斯倫貝謝公司 (SLB) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

As reminder this conference is being recorded. I would now like to turn the conference over to your host, Vice President, Investor Relations, Mr. Simon Farrant.

Thank you, Greg. Good morning and welcome to the Schlumberger Limited fourth-quarter and full-year 2014 results conference call.

Today's call is being hosted from Houston 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 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 is included in the earnings press release on our website.

We welcome your comments after the 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.

Fourth-quarter earnings per share from continuing operations excluding charges and credits was $1.50. This represents an increase of $0.01 sequentially and is $0.15 higher when compared to the same quarter last year.

During the quarter we recorded $1.8 billion of pretax charges. These charges are primarily related to actions we have taken to meet the challenges of the current market conditions.

The $806 million of charges relating to the restructuring of the WesternGeco seismic fleet are as we announced last month. We recorded $296 million of severance cost associated with a headcount reduction of approximately 9,000.

This reduction, which will largely be completed by the end of the first quarter, will bring our headcount more in line with the currently anticipated activity levels.

In Venezuela, effective December 31, 2014, we changed the exchange rate we applied to our bolivar denominated transactions from VEZ6.3 to VEZ50 per dollar, which is in line with the SICAD II exchange rate resulting in a $472 million charge. We believe that this rate now best represents the economics of our business activity in Venezuela.

Going forward this charge will reduce the US dollar amount of local currency denominated revenues and expenses. Had we applied this exchange rate throughout all of 2014 it would have reduced our full-year EPS by approximately $0.08.

The last item relates to a $199 million write-down of unconventional integrated projects in the Eagle Ford as a result of the decline in oil prices. Fourth-quarter revenue of $12.6 billion was flat sequentially. This reflected approximately $260 million of yearend software, product, and multiclient sales which were weaker than what we typically experience in the fourth quarter.

Pretax operating income of $2.8 billion decreased 1% sequentially while the pretax operating margins decreased by just 19 basis points to 22%. This level of margin is consistent with the same period last year.

Sequential revenue and pretax margin highlights by product group were as follows: fourth-quarter reservoir characterization group revenue of $3.1 billion decreased 3% sequentially while margins increased by 95 basis points to 30.9%. The revenue decrease was largely attributable to the seasonal drop in marine seismic activity while wireline experienced declines in Russia due to the seasonality and the weakening of the ruble. These decreases were partially offset by yearend multiclient and software sales.

The margin increase reflected a more favorable revenue makes as a result of the yearend sales.

Drilling group fourth-quarter revenue of $4.7 billion decreased 3% sequentially while margins declined by 94 basis points to 20.7%. These decreases were primarily driven by unfavorable currency effects and activities declines in Russia that impacted the drilling and measurement and M-I SWACO as well as lower IPM activity in Mexico.

Fourth-quarter production group revenue of just under $5 billion increased 5% sequentially on higher wealth services activity in both Western Canada and US land. Yearend sales of completions and artificial lift products also contributed to the increase. Pretax margins were essentially flat at 18.3%.

Now turning to Schlumberger as a whole, the effective tax rate , excluding charges and credits, was 21.4% in the fourth quarter compared to 22.1% in the previous quarter. Net debt at the end of the fourth quarter was $5.4 billion representing an improvement of $458 million as compared to the end of Q3.

We spent $1.1 billion on our stock buyback program during Q4. This represented 12.1 million shares at an average price of $90.22.

Other significant liquidity events during the quarter included $1.2 billion of CapEx and an improvement in working capital of almost $1 billion. From a cash flow perspective we generated $11.2 billion of cash flow from operations during all of 2014.

During this same period we generated a free cash flow of $6.2 billion. This represents a $700 million increase over 2013 and means that we converted 84% of our 2014 earnings, excluding charges and credits into free cash flow. This strong cash generation has allowed us to continue to invest in growth opportunities which we did by completing various acquisitions and investing $4 billion in CapEx, $1.1 billion in multiclient and SPM projects while at the same time returning $6.6 billion of cash to our shareholders in the form of dividends and stock repurchases.

During the full-year 2014 we repurchased 47.5 million shares at an average price of $98.38 for a total of $4.7 billion while paying out almost $2 billion in dividends. Yesterday our Board of Directors approved a 25% increase in our annual dividend to $2 per share. This is now the fifth consecutive year that we have increased our dividend and it results in doubling over the five-year period.

This new level of dividend reflects our confidence in our ability to continue to generate superior cash flows and return excess cash to our shareholders even in the face of market challenges. As it relates to 2015, our strong balance sheet will continue -- will also allow us to be opportunistic in terms of taking advantage of market conditions to make strategic acquisitions and investments. CapEx excluding multiclient and SPM investment is expected to be approximately $3 billion in 2015.

We expect the ETR for the full-year 2015 to be in the low to mid 20%s. However, this can vary on a quarterly basis depending on geographical mix of earnings.

