斯倫貝謝公司 (SLB) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Schlumberger earnings conference call.

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

Later, we will conduct a question and answer session.

Instructions will be given at that time.

(Operator Instructions)

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 second quarter 2014 results conference call.

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

Joining us on the call are Paal Kibsgaard, Chief Executive Officer, and Simon Ayat, Chief Financial Officer.

Our prepared comments will be provided by Simon and Paal.

Simon will first review the financial results and then Paal will discuss the operational and technical highlights.

However, before we begin with the opening remarks, I'd like to remind the participants that some of the information in today's call may include forward-looking statements, as well as non-GAAP financial measures.

A detailed disclaimer and other important information are included in the earnings press release on our website.

We welcome your questions after our prepared statements.

I will now turn the call over to Simon.

Thank you, Simon.

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

Second quarter earnings per share from continuing operations, excluding charges and credits, was $1.37.

This is an increase of $0.16 sequentially and is $0.22 higher when compared to the same quarter last year, represents increases of 13% and 19%, respectively.

During the quarter, we recorded $205 million charge in discontinued operations relating to the potential resolution with the governmental authorities concerning a historical matter.

Please refer to the supplement information contained in our earnings press release for further details.

Second quarter revenue of $12.1 billion increased 7.3% sequentially.

Pretax operating income increased 10.7% sequentially, while the pretax operating margins improved 67 basis points to 21.7%.

Sequential highlights by product group were as follows.

Reservoir characterization revenue of $3.1 billion increased 8.5% and pretax income grew by almost 18%.

This resulted in margins improving by 233 basis points, to 29.7%.

This growth was driven by a very strong performance in Wireline, improved Western Geco Marine utilization, and an increase in SIS software sales.

Drilling Group revenue of $4.7 billion increased 7.4% and margin improved by 74 basis points to 21.1%.

These increases were largely attributable to robust international activity in M-I SWACO and the strong Drilling and Measurement activity in North America and Russia.

Production Group revenue of $4.3 billion increased 5.5%.

This growth was led by well services, as a strong performance internationally and in US land more than compensated for the impact of the spring breakup in Canada.

Margins declined by 123 basis points to 16.7%, primarily as a result of pressure pumping commodity inflation combined with the impact of the Canadian spring breakup.

Now turning to Schlumberger as a whole.

The effective tax rate, excluding charges and credits, was 21.7% in the second quarter, compared to 22.6% in the previous quarter.

We expect the effective tax rate for the full year of 2014 to be in the low to mid-20s; however, this can vary on a quarterly basis, due to the geographic mix of business.

During the quarter we generated $2.4 billion of cash flow from operations.

For the first six months of this year, we have generated $4.2 billion of cash flow from operations.

This compares to $3.8 billion for the first six months of 2013.

As we have mentioned at our Investors Day, our investment in SPM business have now reached a point that starting this quarter we have begun to report them separately in our cash flow statement, similar to the way we report CapEx and monthly client.

While this change has no impact on our free cash flow, it does result in an increase in the amount of cash flow from operations that we report.

Net debt increased $1 billion during the quarter, to $6.1 billion.

Significant liquidity events during the quarter included $1.2 billion of stock repurchases, $522 million of dividend payments, and $922 million of CapEx, excluding multi client and SPM.

During the quarter, we repurchased 11.5 million shares at an average price of $101.85.

CapEx including multi client and SPM is still expected to be approximately $3.8 billion in 2014, as compared to the $3.9 billion we spent in 2013.

And now I will turn the conference over to Paal.

Thank you, Simon.

Our second quarter results were strong and fully in line with our expectations, as international activity rebounded in Russia, Norway and Australia.

Our North American activity grew both offshore in the US Gulf of Mexico and on land, in spite of the Canadian spring breakup.

As a result, second quarter revenue grew 7% sequentially and 8% year-on-year, while pretax operating income increased by 11% sequentially and 15% year-on-year.

Year-to-date, we continue to show solid growth in all our main financial indicators compared to last year, with revenue and operating income growing by 7% and 18%, respectively, pretax operating margins expanding by 191 basis points, earnings per share increasing by 22%, and with incremental margins at a solid 48%.

Several factors are contributing to the strength of this performance.

These include additional market share gains at the back of new technology sales and operational efficiency, as well as service support from strong, quality cost and resource management throughout our global operations.

Our overall financial results continue to demonstrate our leadership in technology, reliability, efficiency and integration, which form the four components of our engine of outperformance that we detailed at our June investor conference in New York and which will continue to drive our corporate performance in the years to come.

In the second quarter, we generated more than $1.2 billion of free cash flow, bringing the year-to-date number to $1.9 billion, which is 35% higher than for the same period last year.

