both margins, and as well as the offsetting factor of the North is positives.

My follow-up would be I know you spent time talking about the top-line expectations in Latin America and the headwinds in Brazil.

Your commentary on Mexico, at least as we start to think about exiting 2014 on a year-over-year basis, seemed more positive.

Just thoughts there in terms of when you perhaps see year-over-year growth in Mexico?

I guess number one.

My follow-up, on the margins in Latin America, you've done a pretty good job of holding those relatively flat.

Perhaps I missed it, but I don't think I heard any thoughts on the margin growth, if we should expect that to move forward here in Latin America?

Or is relatively flat a good expectation?

I think overall for Latin America, I think flat is a good word.

I think we see overall revenue to be flattish this year, and we're going to work very hard on maintaining our margins around the levels that we had in 2013.

So far this year, that's worked out well.

We will continue to focus in on that.

Obviously, a significant negative on Brazil which we already talked about.

Mexico is a lot more positive story.

In the short-term here, what we see is a more budget discipline from Pemex and a little bit more hesitance towards spend as this ongoing reform process proceeds.

As you know, we had some significant wins in the mega-tenders where we have gained significant shares and we will be ramping activity in Q2 and into [H2].

We expect to be exiting Mexico this year on a pretty good note, and that would be a good driver for us in 2015.

Great.

I appreciate the time.

I'll turn it back.

Scott Gruber, Sanford Bernstein.

Thanks.

Paal, could you talk about your strategy in North American rod lift?

Do you see a path to transform a legacy product through technology development, or is the interest in the space largely based on a view of end market growth?

Yes.

We are interested in North America land artificial lift market, and we have followed it for some time.

There is clearly significant growth potential there.

It's a huge market, hundreds of thousands of wells were installed with rod lifts.

We see it as a significant opportunity to apply more science and technology into this market and also to help drive production and cost per barrel.

If you want to be part of transforming a market, which obviously our ultimate goal is here, and transforming it to the benefit of our customers, we are firm believers that you have to play in it.

You cannot change it from the sidelines.

While we have a growing ESP business in the North America land for the shale liquid wells, we also believe that we need to have a complete offering.

What we are looking to do now is to combine our ESP offering with these rod lift companies that we have bought over the recent quarters and then ultimately provide a life-of-well lift solution to our customer base.

That could be ESP for part of the life, and it could be a rod pump for the other part of the life.

We are working on this, and we will give a further update on this business both, I would say, further strategy as well as technology in our June investor event.

Great.

An unrelated follow-up in Russia, Rosneft appears to be taking a new strategy towards contracting rigs.

Have you noticed the change in how they cooperate with the service companies?

Are they starting to push back on pricing for any of your services?

As far as I know, we haven't had any recent discussions with Rosneft on pricing beyond what is normal for our services.

Exactly what Rosneft does in terms of contracting rigs, I don't have any further comments to what their strategy is.

No.

Thanks.

Michael LaMotte, Guggenheim.

Thanks.

Most of my questions have been answered.

Paal, I wanted to ask you about Saxon and more strategically, Schlumberger in the last few years has been moving away from the more asset intensive segments with the sale of rigs in Russia and, obviously, the SPARK business model in US pumping.

Is something changing with respect to that strategy, or was this just an acquisition or a consolidation of opportunity?

No.

You're right.

We continue to focus on return on capitol employed and to be, I would say, capitol efficient as we go forward.

There's no change in the strategy here.

Let me just give you a little bit of the rationale for why we are acquiring Saxon.

Land rigs has always been a key part of our integration platform for well construction.

In the past and what led to the set-up of Saxon and where we have basically sold them the rigs, we sold rigs to Eurasia and Russia as well, is that our priority in the past has been to basically have access to rigs from a trusted providers.

It's more of a capacity issue that we've been focusing in on the past.

What we are doing now is that we are evolving this view to also seeing the land rig as a critical element of how we drive drilling performance.

What we plan to do at this stage now, and Saxon is generally focused on the international market where we basically have all of our integration related business, we plan to invest and optimize in rig design and rig operations by combining Saxon's rig engineering and rig management capabilities, with our existing drilling expertise from both IPM and the Drilling Group.

There are some third-party rigs within the Saxon fleet today.

It's quite a few, and we will continue to support them and if there are opportunities to do third-party rentals we will continue to do that.

We are predominantly buying Saxon because we want to have our own rig provider that can help us drive the performance of our integration business with our construction.

Very interesting.

Thank you.

On Venezuela, I know that PDVSA's been working with IOCs in the Orinoco belt to try to work with terms and get activity higher to raise production.

Can you maybe talk about what you see happening in that market over the next year or two?

Do you think there will be success there, and that 2015 could be a much bigger year in Venezuela potentially?

For us, Venezuela today is actually quite good.

Activity in Q1 was solid.

It was up more than 20% year-over-year.

As you say, we have a close working relationship with PDVSA.

That's after we put our payment agreement with them in place.

Payments are regular, and they are according to plan.

We are in reasonably good shape there.

Looking forward for this year, we see continued increase in the rig counts, and these additional rigs are mainly focused in on the Faja, and we continue to ramp up our resources and expertise in the country.

We have a number of projects with PDVSA where we are working with them to drive up operation efficiency, and obviously to help them drive up production.

We see Venezuela for 2014 to be one of the positives in Latin America.

Okay.

Great.

Thanks, Paal.

Jeff Tillery, Tudor Pickering Holt.

Good afternoon.

I was wondering, you guys have introduced a couple of fleets back to the US frac market from your stack capacity.

I wonder if you could talk us through how you are thinking about further efficiency gains in your frac fleet here in the US, as well as the ability for the market to absorb incremental capacity from you all this year?

I think the overall activity in terms of new wells and in terms of frac stages is going to be up in 2014.

Whether we will add more capacity into this I think is going to be a function of the pricing and the incremental margins we will get on the additional fleets that we put in.

All the fleets that we have introduced over the past three quarters, these criterion have been met and that's why we have been adding them.

We are currently today operating at 82% in terms of 24-hour operations, which has been, obviously, a key driver for efficiency.

Other than that, we are focusing in on term contracts.

We have about 90% of our pressure pumping contract volume on term.

We do that because we see that as a key element to help drive efficiency.

That's how we get predictable work, and we have a close working relationship with our customers for planning and scheduling.

Also having term contracts and longer term relationships other than spot also helps us in the way we work together with them, in terms of technical collaboration, as well as new technology introduction.

I'm reasonably optimistic about our ability to continuing to gain share in that market.

What's going to happen to base pricing, I think base pricing as of now, we are looking for it to flatten out.

My second question is just around the seismic outlook.

I know the backlog can be choppy for that business, but it was up a reasonable amount sequentially to exit Q1.

Has that changed at all, the Slumber J outlook for the marine seismic business as the rest of the year plays out?

No.

We haven't changed our outlook for the seismic business since January.

Like you said, the backlog was up $196 million sequentially and $49 million year-over-year.

This was driven both by land and marine.

In terms of the 2014 outlook for seismic, we maintain the outlook that we did in January that it's going to be flattish in terms of overall spend this year.

We continue to see pressure on basic marine pricing.

We saw that in Q1.

In terms of Q2 and Q3, activity in our bookings and utilization is looking quite reasonable.

There will be no change to what we looked at in January.

Thank you very much.

Okay.

That's all the time we have for questions today.

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

Greg will now provide the closing comments.

Thank you.

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