斯倫貝謝公司 (SLB) 2014 Q3 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 lines are in a listen-only mode.

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

(Operator Instructions)

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

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

Please go ahead.

Thank you, Cynthia.

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

Today's call is being hosted from New York, 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 would 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 is included in the earnings press release on our website.

We welcome your questions after the prepared statements.

Please limit to one question and a related follow-up.

I will now turn the call over to Simon.

Thank you, Simon.

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

Third-quarter earnings per share from continuing operations was $1.49.

This is an increase of $0.20 sequentially, and is $0.20 higher when compared to the same quarter last year, and represents increases of 9% and 16% respectively.

Third-quarter revenue of $12.6 billion increased 4.9% sequentially.

Pre-tax operating income increased 7.1% sequentially, while pre-tax operating margins improved 45 basis points to 22.2%.

Sequential highlights by both product groups were as follows.

There's a broad characterization revenue of $3.2 billion, increased 2.9% while margin improved by 29 basis points to 30%.

This growth was driven by a very strong performance in Testing Services, improved Western GeCo marine utilization, and an increase in SIS software sales.

These increases were offset in part by lower multi-client sales.

Drilling group revenue of $4.8 billion, increased 3.6%, and margins improved by 60 basis points to 21.7%.

These increases were largely attributable to robust drilling and measurement activity in offshore North America, Latin America, and Russia, and a strong IPM activity in Mexico.

The second quarter acquisition of Saxon also contributed to the revenue growth.

Production group revenue of $4.7 billion increased 8.1%.

This growth was led by Well Services, largely as a result of the rebound from the spring break-up in Canada, and a strong performance on US land.

An increase in completion in product sales in Latin America and the Middle East and Asia, and expanding artificial lift sales in North America, also contributed to the growth.

Margin expanded by 158 basis points to 18.3%, primarily as a result of the rebound from the Canadian spring break-up, as well as from improved efficiency and recovery of logistical costs in Well Services.

Now turning to Schlumberger as a whole.

The effective tax rate was 22.1% in the third quarter, compared to 21.7% in the previous quarter.

During the quarter, we generated $3.1 billion of cash flow from operations.

For the first nine months of this year, we have generated $7.3 billion of cash flow from operations.

This compares to $6.6 billion for the same nine months of 2013.

As we mentioned, starting last quarter we began to report SPM investment separately in our cash-flow statement, similar to the way we report CapEx and multi-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.

The 2013 cash flow from operations figure has been re-stated to reflect this change.

Net debt decreased $221 million during the quarter to $5.8 billion.

Significant liquidity events during the quarter included $1.5 billion of stock repurchases, $519 million of dividend payments, and $980 million of CapEx, excluding multi-client and SPM.

During the quarter, we repurchased 13.9 million shares, at an average price of $108.41.

CapEx excluding 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.

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

Thank you Simon, and good morning, everyone.

Our third-quarter results set a new record for Schlumberger, driven by North America, and further backed by robust international performance.

In the international markets, growth was led by Latin America and Europe, CIS, and Africa, in spite of headwinds in Russia and Libya, while Middle East and Asia proved highly resilient in the face of a significant slow-down in northern Iraq.

Third-quarter revenue grew 5% sequentially, and 9% year on year, while pre-tax operating income increased 7% sequentially, and 12% year on year.

Several factors contributed to this performance, including continued market penetration of new technologies that helped further drive our international margins, as well as margin gains in North America from operational efficiency and market-share improvements.

Overall, our performance demonstrated the advantage of size, and the benefit of a broad technology offering and operational footprint, while providing further proof of our leadership and technology, reliability, efficiency, and integration.

In terms of our financial performance, we generated more than $1.8 billion in free cash flow in the third quarter bringing the year-to-date total up to $3.7 billion.

This represents a 29% increase over the comparable period in 2013, and a conversion of 93% of our third-quarter earnings into free cash flow.

Based on our improved ability to generate free cash, we continued our active stock buy-back program during the quarter, buying back $1.5 billion of stock, which puts us firmly on track to complete our $10-billion buy-back program within the stated two-and-a-half-year period.

Looking at the operating areas, our North American results set a new record, with revenue up 9% sequentially and 18% year over year, while margins increased by 137 basis points to reach 19.4%.

This is in spite of headwinds from heavy rainfall in the Permian Basin that limited land activity in the US, loop currents that slowed offshore activity in the Gulf of Mexico, and very low multi-client seismic sales.

In Canada, activity rebounded well after the spring break-up in the second quarter, and this together with a further increase in land activity in the US, helped generate record land revenue, representing a 9% increase sequentially.