The strength of our cash flow reinforces the confidence we have in the financial targets we laid out at our June conference, and will also enable us to further invest in the business, while increasing the cash we return to our shareholders.

Our International business continued to perform well in the second quarter, with seasonal rebound of activity coupled with growth in key markets leading to an 8% sequential increase in revenue, while pretax operating margin expanded by 122 basis points to reach 24%, a level not seen since the pre financial crisis peak of 2008.

Compared to the second quarter of last year, International revenue was up 7% when adjusting for [FRAML],on the back of strong growth in the Middle East and Asia, and in Europe, Africa.

In terms of pricing, the international market remains highly competitive and we have still not seen 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 strong top line and margin performance.

The premium in the 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 further expand margins.

In Latin America, revenue was up 5% sequentially, while margins were essentially flat with the previous quarter, at 21.2%.

Compared to the second quarter last year, Latin America revenue was down 3%, driven by Brazil and Mexico, where the impact of lower activity and pricing were only partly offset by the strong activity in Argentina, Ecuador and Venezuela.

Pretax operating margins, however, was up 62 basis points, due to careful cost and resource management, as well as our broad and diverse business portfolio in the region.

The strongest sequential revenue growth was recorded in Venezuela, where we also renewed our payment agreement with PDVSA during the second quarter.

Compared to the same quarter last year, our revenues in Venezuela this quarter was up significantly, while we at the same time have reduced both DSO and the absolute value of our receivables.

In Argentina, the strong sequential growth was driven by rig-based activity in the Vaca Muerta shale, where we are now seeing encouraging results from the application of new technology and work flows and where a continued focus on well cost reduction is also improving performance.

In Ecuador, we continue to progress on the [Shushufindi] SPM project, and during the quarter we also signed a letter of intent for Group 1 of the mature field tender with contract signature and ramp-up of operations expected in the second half of this year.

In Mexico, revenue fell sequentially and year-over-year, due to lower overall rig count in the country, continued budget restrictions in PEMEX, and as several of our IPM rigs in the south were shut down for the entire quarter, due to local social issues that are outside of our control.

However, the activity outlook for the second half of the year is stronger, as we continue to ramp up activity on the new Mega Tender contract, where we have gained significant market share, and as PEMEX and the local government resolve the social issues impacting our IPM project in the south.

Middle East and Asia revenue increased 4% sequentially, while margins grew by 151 basis points to 27.8%.

Year-over-year revenues increased by 12% and margins were up by 323 basis points.

In the Middle East, sequential revenue growth was again driven by Saudi Arabia, where new well activity continues to expand, supported by steady growth in the rig count and where rigless activity is also increasing in a number of fields.

We continue to add resources and invest in additional infrastructure in the kingdom to keep pace the additional work we are taking on.

And with the capacity and capabilities we now have on the ground, our Saudi operations is quickly becoming one of the largest and most advanced setups in our global portfolio.

Growth was also driven by the United Arab Emirates, as activity continues to ramp up on our existing contracts, together with additional seismic and completion technology deployments.

In Southern Iraq, activity was, as expected, down both sequentially and year-over-year, as commercial discussions between the government and the international oil companies continues and where the situation was further complicated by mounting civil unrest during the quarter.

The worsening security situation led us to take additional measures to protect our people and assets in the country; but beyond the additional costs and lower efficiency, there has been no impact on our ongoing operational capabilities.

However, safety remains our top priority, and we continue to monitor the situation closely, together with our security advisors, and we are ready to take the appropriate actions should the situation worsen further.

Activity in Northern Iraq, on the other hand, was strong in the second quarter, driven by exploration drilling; and we expect growth in this part of the country in the second half of the year to offset the activity drop we are seeing in the south.

Turning to Asia.

We saw strong year-over-year growth in several geo markets, driven by higher customer activity as well as market share gains.

The strongest growth was seen in Australia from continued land activity in Queensland, successful completion of the first ISO metric seismic survey in the Great Australian bite, and strong new technology sales for both Wireline and Drilling and Measurements on exploration projects.

In China, revenue was up sequentially, driven by strong offshore activity, seasonal recovery on land and our tight gas SPM project in the Ordos basin for [Changquing] Petroleum.

Still, year-over-year revenue was down in the second quarter, due to slowdown in activity in several land basins, as customers continue to review budgets and internal processes.

Looking at the second half of the year, offshore activity looks strong and land activity, including the shale gas development, is set to pick up from current levels.

However, we expect growth rates to be somewhat tempered until our customers complete their internal reviews and spending plans are clarified.