And now I turn the conference over to Paal.

Thank you, Simon, and good morning, everyone. In the fourth quarter we continued our strong financial performance driven by record activity in North America and in the Middle East and Asia. In other international areas, Latin America revenues improved slightly on higher activity in Venezuela and Colombia while Europe, CIS and Africa fell as the ruble weakened and the seasonal decline activity started in Russia.

Europe, CIS and Africa declined further from the downward trend in oil prices which curtailed customer activity and reduced rig count in the North Sea and parts of West Africa. Overall fourth-quarter revenue was flat to the previous quarter but grew 6% year on year.

Pretax operating income decreased 1% sequentially and grew 7% year on year while pretax operating margins were essentially flat, slipping 19 basis points sequentially but rising 13 basis points year on year. This performance ended a year in which Schlumberger revenue climbed to a new high in spite of significant headwinds including activity challenges in a number of GeoMarkets, geopolitical unrest in Libya and Iraq, international sanctions in Russia and reducing customer spend.

Still our global footprint, broad business portfolio and strong execution capabilities provided the required resilience to outperform even in this environment.

Looking at our corporate financial performance, we generated more than $3.4 billion in free cash flow in the fourth quarter bringing the full-year total to more than $6.2 billion. This represents an increase of 13% over 2013 and a conversion of 84% to the full year's earnings into free cash flow.

During the quarter we continued our active stock buyback program buying back $1.1 billion in stock to keep us on track to complete the $10 billion program within the stated 2.5-year period. As a further demonstration of the confidence we have in our continuing ability to generate free cash flow, the Board of Directors just approved a 25% increase in our quarterly dividend which means that we have doubled our dividend payments over the past five years.

By geography our North American results set a new record for the area as revenue grew 2% sequentially. Land activity improved in spite of flat sequential rig count as new technology introductions and operational efficiencies drove performance. Offshore drilling activity in the Gulf of Mexico returned to normal and grew by 12% sequentially following the impact of loop currents in the third quarter while multiclient seismic sales also improved, although ending up significantly down compared to the same quarter last year.

Sequential revenue gains were led by the production group on higher pressure pumping activity on land in both the US and Canada and further supported by very strong uptake of the BroadBand family of stimulation technologies that are growing at 4 times the rate of HiWAY at the same stage of its introduction. North America margins increased by a further 24 basis points in Q4 to reach 19.6% driven by stronger activity and new technology uptake, solid execution and further supply chain cost improvements.

Lower oil prices have already created pricing pressure on land for hydraulic fracturing and drilling services. And we are actively working with our customers in all basins to help lower the overall drilling and completion costs. In addition to general pricing discussions, our customer interactions are focused on how we can better work together and how we can create savings from new technologies and workflows as well as from improved operational planning and efficiency.

Looking forward in North America we see a relatively flat first quarter for offshore activity in the Gulf of Mexico as well as solid activity in Canada. However, the dramatic fall in oil prices has already led to a reduction of around 400 rigs in US land compared to the October peak and we expect that the trend of activity reductions and pricing pressure to continue in the first quarter.

In our international business strength in the Middle East and Asia and solid performance in Latin America was offset by significant revenue reductions in Europe, CIS and Africa. As a result revenue slipped 1% sequentially but improved 1% year on year while pretax operating income decreased 2% sequentially but grew 4% year on year.

Full-year performance in the international market was strong in spite of E&P CapEx spend remaining flat with 2013. Year-on-year revenue grew by 4%, operating income by 12% with incremental margins of 69%.

International margins, which ended the year at 24%, grew 168 basis points versus 2013 and we generated more than 70% of our global operating income in the international market in the past year. The significant drop in oil prices has put pressure on our customers to further reduce their cost per barrel and we are actively engage with most of them to find ways to generate the required cost savings while maintaining a very strong focus on the quality and integrity of the products and services we provide.

Within the international areas performance was led by the Middle East and Asia where sequential revenue grew by 4% and pretax operating margins increased by 71 basis points to 28.3% driven by activity growth in the Middle East while activity in Asia was largely unchanged. Year-on-year revenue increased 6% and margins grew by 213 basis points. In the Middle East region activity reached a new record in Saudi Arabia led by growth from a number of key projects and we expect to see continued strong levels of both rig-related and rigless activity in the coming year.

Kuwait was also strong on land seismic activity and yearend product and software sales, while Oman continued to be driven by wireline services and hydraulic fracturing work. Activity was again higher in the United Arab Emirates particularly for well construction technologies both offshore and on the island drilling project.

In Iraq, activity was steady in the north as an improved security environment has allowed operations to slowly resume. However, the overall activity level still remains significantly below pre-conflict levels.

In the south we saw modest activity improvements although new project startups continue to be delayed.