Much of this increase came from hydraulic fracturing operations, where stage counts were higher, where we also obtained improved cost recovery from our customers, and where we saw strong performance from our supply chain, and distribution organization following the challenges we experienced in Q2.

Offshore, revenue improved by 12% sequentially, driven by strong activity in eastern Canada, and by market share gains in drilling services in the Gulf of Mexico.

North America also benefited from further growth and expansion of our artificial lift business, and I will return to this growth initiative later in the call.

Our international business posted strong results again in the third quarter, with a 3% sequential increase in revenue, and with pre-tax operating margin expanding 55 basis points to 24.6%, which is the highest level seen in five years, in spite of the geopolitical headwinds experienced in Russia, northern Iraq, and Libya.

Compared to the third quarter of last year, international revenue was up 5%, on the back of strong growth in key markets in Latin America, sub-Saharan Africa, Saudi Arabia, the United Arab Emirates, and Australia, and with strong incremental margins, at 50%.

In terms of pricing, the international markets remains highly competitive for basic services, and we see no sign of any general pricing inflection.

However, we continue to be able to drive effective pricing through sale of new and unique technology, together with continued growth in integration- and performance-based contracts.

This combination puts us in a very strong competitive position, which we continue to leverage to drive market-share gains and expand operating margins.

Within the international areas, revenue in Latin America was up by a strong 10% sequentially, with margins increasing to 21.9%, and with all geo-markets recording growth.

Compared to the third quarter last year, Latin America revenue was up 5%, driven by Argentina, Venezuela, Colombia, and Ecuador, with moderate growth in Mexico, and lower revenues in Brazil.

Pre-tax operating income also increased year over year, driven by strong activity throughout our broad and diverse contracts portfolio, as well as through careful cost and resource management.

In Argentina, our strong sequential growth was driven by rig-based activity for development of both conventional and unconventional resources.

Customers announced seeing clear results from applying our industry-leading shale work flows and technologies, in terms of both increased production and greater efficiency.

In Mexico, revenue grew on higher IPM project work on land, resolution of the social issues related to our project in the south, in addition to stronger deep water activity.

As the energy reform continues to move ahead, we won a significant multi-year contract to build and manage the national data repository, and to prepare data rooms that will be needed for the country's first public oil tenders next year.

In Venezuela activity increased further in the third quarter, supported by strong up-take of new technology, while payments continue to be made in line with the signed agreements.

In Europe, CIS, and Africa, revenue grew 1% sequentially, while margins improved by 132 basis points to 23.4%, as exploration activity strengthened in Angola, and new projects started in other parts of sub-Saharan Africa.

Compared to the same quarter last year, revenue grew by 4%, and margins were up by 103 basis points.

Activity in Russia benefited from a strong summer season, particularly offshore [Sarcaland], and in the arctic, but growth was tempered by the impact of international sanctions.

Earlier in the third quarter, we announced the likely effects of sanctions on our results in Russia, and this ultimately translated into a $0.02 impact coming from restructuring costs to remain in compliance, and some impact from activity, and a weaker ruble.

In other parts of the Europe, CIS, and Africa area, activity was mixed in the North Sea, with increased software sales in the UK, but lower activity in Norway, as peak seismic and drilling activity ended.

In north Africa, significant operational delays were experienced in Algeria, and activity slowed in Tunisia, ahead of the November election.

Operations in Libya continues to be challenging, with a very complex security situation, and with activity remaining at the minimal level.

We are currently carefully evaluating our operational structure in the country, and will resize resources in accordance with a 2015 activity outlook.

On the positive side, however, we remain active offshore, and we continue to have a constructive view on the long-term potential of the country.

In the Middle East and Asia area, revenue was essentially flat with the previous quarter, with margins stable at 27.6%, as growth in Saudi Arabia and Oman offset lower revenue in Iraq and India, and with activity in Asia largely unchanged from the second quarter.

Year-on-year revenue increased by 6%, and margins grew by 149 basis points.

In the Middle East, activity growth was strongest in Saudi Arabia, with new rigs mobilizing, exploration activity strengthening, and development drilling increasing.

We have added resources to match the additional work in the country, and we expect to see further increases in activity, as more drilling rigs are added, and rig-less activity continues to expand.

We also saw solid growth in Oman, with strong artificial lift product sales, and market-share gains in drilling services.

As for in the Middle East, activity was lower in India, on lower product sales and the effects of the monsoon season.

Activity was also lower in northern Iraq, as unrest in the area increased, and forced a complete shutdown of our operations for part of the third quarter.

The security situation has improved more recently, and rigs are slowly returning to work.