In Europe, CIS and Africa, revenue grew 13% sequentially, with margins improving by 180 basis points, to 22.1%, as activity rebounded from the first quarter seasonal lows.

Compared to the same quarter last year, revenue grew by 4% and margins were up by 158 basis points.

Sequential revenue growth was driven by Russia, where we saw strong recovery in activity after a harsh winter.

The underlying activity outlook, both offshore and on land in Russia, continues to look solid, and with recent contract awards in Sakhalin, we expect to finish the year on a strong note.

Activity also increased strongly in the North Sea, driven by seismic and core rig-related services in Norway for a number of customers.

In Africa, sub Saharan activity was solid, in particular in Chad and Mozambique, while in north Africa activity rebounded sequentially, with growth in both Algeria and Tunisia, but was party offset by Libya, where activity remained subdued.

In North America, revenue grew 6% sequentially, in spite of the Canadian spring breakup, and 16% year-over-year, as we continue to grow our market share on land in hydraulic fracturing, artificial lift and drilling services.

As we actively expand our land business, we are currently seeing some impact on our pretax operating margins, which were down 53 basis points sequentially and 170 basis points year-over-year, driven by additional costs related to supply chain and transportation and onboarding of several new companies.

However, these effects should be short lived, as we continue to implement our strategic plans for our North America land business and in the process establish a broad and unique platform for profitable, technology driven growth in the coming years.

In our hydraulic fracturing business, we posted strong year-over-year revenue growth, driven by market share gains, further improvements in operational efficiency, as well as introduction of new technologies, which all together more than offset the effects of the spring breakup in Canada.

In terms of basic pressure pumping pricing, we saw some improvement in the second quarter, but this was contained to newer basins with lack of service capacity and to customers where we still operate at very low margins.

Still, the pricing traction was partially offset by continued cost inflation for labor, sand and transportation, and pricing discussions with our customers, therefore, continues to have a strong focus on cost recovery, at this stage.

In the second quarter, we also saw further improvement in our land drilling product lines, where the combination of new technology introductions, new business models and new alliances are driving both market share gains and higher operating margins.

In the US Gulf of Mexico, deepwater drilling activity was up sequentially, due to the expected rebound from the operational delays that impacted the first quarter.

In the second half of the year, the drilling rig count growth will flatten somewhat, as some rigs shift to completions related work, although we still expect to see revenue growth through market share gains in several product lines.

The highlight of the quarter was undoubtedly last month's investor conference in New York, where we set out clear goals for continued strong growth and financial outperformance over the coming years.

Our plans are built on the four key themes of technology, reliability, efficiency and integration, with technology and integration driving superior growth, and reliability and efficiency improving financial performance.

In terms of technology, we showed how our R&E transformation that started six years ago has led to a step change in operational performance of our products and how we continue to accelerate the pace of new technology introduction with flattening R&E investments.

During the investor conference, we also laid out full details of our reliability and efficiency transformation programs and how this will change the way we manage our people, our assets and our inventory, as we look to further improve our financial performance.

Based on s set of realistic assumptions covering the global economy, the oil and gas markets and industry investment levels, we are confident in our ability to continue our run of financial outperformance and to deliver on the earnings per share, return on capital employed, and free cash flow targets that we laid out during the conference.

Turning our focus back to the remaining part of 2014, we continue to see a relatively constant mix of headwinds and tailwinds in the global economy and in our industry, which leads us to maintain our already established outlook for the year.

The slow and steady recovery in the global economy is continuing, and the global oil market remains relatively tight, with a solid demand outlook, continued supply uncertainty related to geo politics and with Brent prices holding steady above $100 per barrel, which should encourage oil directed investments in both the North American and international markets.

The North America natural gas market appears more comfortably supplied, as US production continues to grow and storage levels gradually reconnects with historical averages, while the market balances in the international natural gas markets remain more or less unchanged.

We continue to expect weather-related E&P investment levels to grow north of 6%, driven more by development than production focused activities, while exploration spend will likely be flattish in 2014, driven by lower seismic spend as the IOC's focus on free cash flow generation.

Within this scenario, the growth and performance drivers that we outlined in late June, amplified by our broad geographical footprint, our balanced technology portfolio, and our agile organization will enable us to outperform in almost any market, 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, viewing this quarter's results as merely a steppingstone on the way to delivering the commitments we made in New York.

Thank you.

We will now open up for Q&A.

Thank you, Paal.

Greg, we will now take questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Ole Slorer from Morgan Stanley.

Please go ahead.

Thank you very much.

Paal, I wonder whether you could just shed a little bit more light about what your comments on the cost structure in North America.

We're seeing very large volumes of sand, for example.

This can hardly carry the same margin as your technology offering.