In southern Iraq, there was no security impact on our operations in the third quarter, but activity remains lower compared to the same quarter last year, as new contract awards continue to be delayed.

With government approvals and new contract awards still pending, we do not expect any significant improvement in activity in the near term.

Southeast Asia revenue was also flat for the second quarter, as activity slow-downs in Australia and lack of exploration success in Malaysia and Thailand were offset by stronger activity in Vietnam, marine seismic work in Brunei, and improved product sales in other Asian geo-markets.

China saw sequential growth in shale gas development on land, together with continuing strong activity offshore in Bohai Bay.

Elsewhere in China, activity continued to be slow, and we do not see further growth until our customers' spending plans become clearer.

I would now like to update you on the progress we have made in our artificial lift business since we outlined our growth strategy for this market in New York in June.

First, in addition to our existing basin coverage in North America established through an active M&A program over the past year, we have in the third quarter completed several new acquisitions to further expand our operational footprint in Canada.

Second, in line with our goal of optimizing cost efficiency and reliability, we have injected additional supply chain, engineering, and manufacturing capabilities to our rod lift organization, to drive additional value from design, quality assurance, sourcing, and distribution.

Third, in order to address the growing market for live-for-well lift solutions in the unconventional market, we have combined all Schlumberger artificial lift technologies in North America into a single organization that will cover ESP, PCP gas lift, and rod lift systems.

This has given us one customer-facing organization with a complete technical portfolio, capable of recognizing business opportunities throughout the entire spectrum of the artificial lift market.

Integration of the various components of this organization is progressing very well, with our ultimate goal being to offer our customers a complete range of industry-leading technology, together with best-in-class local service.

We remain on track to sell more than 7,000 pump jacks and installing over 5,000 PCPs in 2014 in North America.

Through the careful execution of our growth strategy over the past year, we have now firmly assumed the leadership position in the global artificial lift market.

I would also like to give you a progress report of the transformation program we outlined in New York, where we are already starting to change the way we manage our people, our assets, and our inventory to further improve our financial performance.

In southeast Asia, we concluded the successful piloting of a centralized asset management and maintenance facility for our Wireline product line, reducing the down haul tool fleet by more than 30%, compared to the previous level required to service the region.

The surplus of assets that this initiative created have already been redeployed to capture new business opportunities and support growth in other regions, and our Wireline product line is in the process of expanding this model to other areas.

We have also extended the coverage of our regional distribution centers to new areas in South America, resulting in an average 10% reduction in spares on hand versus 2013 for the product lines currently involved.

Worldwide coverage for spares distribution will be achieved in the coming months with the creation of a third distribution center in Rotterdam.

Implementation of revised job execution and competency assurance processes also continues, and is already showing notable reliability improvements.

In Wireline, the systematic deployment of new standard work constructions has already in 2014 produced a 30% reduction in customer non-productive time compared to last year.

Turning then to the economic environment, the outlook for global GDP growth softened somewhat during the third quarter, on weaker data from Europe and China, also leading to a slight downward revision of the absolute oil demand outlook.

Given the strength of the US economy and the ongoing efforts to stimulate and manage growth in Europe and China, we continue to believe that the slow but steady recovery in the world economy is still intact, and that the overall oil demand situation is largely unchanged.

While market sentiments are currently driven by fair or short-term over-supply due to the continued growth in North America production, we still see the supply situation as relatively well-balanced, given the continued challenges in the non-NAM, non-OPEC production base, lack of growth in OPEC sustainable production capacity maintaining tightness in OPEC spare capacity, and with the continued geopolitical risks in several key producers.

We therefore expect Brent to recover and stabilize when and at the level that is deemed appropriate by the main oil producers.

The key to the overall oil market is still that the global oil demand is currently set to increase by 1.1 million barrels per day in 2015, which will require growth in EMP investments.

Where the growth in EMP investments will take place will be a function of what level the oil price stabilizes at, and where a lower oil price will likely lead to more of the investment taking place in lower operating cost environments.

For natural gas, markets remain comfortably supplied, although with the upward pricing trends in Asia Pacific and Europe as winter approaches.

Based on this macro setting, which continues to include a mix of economic and geopolitical head winds and tail winds, we maintain the long-term view that we outlined in June in New York, believing in continued solid demand for our products, services, and expertise.

We also firmly believe that opportunities exist for differentiated growth through new technology and greater integration, and that the transformational impact of our reliability and efficiency programs will further support and accelerate our financial out-performance.

That concludes my remarks.

Thank you, we will now open up for questions.

Thank you.

(Operator Instructions)

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

Thank you very much, and excellent execution.