So how does this impact, and how did it impact, the margins in the quarter, and how do you see that impacting margins in North America going forward, when it comes to the relative pricing power and ability to take a mark-up on sand costs and logistics?

Okay.

Thank you, Ole.

So as I said, there's a lot of moving parts for us in North America at the moment.

So maybe I can just take you through the picture the way I see it.

So we have been focusing lately on revenue and expanding our revenue base in North America land.

At $3.9 billion in the quarter, revenue was up 6% sequentially and 16% year-on-year, which is a record for North America, in spite of the Canadian breakup.

Now the growth came from both efficiency and share, including pressure pumping, artificial lift and drilling services.

In pressure pumping, we added one more fleet during the quarter and that takes the total of 8 additional fleets in the past year.

So we have clearly gained share in pressure pumping.

So the key here is to, like I said, expand the revenue and share base in North America land to further broaden our platform for technology driven growth in the coming years.

Now with that, we see some temporary impact on margins, as we take on a higher proportion of somewhat lower margin businesses.

But we plan to drive margins up in the coming quarters in these businesses through integration, scale and new technology introduction.

And like you said, as well, there were also some short-term additional costs linked to supply chain, for instance on sand, where we took some higher costs because there were some significant changes in sand size and volumes for several of our customers; and also transportation had some higher cost, due to the fact that we had a very high growth rate and transportation availability became quite tight.

In addition to that, you had the Canada breakup, and you also had somewhat lower multi client sales.

So all in all, that drove the 53 basis point reduction.

But our focus going forward, again, is to drive the margins back up, but on a much broader platform for revenue growth.

Thank you very much, Paal.

Thanks, Ole.

Your next question comes from the line of Jim Crandell from Cowen.

Please go ahead.

Good morning.

Paal, could you address the potential for sanctions impacting Schlumberger's business in Russia?

Well, as of now, nothing has really changed for our position in Russia.

Sanctions were implemented early in the year.

There was some new sanctions coming out this year.

So far, that has no real impact on our business.

So as of now, it's business as usual for us.

In Russia so far this year, activity has been as planned or even slightly stronger.

The only change from the plan we laid out at the beginning of the year was the impact of the ruble, which had a fairly significant impact in Q1, but the ruble rebounds somewhat in Q2.

So that's really the main change from the plan that we've seen so far in Russia.

So as of now, no impact on sanctions; and whether there will be impacts in the future is a bit difficult to comment on.

But as of now, we continue business as usual.

Okay.

And one follow-up, Paal.

Could you talk just a little bit about the recent announcement of the deal with Precision Drilling and how quickly you think the US can move to incentive pricing or some kind of integrated model?

And I guess would this, in essence, be shared with Precision or would this be -- would Precision be working for you, or there are a number of different scenarios as you look forward?

So part of the reason for doing this alliance with Precision Drilling is that both ourselves and Precision Drilling believe that over time the North American land drilling market will move toward a general contractor model, towards more of a well construction, turnkey type of market.

And in that setup, we have now established this alliance where Precision Drilling will be the general contractor and we will rent them our down hole technologies.

In addition, we will train their people to run it.

And obviously, we will own the equipment and we will maintain the equipment for Precision Drilling.

So we see this as an avenue to establish further penetration for our unique technologies in the North America land drilling market and hence, it's another good growth opportunity for us.

Okay.

Thank you very much.

Thank you.

Next question.

Greg?

One moment whilst we check the line.

Your next question comes from the line of David Anderson from JPMorgan.

Please go ahead.

Thanks.

Good morning.

Paal, I was just wondering if you could expand a little bit about the cost pressures around your supply chain.

I guess my first question is, are you able to pass through most of those costs right now?

You had said kind of near-term pressures.

So I'm just wondering, is that because you are expecting to get those passed through, or is it also partly because the way your transformation is set up, that just takes a little while to absorb those and you start to see better margins as we start to progress?

David, I think in general, we are able to pass through those costs.

What happened towards the end of Q1 and also into Q2, there were some significant changes in the way some of our customers operated in terms of sand sizes, in terms of volumes, and these were basically somewhat unannounced and something we had to respond to relatively quickly.

We managed to continue to support our customers and support our operations, but we took some additional costs in order to do that.

And over time, we will -- we are able to pass these on, and a lot of them we managed to pass on towards the second part of this quarter.

But there were some short-term changes that resulted in additional costs for us that we decided to absorb.

All right.

And then I guess my other question around that was around your logistics.

Obviously, you have a very big logistics operation.

As we see how North America progresses over the next several years, and in some of the cases we're seeing doubling of the amount of sand in wells, do you need to build that out more?