I have a few questions on various technologies, but I think I'm going to leave that for now.

Probably on everybody's mind right now is the oil balance, and the tipping point in oil, and where we stand.

The volatility has been tremendous.

I think everybody is confused about what level of CapEx will be required, given what's going on.

You opened Pandora's box about talking about spare capacity and how you see it.

I wonder whether you could expand a little bit about what gives you confidence?

Well, I think if you look at what the sentiments in the market are today, it is obviously driven by the fear of over-supply.

But if we go back to the status of the global economy, yes there was a downward revision in GDP growth outlook, but this was only slightly.

We're still looking at 2.7% and 3.2% growth in GDP in 2014 and 2015, and this is only 0.2% down for both years.

Like I said, the overall slow but steady recovery in the global economy we believe is still intact.

If you now look at the demand side, there was a corresponding downward revision of the oil demand for both 2014 and 2015, but the key here is to look at the absolute demand, because the IEA for 2014 changed both the 2013 actual demand, and the updated 2014 demand.

If you look at the 2014 absolute demand, it is still at the February level, and only 0.2 million barrels a day down from the July peak.

The 2015 absolute demand is now 93.5, which is still 1.1 million barrels a day up.

Based on this, we see the demand side of the oil market also as more or less unchanged.

What's left is to look at the real supply situation, and we don't think that has changed dramatically in terms of fundamental supply capacity since Q2, as well.

That's because of there is lack of growth in OPEC sustainable production capacity.

Actually, if you look at the IEA report, the OPEC sustainable production capacity is actually down 800,000 barrels a day in September of 2014 versus last year.

There's also continued weakness in non-NAM, non-OPEC production, and there is still geopolitical risk related to both Libya and Iraq.

Based on this, we see the overall supply picture as more or less unchanged as well versus Q2.

With the growth in demand for next year, we believe there has to be increased spending levels.

Where this spending is going to take place, I think it's going to be a function of where the oil price stabilizes.

At the lower oil price, we believe that more of these investments will take place in lower operating cost environments.

If the oil price stabilizes back at the levels we saw earlier this year, then we might continue with a similar picture next year as we had this year.

That's our overall view.

To summarize, Paal, you believe the spare capacity in the global system today is going down for the next two years?

Well, I would say at least it's not going up.

So far this year, it's been flat.

When production -- when more production is offered into the market, it is at the expense of the spare capacity.

Our next question will come from the line of Bill Herbert with Simmons & Company.

Paal, I was hoping you could frame, in light of your macro outlook, perceived international opportunities and threats, or headwinds and tail winds and how that, at least conceptually, coalesces into an outlook for next year?

The market of late seems to have been unduly focused on the prominent threats.

Moreover, also if you could comment on margins as well?

I was struck by how resilient your Eastern Hemisphere margins were in light of the dislocations that unfolded in the third quarter.

Okay, well if I first start with the second part of your question.

We are very pleased with the performance of our international business, including Latin America.

Year-to-date international revenues up by 5%, which is out-growing the growth in EMP spending in international market.

Our operating income is up 15%, with incremental margins of 66%.

Today I'm already instanced internationally at 24.6%, which is the highest level we've seen since the 2008 pre-financial crisis peak.

I think it's important to note that as well that about 80% of our global operating income growth so far in 2014 is actually generated in the international market on a relatively low growth in EMP spend.

If you look at what happened in 2014, like you say, there was a good mix of tail winds and headwinds.

If you look at the tail winds this year, in terms of geographies it's been Argentina, Ecuador, sub-Sahara Africa, Saudi, and the UAE.

In terms of the type of basins, it's been land and conventional offshore that's been driving the growth.

In terms of customer groups, its been independence and NOCs.

Now if you look at the flip side for the headwinds, geographically it's been Brazil, Mexico, Libya, Russia, Iraq, and China.

In terms of the basins, it's deep water and exploration, and in particular seismic.

Also, in customer groups it's been the IOCs going from solid growth to flat spending in 2014.

Now these headwinds will make up around $1.1 billion of full-year revenue reduction for us versus 2013.

Looking at our full-year revenue growth for 2014 in the international market it's going to be around 5%.

That includes absorbing all these significant headwinds.

We have managed this growth at the same time as we have expanded margins by about 200 basis points, and as I mentioned, very strong incrementals.

It really demonstrates the strength and the earnings growth resilience we have in our international business.

If you look at 2015, we expect that we will continue to see a mix of headwinds and tail winds in the international market.

The tail winds may not be as strong, depending on where the EMP spend levels off; but several of the headwinds will largely diminish, as well.