I guess I'm asking, are you satisfied with your logistics footprint or is this an area where we need to build up a little bit better?

This is all part of the entire story I am talking about, as well.

We are gradually expanding that to make sure that we can meet changes to how our customers want to operate, but also continue this expansion of our business.

So we continue to invest in that.

And given the fact that we have grown so much over the past year, as I mentioned, 8 additional fleets in the past four quarters, we are at the point now that we are upgrading some of this as well, and that is resulting in some additional costs in this quarter.

Okay.

Thank you.

Real quick question.

Simon, could you just tell me where the share count was at the end of the quarter, if you don't mind?

Okay.

Well, the average for the quarter was 1.315 billion.

And this is a result of what we purchased during the quarter, which is 11.5 million shares.

So your question about the end of the quarter --

Just at the end of the quarter, just help me understand that.

I think towards the end of the quarter, I have to confirm this figure for you, will be about 1.38 billion.

Okay.

Thank you very much.

You're welcome.

Your next question comes from the line of Angie Sedita from UBS.

Please go ahead.

Thanks.

Good morning, guys.

Good morning.

So Paal, on the Analyst Day, it certainly was clear that Schlumberger has decided that land rigs are important to furthering your technology.

And you just discussed the Precision deal that you acquired earlier in the year, the Saxon, 100% of Saxton.

So can you talk about how that differs and the thoughts there in being able to integrate the rig with the bottom hole assembly, and the time line to actually develop a newly designed rig and how many rigs could you actually put into the market over the next three years?

If I first address the alliance with Precision versus the acquisition of Saxton, so Saxton is generally focused on the international markets, and that's the mean that we are going to use to pursue the international well construction market.

As of now, we have decided to pursue the North America well construction market more through alliances, and that's where the Precision Drilling alliance comes into play.

So in terms of our investment into a new rig, into new rig technologies, that is something we're just starting, so that's going to obviously take a little bit of time before we have something to put into the market.

So I can't give you a specific number of how many rigs we will put in to the market, but that will be when the rig is ready and we will then just gradually add capacity as we have viable work for these type of rigs going forward.

So we have two different strategies, one for North America, through the Precision Drilling type of an alliance, and through our own rigs in the international markets.

Okay.

Fair enough.

And then on China, you hit on it on your opening comments, but clearly things have changed there with the recent events, with the corruption of CNBC and the slowdown of PetroChina.

So has that just changed your near-term outlook for China, or your long-term outlook, as well?

And now do you believe it could be difficult for the independent Chinese oil service companies to succeed in the region?

Well, I can't really comment on how it's going to be for the independent Chinese companies, but I would say that the main thing that is changing for us is the short term.

We are still very bullish on the medium to long-term growth prospects in China.

We are very well set up in China to be part of that, through our technology and integration capabilities.

So as these processes continue and hopefully draw to a conclusion over the next couple of quarters, we see growth being tempered; but beyond that, I'm very bullish on China going forward.

Great.

Thanks.

I'll turn it over.

Thank you.

Your next question comes from the line of Michael LaMotte from Guggenheim.

Please go ahead.

Thanks.

Good morning, guys.

Paal, if I could return to the Precision and North America strategy question a little bit and maybe ask you to address it within the context of the joint venture that you did last year with Forest in the Eagle Ford.

My understanding of that venture was that it was really about establishing a business model in the US of integrated services and control of project.

Can you contrast that versus what we're seeing now in the Precision arrangement, which looks more like Schlumberger as a supplier or vendor to a general contractor?

I think these are two different things.

So within IPM, we have two different business models.

One is well construction and one is production management.

And the Forest deal we did is a production management type of deal, where we are paid on a fee per barrel, while the alliance with Precision is more along the well construction lines.

So in some cases, we end up being the general contractor and we either own the rig or rent the rig and deploy our services through that.

Or in the case with Precision Drilling, we will be renting them our down hole equipment, while they are the general contractor.

So these are different permutations of the well construction model.

Thank you for the clarification.

That helps.

Simon, if I could ask a quick one for you on Venezuela and on the Bolivar exposure.

Paal in his prepared comments talked about the good performance, even on DSOs.

Can you talk about what the currency impacts are there and what they might be here in the third quarter?

So in the third quarter, we don't -- I mean, in the third quarter, our assumption that the exchange rate for the Bolivar will continue at the same rate as we are using today, and this is 6.3 Bolivars to a dollar.

Some of our revenues are in Bolivars.

And obviously the receivables, some of the outstanding receivables are also in Bolivars.

If the exchange rate will change, will definitely impact us.

I don't know to what extent the exchange rate will change.