Brazil and Mexico are likely to be tail winds next year.

Deep water exploration, as well as Libya, Iraq, China, should also be less of a drag than what we saw this year.

That really leaves Russia and Asia as the main headwinds that we're going to be facing.

The overall balance will become clearer in these two regions in Q4.

Still, we expect to see strong earnings growth from our international business also in 2015.

Very good, thank you, sir.

Thanks.

Thank you.

Our next question will come from the line of Jim Wicklund with Credit Suisse.

Good morning.

Let me move to North America, if I could.

Your market-share gains you mentioned in the Gulf of Mexico and the 12% revenue growth were impressive, considering that we've all been reading and hearing about loop currents and weather -- and you had warned about weather.

Can you talk to us a little bit about your mix, your customer mix, and the other things that are allowing you to do so well in the Gulf of Mexico?

Well I think we again, Jim, we have a broad portfolio.

We have a good balance in the Gulf of Mexico between characterization drilling and production.

Our offshore business in North America also includes a very strong position offshore eastern Canada, which was also quite strong in Q3.

We were impacted by the loop currents; but at the same time, we have a sizeable business.

While some rigs were shut down for this, there were a number of rigs continuing to operate without any impact.

When you have a certain size, then, some of these events, it's easier to absorb them as you go forward.

Impressive.

My follow-up, if I could.

I agree with you completely on the outlook for spending and the need to maintain current production, but clearly, US independent spend-off off cash flow, so that puts the US activity probably most at risk.

My question is, is there a risk that pressure-pumping pricing in a slower market crashes again like it did a couple of years ago, or have we had enough capital discipline in the industry that that's not likely to happen?

Well, it's a good question.

I think it's going to be a function of activity of course, right?

Like you say, we agree that the 2015 activity it's too early to say what's going to happen; but it is clearly going to be a function of the level of free cash flow for the EMPs, which was already negative in general at the WTI of 90.

The key going forward is going to be their continued borrowing capacity.

There's really two scenarios here that we end up with a lower WTI, further cost inflation in the EMP value chain, and reduced borrowing capacity.

This will likely have an impact on spending growth rates.

On the flip side, if we see a recovery of the WTI, and also we see limited cost inflation in the EMP value chain, I think these are the factors that would support further spending growth.

But looking at pressure-pumping pricing, it's going to be a function of the activity levels, and how much horsepower capacity has been ordered in the past couple of quarters.

I believe that it's a fair bit already on order.

If the spending growth is impacted, I think it can quickly put pressure on frac pricing, including both sand and transportation, as well.

Thank you.

Next we will go to the line of James West with ISI Group.

In the release, in your remarks, I was struck by how many times you highlighted strength in deep-water activity and strong exploration activity, particularly in deep-water drilling.

It seems like there's a big debate in the market right now about deep water.

How do you see that activity evolving over the next year or two?

For deep water?

Yes.

Well, I think if you look at first the deep water rig supply, it was at a record high in Q3.

At the same time, the number of stacked rigs continued to increase.

There's a further 10 new rigs planned for delivery in Q4.

I think it's very clear we are in an over-supply situation of deep-water rigs at this stage.

If you look at deep-water drilling, which is really where we make our most of our revenue, this year we expect to see a 6% decline in drilling rig activity for deep water.

This decline is mainly driven by Brazil, which is down over 30%, and partially offset by the Gulf of Mexico and west Africa.

When you exclude Brazil, deep-water drilling is actually up about 3% versus 2013.

Looking forward to 2015, we see flattish deep-water drilling activity in 2015, generally supported by lower rig rates.

We have weathered, I think, a fairly significant deep-water decline this year, and we expect it to be more or less flattish going forward into next year.

Okay, one follow-up, if I may.

A lot of the commentary was around deep-water exploratory wells.

Has your percentage of wells that you're working on in deep water on the exploration side -- has that decreased, is it steady, is it increasing?

If you look at the oil exploration market and the exploration spend, we expect now that the 2014 exploration spend will be down 4% to 5% versus last year.

This spend reduction is mainly led by seismic, which will be down more than 20%, while the exploration drilling is only slightly down.

I would say that the market is down overall, but the main driver for the reduction in exploration spend is predominantly seismic.

Thank you.

Our next question comes from the line of Angie Sedita with UBS.

Thanks.

Good morning, and nice to see that big $1.5-billion buy-back.

Thank you.

As a follow-up to one of the earlier questions on pressure pumping, and just the thoughts about North America, and obviously it's in flux.

I do believe that Schlumberger was considering building incremental new build capacity for 2015 as the markets -- given the market dynamics.

How do you feel on that now?

Is that on hold?

Are you still thinking that the market -- what are your thoughts?

Well, we have a fairly sizeable pressure-pumping business, which is including both North America and international.

We have made some orders for new pumps.

We still have some pumps left in the idle asset program.

We made some orders for new pumps, but at the level that it doesn't really worry me.

These new pumps will be distributed in between North America and international.

We've had fairly significant growth, both in Argentina and Saudi Arabia over the past 6 to 12 months.

The orders we have made is generally what we want to have on order in terms of long-lead items, to make sure that we can cover the business in any eventuality.

Okay, that's fair enough.

If you think -- I know that obviously the Middle East is very strong, particularly the Saudis.

But just theoretically, where do you think Brent needs to be before the Saudis would start to -- and the Middle East overall, excluding, Iraq of course -- where do you think Brent would need to be for them to begin to slow their drilling activities, where they start to become uncomfortable?

I know obviously they are drilling both for gas and oil.

Well, I'm not going to make any predictions at what level the Saudis would change what they are doing.

We have a very strong business in Saudi Arabia.

Growth has been very strong this year.

As of now, we continue to expect solid growth in Saudi Arabia next year, as well.

Thank you.

Our next question will come from the line of Michael LaMotte with Guggenheim.

Thanks, good morning.

Paal, you mentioned the potential for inflation in the frac value chain in US onshore.

I was just curious, given that most of that is now being driven by sand, and the transportation and distribution related to sand, how is that impacting the market for highway and broadband?

Well, I think there's no real impact from these things in particular to broadband and highway.

I think the escalating cost of transportation and sand, at this stage, I think is something that all the players are looking to pass on to the customers.

I think there's going to be a limit to how much of these additional cost escalations that our customers are prepared to take, given their free cash flow situation, and also given the drop in oil prices.

But there's no relative impact on these cost escalations on either broadband or highway.

Well, I was thinking more from a marketing standpoint, if sand availability would actually push customers to look for productivity-improving alternatives, such as highway and broadband.

Yes, we do use less sand in highway in particular, so that is obviously a selling point.

But it is more a function of what the philosophy of the customer is.

Do they want to go with a slick-water frac, which generally now has a lot higher volume of proppant, or they go to more of a cross-linked or highway type of frac, in which case the proppant volume is significantly less.

Are you seeing a shift in trend, one versus the other, materially over the last couple of quarters?

Not materially.

Highway continues to do very well.

I'm actually very pleased with how broadband is going.

Broadband at this stage of its introduction is growing significantly faster than what highway did back in 2011 and 2012.

We are now continuing to engage in broadband -- I would say presentations and broadband sales and information at the C level of our customers.

We engage at that level to establish a very clear understanding of what this technology brings, and also to try to agree on pilot programs and evaluation of these pilot programs over a period of time.

Thank you.

Our next question comes from the line of Kurt Hallead with RBC.

Paal, thanks for all of this color.

Wanted to follow-up in particular on two things.

You mentioned cost recovery dynamics that have been under way, I take, in the North American market.

Do you feel that you're at a point now where you'll be able to get some net margin accretion going forward, or is it still just offsets to the cost inflation?

I still think we're generally looking -- in terms of price increases with our customers, we are generally looking to recover the cost inflation that we're seeing.

Like we said before, we believe that the main way of driving margins in the North American pressure-pumping business will be through efficiency, and through introduction of new technologies that increases production or lowers cost or improves efficiency.

The main focus that we have now is to pass on the cost infliction that we have from our supply chain to our customers.

Like I said, given the state of the free cash flow and where the oil price is, I think the appetite from our customers will be lower in terms of how much of the further cost increases they are willing to take.

Then the second dynamic was in terms of the Libya -- excuse me, Russia, Libya, Iraq challenges that occurred during the course of the third quarter that resulted in that announcement that the earnings would be impacted by $0.02 or $0.03, and the commentary you made about it being a $0.02 impact, in particular.

What kind of lingering effects do you expect from those -- from Russia, and maybe a Libya going out into the fourth quarter?

Well, if you look at Q4 as a whole, this year we expect sequential growth in earnings per share probably around $0.05 to $0.07.

That's our target.

This is somewhat lower than the sequential increases we normally see in Q4.

There's really two primary reasons for that.

One, as you allude to, we expect to see a continued impact from the situations in Libya, Iraq, and Russia.

In particular, the ruble effect in Russia is potentially going to be higher in Q4 than what we saw in Q3.

The second main factor is the cost focus that our customers have, which is likely going to lead to lower levels of year-end sales, including both software products, but in particular multi-client.