We know about the different exchange rates that are being used and we simulate our results on the various exchange rates.

But for the time being, our Q3 assumption that there will be no change.

No change.

Okay.

Thank you.

Your next question comes from the line of Jim Wicklund from Credit Suisse.

Please go ahead.

Good morning, guys.

If we could shift to Latin America, Mexico first, if I could.

Revenues were down.

We all know what's kind of going on in Mexico.

You've won some projects, you mentioned you had some rigs down in IPM projects in the south.

Can you walk us through the next 18 months of what you expect to see happen in Mexico?

18 months is a long time, Jim, but I'll -- let's start off with H2.

We see activity picking up in the second half of the year, and that's going to be primarily in Marine, but also in the North.

We've had, in addition to the Mega Tender, also several service contract wins in Marine and in the South, which is going to give us further market share gains.

So this area is still impacted by the budget constraints of PEMEX.

So as we work through that, we still see growth in the second half of the year, but I believe most of these budget constraints, as well as the rig shutdowns, will be sorted out over the next one to two quarters.

So while I expect growth in the second half of the year, I'm still a lot more optimistic about 2015, and hope that we can get back on track to have a really good year next year in Mexico.

Through 2015 covers my 18 months.

I appreciate that.

Now can you do the same thing for me for Brazil, considering the drilling contract is now being retendered.

Do we expect that really to switch over at the end of the year?

And what's the implication for your idle equipment in Brazil, if that happens?

First of all, we don't have any idle equipment in Brazil.

We don't hold idle equipment around in various countries.

If it's idle, we put it into the pool and put it to use.

But in Brazil, this year is obviously significantly down, both due to pricing and significantly lower activity.

There might be some uptick in 2015, but I'm not as optimistic on the improvement in 2015 in Brazil as I am in Mexico.

I think we will see improvements in activity, partly due to the drilling activities surrounding around 11 exploration awards, which is going to start for some of the IOCs in 2015.

And there could also be a challenge that Petrobras will increase some of their activity.

But I'm a bit more guarded on how great 2015 will be in Brazil.

And for these two contracts that are now tendered, I expect them to be quite competitively bid again.

I don't think there's going to be any dramatic change to that.

Now, we'll see what happens.

Okay.

Thank you very much.

Thanks.

Your next question comes from the line of Doug Becker from Bank of America-Merrill Lynch.

Please go ahead.

Thanks.

I wanted to circle back on North America.

First quarter was impacted by weather.

We saw second quarter impacted by some of the supply chain, sand, labor issues.

Just any quantification in terms of what type of impact we have here that would be outside the norm?

I can't give you that like I reviewed in, I think, the first question from Ole.

There's a lot of moving parts from us.

Supply chain has some impact, but there's a lot of other moving parts that I just reviewed.

So I can't break it down for you.

But with all the moving parts, 53 basis points down isn't dramatic.

And we are quite confident that we can improve margins going forward from this point.

Sure.

Maybe just order of impact between supply chain, sand, labor, just --

I'm not going to break it down any further.

Okay.

And then just circling back on Latin America, just an update on the mobilization for the Mega Tenders, is that on pace to become complete this year, or do we actually maybe see some margin improvement in the fourth quarter as that winds down?

No, we are on track with mobilization for that.

A fair bit of the equipment that we needed for those contracts we already had in-country.

So at this stage, we are operating 10 rigs across three projects for the Mega Tenders.

This will probably gradually increase in the second half of the year.

But I don't expect any significant negative margin impact for the mobilization, so we should see progress from this point.

Thank you.

Your next question comes from the line of Bill Herbert from Simmons and Company.

Please go ahead.

Thank you.

Good morning.

Good morning.

Question with regard to international revenue outlook for the second half of the year.

First half, broadly speaking, we were up about 5% year-over-year.

What do you think would be a reasonable expectation for second half on a year-over-year basis?

Well, if you correct for Framo, which was counted as revenue in H1 of last year, and obviously now as a minority interest in one sub sea this year, our international revenue was up 7% in H1.

Okay.

And we expect that at least to continue in the second half of the year.

Okay.

And a similar question, incremental margins were about 75% year-over-year.

Stunningly strong.

I expect them to moderate for the second half of the year.

But I guess the question is -- I know your target for 2017 on a consolidated basis is 40%.

But it just seems to be that the execution is generating considerably stronger incrementals than, frankly, most seasoned observers have been expecting.

Well, was there a question or -- ?

I mean, I guess the observation and the question is the sustainability of what we've seen in the first half.

I'm modeling a considerable moderation, and that's what the Street estimates convey.

And yet you continue to outperform markedly on front.

Fair enough.

Fair enough.