Still the base business should continue to be solid, driven by both North America, Latin America, and the Middle East; but somewhat lower sequential growth in earnings per share in Q4 this year than what we normally see.

Thank you.

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

Thank you.

Paal, I wanted to come back and get your thoughts on Libya.

I think one of the things that's been a surprise to many is how much supply growth we've seen in that region at a time when it seems like you and others are really contracting in the area and there's very little service activity going on.

Just given your macro thoughts so far during the call, what do you view in terms of sustainability of Libyan production here, given this ramp-down in activity?

What's the trigger point for you to make a decision on whether or not you start to cut head count there?

Is that strictly going to be just on the land side, or is that going to be offshore, as well?

Well, that's a good question.

In terms of our resource base, that's something that we continue to look at in any country that we are in.

Offshore, we are currently operating on one rig.

There might be another couple rigs added in the next couple of quarters.

But that's not a significant part of the head count that is related to the offshore activity.

The main head count is focused on the land business.

The land business is, as I said, at the minimal level.

We are currently looking at what the outlook for 2015 is.

Q3 of 2014 is about 50% down in activity in Libya compared to what we saw in Q3 of last year.

That low activity in our mind, if it's not changed, would obviously have an impact on the sustainable production capacity of Libya going forward.

The fact that Libya, which I think in OPEC now is listed as I think about 900,000 barrels a day of sustainable capacity, the fact that they go from 200,000 to 900,000 over a period of time is not surprising.

I think the key here is how sustainable is that when the level of work is currently very low.

I think it will take some time before it is impacted, but obviously the key to maintain that production capacity is to continuously invest into it.

Fair enough.

My follow-up would be you mentioned Brazil now as a tail wind for next year.

Just curious, I know there's a Wireline services contract that's pending, I guess.

Can you talk about timing on that.

Would that be incremental to Schlumberger, or is that strictly just a re-tender here of an existing contract?

For Brazil, the two main contracts that have been out for tender recently has been the Wireline services one and the directional drilling LDVD contract.

We maintained the market share we had in both contracts.

We had the largest lot in Wireline, and the middle lot in drilling and measurement, which we see as good, because it basically prevents us from having any significant mobilization or de-mobilization costs, which are always key to the profitability of these type of contracts.

Both of those contracts we got quite reasonable price increases while we maintain our market share.

Activity-wise or market-share-wise, no change for us; but better pricing and really no additional cost of mobilizing or de-mobilizing.

I would say these contracts are incremental to Schlumberger in 2015.

I expect the contracts to be finalized over the next couple of quarters.

Thank you, Paal.

Thank you.

Our next question will come from the line of Jeff Tillery with Tudor, Pickering, Holt.

In talking about the exploration-oriented results for you all, obviously seismic is down; but in the release and several times with the success in Africa and sub-Saharan Africa specifically as being a tail wind for margins, just given the customer degree of exploration's success this year, how does that impact your view of, say, the next 12 to 15 months, specifically in terms of how it would impact the ECA region?

Okay, that's a good question.

I agree with you, the exploration success both in 2013 and 2014 has been relatively poor, which I think is part of the reason why a number of customers are taking a step back and re-evaluating their prospects and how they are going to go about doing this.

Like I said, we see exploration spend this year being down 4% to 5%, driven by seismic.

But looking towards 2015, we expect exploration spend to be flattish to only slightly down.

Again, this is going to be driven by seismic.

We continue to see good exploration drilling activity, and the main thing impacting exploration spend is still going to be seismic next year.

The success you're having in bucking the overall trend, how much of the integration that you all discussed back in June is the driving force in that?

Well, I think the impact of the whole range of transformational efforts that we are doing, as well as new technology, and as well as our integration capabilities, all of these elements are key factors that allows us to produce I would say outstanding results -- in particular in the international market.

We expect that strength to continue to grow and expand going forward as we further implement these transformational programs.

Okay, thank you very much.

Our next question comes from the line of Jud Bailey with Wells Fargo.

Thank you, good morning.

Paal, I wanted to ask you about a specific region, if I could.

The North Sea in Norway, you've had Statoil, who's starting to scale back activity.

Now you add on to that you've got a little bit lower commodity prices.

I'd be curious to know how you see that market playing out maybe over the next one to two years with commodity prices as a headwind, and Statoil suffering through some cost overruns.

In terms of what the commodity price is going to be, I think it's too early to say what level it's going to be at in 2015.

Obviously it's been a sharp drop over the past two to four weeks.

How this is going to evolve I think is still highly uncertain, and I still believe that there's going to be some kind of recovery happening.

Now, right into the North Sea, we still see low single-digit growth in activity for our North Sea geo-market in 2015, and you can break that down into three.

Firstly in Norway, we expect to see lower exploration activity and flat development activity.

In the UK, we actually expect to see somewhat higher exploration activity next year, and still flat development activity.

In addition to this, other than North Sea geo-market, we continue to manage some of the remote activities.

There is strong remote activity next year.

We have project in the Canaries, we have a project in Cyprus, and we also have a project in Mauritania that we manage out of the North Sea.

Overall for that business unit and that assets and the resources we have in the North Sea, we see still some growth in 2015.

Thank you for the color.

My follow-up is, you noted all the various headwinds and tail winds internationally for 2015.

It looks like you've alluded to this Latin America is poised to finally show a nice recovery.

Knowing what you know today, do you think, will Latin America will be your best growth market in 2015, versus even the Middle East and Asia?

Well, I think it's still too early to say.

But if you look at the trends that we saw in Q3, we are clearly seeing the recovery of Latin America, with good growth in pretty much every geo-market.

I'm quite optimistic about what Latin America can do next year.

One thing is the revenue growth.

The other thing is the pre-tax operating income growth.

I would say for next year, I'm quite optimistic at this stage still on Latin America in terms of growing earnings, similarly also for Europe-Africa, as well as the Middle East.

Those will still, I think, be the three main drivers of earnings growth in the international market next year.

Great, thank you.

Thank you.

Our next question comes from the line of Brad Handler with Jefferies.

I'd like to come back to your artificial lift initiatives.

Maybe as a grounding for us, can you ball-park the revenue contribution that you've acquired, just in terms of framing for us your starting point for growth?

I can, but I won't.

(laughter) Fair enough.

I guess I'm not too surprised at that.

Okay.

If you want to try to make some interpretation, we gave you some numbers on installations of pump jacks and ECPs.

It might not be easily transferable to revenue, but we've had a big program.

We bought a number of smaller companies.

It has a reasonable contribution to North America, and also to our over artificial lift position.

But I'm not going to break out and give you a specific revenue number.

Okay, that's fine.

Out of -- just to keep the follow-up in the same vein, in an environment where the -- if there is a somewhat lower commodity price, what is your sense of the artificial, the impact on artificial lift, or the production side of the business maybe a little bit more broadly, presumably in the North America market?

Well, for the overall production business, in the event that activity is down in North America, any part of the business might have challenges and pressure on pricing.

I think again where you'll see it the fastest and the most will likely be in pressure pumping.

In terms of artificial lift, we have not seen the same up-tick in pricing when activity is very high, and I don't expect to see the same kind of pressure there, as well.

But any flattening of growth or reduction in activity will likely have an impact on pricing in any product line.

But I think it's way to early to say even for North America whether we will be in that situation in 2015.

Okay, thanks.

Thank you.

Our final question comes from the line of Scott Gruber with Citi.

Yes, good morning.

Another scenario, if crude prices stay low, your project management businesses -- both drilling and production -- should be a real key differentiators.

How big are those businesses as a percentage of revenue now?

Given the contract backlog, what's the growth outlook for 2015?

Again, we're not breaking out these numbers, right -- other than that we've given some indication of how much our integration-related business is.

That's not all project management or production management.

There's that any type of integration.

But I agree with you in a more challenging environment, the ability to take on projects and provide more integration to drive value will be a competitive strength.

I believe there's some flex in how you proceed with your internal transformation given market dynamics.

If we paint the scenario where upstream CapEx flattens and the expectation is it stays flat for a few years, can you provide some color on what changes you make to your program, and how quickly you think you can achieve some of your targets, realizing that some of them are partially dependent upon customer acceptance of new tools?

How quickly do you think you can accelerate some of those changes?

Well, we have some discretion as to what we can accelerate in terms of the implementation, but some of these things are also based on the overall schedule that you've laid out and things that we have to develop in order to roll them out.

But yes, there is some flexibility of accelerating investment and implementation in terms of part of the transformation.

These are things we are actually looking at now.

We laid out our financial targets for 2017 in June in New York, and they were predicated on a set of macro and industry assumptions.

If these assumptions end up being too optimistic, we will see what we can do internally to still be within the ranges that we've given, or at least close to them, even if the macro assumptions are below.

I can't promise that we will do it, but that's obviously going to be the ambition.

New technology introductions, new technology sales, and acceleration of transformation programs is going to be key drivers that potentially will allow us to do that.

Great, thanks.

Thank you.

With that, I'd like to turn it back over to Mr. Farrant for any closing comments.

Well, 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, and Tiffany will provide the closing comments.

Thank you.

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