So H1, like you said, I think we're about 65% incremental.

So I think it's fair to say that there might be some moderation in the second half of the year.

Now we are working very hard on keeping these incrementals up, and the strength of our position internationally should allow us to have higher incremental margins than obviously what we see in North America.

Whether it's going to go down from the 65, potentially it could, but we are going to do our best to keep it as high as possible.

Thank you.

Your next question comes from the line of Jeff Tillery from Tudor, Pickering, Holt.

Please go ahead.

Hello.

Good morning.

Just wanted to follow up on North America, outside of the supply chain side.

You mentioned on-boarding of some of the acquired companies.

If you could just talk about the artificial lift business in aggregate.

A dozen different companies in rod lifts.

Where are you in the continuum of bringing everything to some sort of standardization, or getting your manufacturing and operational efficiency where you want to be, and what sort of time line would you think that occurs on?

That's a good question.

So we are in the early phases of bringing everything together.

So we are not looking to integrate each of these 12, 13 companies into one completely unified entity.

They are working in different basins.

They all have their individual setups.

But we are looking to consolidate supply chain as much as possible, and also take the best practices from the individual companies and try to populate them across all the different companies.

So this is going to be done gradually, and I still think it's going to take us probably a good 12 to 18 months to get everything set up exactly the I way we want.

These companies are well run.

It is a different business than what we have been in in the past, and we are also partly learning some of the things as we go into it.

But I would say it probably will take us at least another 12 months to get the setup of exactly the way we want it.

And then you referred, on the last conference call, to you have to be in the game in order to change it from a technology standpoint.

How should we think about that time line for introducing new technology in that business?

Does that come post that 12-month period, or should we look for some markers here in the interim?

What we are gradually doing now is to bringing our ESP business closer together to these rod pump companies.

Because we still believe that there is a period of utilization for different type of lift solutions throughout the life of the well.

So by having a very good footprint when it comes to rod pump market share, it should be easier for us to penetrate this market in the early phase of the wells, before you put the rod pump on the well, with our ESP.

So the first step in getting more technology into this is to increase the penetration of ESPs on that rod pump footprint.

Thank you very much, Paal.

Thank you.

Your next question comes from the line of Waqar Syed from Goldman Sachs.

Please go ahead.

Thank you.

Paal, there have been some comments out of some major operators in the Norwegian area about maybe relooking at their capital spending.

What's your outlook for Norway for the second half, and maybe more also on the 2015 -- in 2015?

Well, if we focus on H2, for the summer months, we expect a normal impact from the rig maintenance, both in the UK and Norway.

But as of now, we have a solid activity outlook for the remaining part of the year in Norway.

We have some good contract wins recently.

There is some other work that is out for bid that will probably be awarded relatively soon.

Some of these contracts are key for us, so we are hopeful that we will be successful in winning them.

So I think overall, I'm positive on the activity outlook for Norway for the second half of the year.

Okay.

And then in [Cairo] Sea, there is some important drilling going on.

Are there any discussions going on regarding anything follow-up beyond the first well right now, or is it too early to have that until we see the results from the first well?

You're talking about Russia?

Yes, that's right.

I don't know the detail of the specific well you're referring to, but I am aware that there is good activity in the Arctic in the second half of this year.

Going into 2015, I don't have any detailed visibility yet, but there is strong focus on advancing both these exploration and development programs in the Arctic in Russia, and we are actively participating in that.

Okay.

Thank you very much.

That's all I have.

Thank you.

Your next question comes from the line of Brad Handler from Jefferies.

Please go ahead.

Thanks.

Good morning, guys.

Good morning.

Couple of questions related to seismic, please.

Obviously, you've laid out your macro view, and that's very helpful, but noted that multi-client sales in the second quarter were particularly soft.

I guess they haven't been this soft in a few years.

And I'm curious if you can put that into some greater context for us and give us a sense of if that has implications for your you views on the fourth quarter, which is obviously where it's seasonally strongest, generally.

And then secondly, just perhaps overall for the year, I think you signaled that you expect seismic to be down for the industry, but I'm not as clear if that's what you expect for yourselves, as well, or are some things like IsoMetrix and other factors helping you out on a relative basis?

Okay.

If we started with multi-client, like you said, multi-client revenue in Q2 was weaker than we expected, at $133 million.

This is down 47% year-on-year, which is quite significant.

It is not surprising that multi-client revenue falls when there is basically added scrutiny on exploration and seismic spend.

But we are now at the lowest level that we've seen since 2009, just following the financial crisis.

But we managed to absorb that reduction in the second quarter and still deliver on the quarter, which I'm pleased with.

In terms of the rest of the year, I expect Q3 to be fairly similar to Q2.

I don't expect any significant improvement.

There should be a year-end effect.

It might not be as high as what we saw in 2013, but I still expect there to be a surge towards year-end, but potentially lower.

In terms of the overall outlook for seismic for us, we also expected to be down in terms of overall revenue for this year.

And it's driven then partly by multi-client and also through Marine where we, at this stage, have gone from 15 vessels at the beginning of the year down to 13 vessels at the end of Q2, and we plan to reduce also down to 12 vessels in Q4.

So we are doing this to maintain profitability and utilization, and we'll continue to look at further vessel stacks, if it's necessary.

Got it.

Thank you very much.

Very helpful.

Your next question comes from the line of Bill Sanchez from Howard Weil.

Please go ahead.

Thanks.

Good morning.

Good morning.

Paal, I wanted to ask you, just quickly, on your offshore revenue growth outlook here.

Clearly, the offshore revenue component is very important for Schlumberger.

How are you seeing that unfold here versus maybe where you were at the beginning of the year, given the fact that we've certainly seen some utilization challenges on the floater side, as new capacity has come into the market?

And certainly, you mentioned again the demand waning here on the IOC side.

Has there been any material changes, as you think about revenue growth here for you, what should the market externally look at?

Clearly, we see the utilization numbers and we're able to track that.

We know day rates have come down significantly.

We know you've got share opportunities here that you're gaining.

How do we think about the offshore revenue stream for Schlumberger?

Well, if you look at the international market, so far this year we've seen about 6% growth in rig count on land, as well as 6% growth in rig count for the conventional offshore.

Deepwater is basically two stories.

You have Brazil, which is down about 27% year-to-date, while the rest of the world is also up about 6%, which is similar to the conventional offshore.

So there's really no change to what we expected going into the year.

We had factored into our deepwater plans some lower utilizations, as we were expecting these commercial discussions on rig rates to lead to lower utilization.

Some of these discussions have concluded actually quicker than what we thought, and I think that has a positive impact on the utilization versus what we assume.

But really nothing dramatic.

We expected Brazil to be down significantly and the rest of offshore to continue to grow at a solid pace.

And 6% is -- we consider that quite good.

Okay.

So the rate of growth, really nothing's changed?

No.

Okay.

I appreciate the time.

I'll turn it back.

Thank you.

Your next question comes from the line of Michael LaMotte from Guggenheim.

Please go ahead.

Just a quick follow-up, Simon.

Can you give us a breakdown of how much of the 16% growth year-on-year in North America was organic versus the acquired companies?

Well, Michael, we obviously have these numbers, but we're not going to disclose all of these details.

Okay.

Thank you.

Thanks.

And your final question today comes from the line of Rob MacKenzie from Iberia Capital.

Please go ahead.

Hello, guys.

I guess I got a little bit of a different question for you on the lift business than what you've had so far.

My question is centered around your view of where that business develops over time.

Because clearly, obviously buying rod lift companies and the dumb iron, if you will, associated with that is not something that is something Schlumberger's typically been interested in in the past.

Is there another angle here we should be looking at, namely perhaps making it more of a service delivery business through the life of a field versus just a pure equipment sale business?

What's your vision for where that segment goes?

It's a very good question.

I think there are two things to be said about that.

Firstly, I think over time there are things that could be done to advance the technology that is used.

Now, I think you will be needing a range of technologies, because the flow rates of these wells, they vary gradually with time.

But I think there are things that could be done, both on the ESP side and on the PCP rod lift side, which we are working on.

So that's on the technology itself.

But the other part is the business model, like you allude to.

And our view of this for the future would be that we potentially ultimately can sell lift.

So we will take on the well and we will basically have a business model where we are paid on production for up time, on our ability to maximize production through the optimal lift solution for the well.

So that is our view on the future.

That's why we are getting into this, and again, changing the game will have to be done from within.

Rod pumps are going to be key in this, based on the installed base in North America land.

But I think there's opportunity to optimize the technology and there is also a very good opportunity to potentially change the business model over time.

Great.

How would you help us thinking about how that trajectory looks, how long it takes, pace of adoption and so on and so forth?

It's a bit difficult to predict on that, Rob.

But what we are focusing on now is to basically consolidate all these companies that we have both, gain a further understanding of the market, and get closer to this part of our customer base which we haven't worked on -- worked with closely in the past.

And I think as we do that and establish ourselves as a credible player in this market, which I think we can do relatively quickly, I think our chances of starting to change this business model, say over the next one to two years, should be there.

Great.

Thank you very much.

Thank you.

Okay.

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

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

Greg, will you now please provide the closing comment?

Thank you.

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