Southeast Asia remained flat through the third quarter as strength in shale gas development on land in China offset modest activity declines in Malaysia, Indonesia and Vietnam. China was also boosted by increased product sales during the fourth quarter and strong offshore activity in Bohai Bay.

In Malaysia work has begun in a new well construction project on the Bokor field where we have now been conducting integrated projects and production management operations for more than 10 years. This is another example of the value that long-term relationships bring to integrated operations.

In Latin America revenue improved 1% sequentially while pretax operating margins fell 102 basis points to 20.9% as growth in Colombia and Venezuela was offset by weakness in Mexico and delays in Argentina and Brazil. Year-on-year revenue grew by 3% while pretax operating margin slipped by 31 basis points. In Venezuela growth was driven by new technology and workflow deployments for PDVSA as well as increased activity in the Faja through a series of new project startups.

In Mexico revenue decreased significantly on a combination of customer budget constraints and seasonal weather effects impacting offshore activity. The lower customer spend mainly impacted land development activity although some exploration work was also delayed.

Elsewhere in the area activity in Brazil was solid on land but offshore work was lower as IOC projects were completed and drilling delays were experienced on existing projects. In Argentina growth slowed in the fourth quarter although activity from conventional resources grew and the HiWAY technology continuing to penetrate the market.

In Europe, CIS and Africa revenue fell by 7% sequentially with margins declining by 112 basis points to 22.3%. Compared to the same quarter last year Europe, CIS and Africa revenue fell by 5% while margins slipped by 21 basis points.

In Russia weakness in the ruble and the onset of winter weather led to the lower results. The North Sea activity also declined on lower rig count in both Norway and the UK as customers reduced activity in response to lower oil prices.

In other parts of the Europe, Africa and CIS area, activity was stronger in North Africa with increasing activity for unconventional resources in Algeria and Tunisia. It was partially offset by very weak activity in Libya where we now have successfully restructured our operations in line with the lower activity. In Angola activity decreased following the peak in exploration seen in the third quarter while elsewhere in Sub-Saharan Africa activity was strong in Congo and we also secured additional work in Chad and Gabon.

Before leaving the Europe, CIS and Africa area I would also like to mention that we were awarded a four-year contract for drilling and well services by Statoil for the UK Mariner development east of Shetland. Mariner is one of the largest project developments on the UK continental shelf in the last 10 years and the 22 distinct services that Schlumberger will provide offer considerable opportunities for integration in this unique project.

In terms of the outlook for the international market as part of the Middle East and parts of Latin America we do expect a reduction in spend levels for all customer groups in the coming year, although we believe that the activity and pricing impact will be less than what is projected in North America land. It is also worthwhile to keep in mind that E&P spend in the international market was already flat in 2014 with a corresponding drop in discovered reserves and in oil production capacity, so a further reduction in spend levels in 2015 will likely accelerate these trends.

Turning to the overall macro outlook for 2015, GDP growth rates softened somewhat in the fourth quarter. But at 3% growth is still projected to be higher than 2014 confirming that the global recovery remains intact. And as a result demand for oil is again expected to increase by around 1 million barrels per day in 2015.

Looking at the supply side the growth in global oil production capacity of around 1 million barrels per day over the past year matches the growth in demand, so the overall oil market is still relatively well-balanced from a capacity standpoint. The dramatic fall in oil prices is instead a result of higher marketed supply in the second half of 2014 from North America and also from OPEC who have shifted focus from protecting oil prices to protecting market share.

In response to the fall in oil prices the industry is currently in the process of significantly reducing E&P investments, which will lead to a reduction in supply as decline rates impact current production capacity and lower exploration and development activity delay supply additions. In a scenario of continuing economic growth and increasing demand for oil, the lower E&P investment levels will lead to a tightening of the oil market with the first indication being the reduced production capacity in the international markets in 2014 following a year of flat E&P investment.

In this uncertain environment we continue to focus on what we can control and we have already taken significant steps to restructure and rightsize our business to match the reduced E&P investment levels. We are further convinced that performance must now be driven by an accelerated change in the way we work through our transformation program. The delivery of new technology that improves the performance of our customers' reservoirs, the increases in efficiency and reliability that reduce overall finding, development and production costs and the opportunities for growth that greater integration brings are all significant drivers of our own and our customers' performance.

The technical performance targets of our transformation program is independent of the macro environment and we are in 2015 actually looking to further accelerate the implementation of the program. In terms of technology we still expect new technology sales at premium pricing to contribute more than 25% of our revenue while we also target integration related activity where we have unique capabilities to exceed 30% of our total activity. In terms of reliability and efficiency we are in 2015 aiming to make further progress towards our targets of a tenfold reduction in unproductive time, a doubling in asset utilization, a 20% increase in workforce productivity and a 10% lowering of support costs, which will all help to significantly lower our operating costs.

Part of our transformation program requires us to work differently with our customers in order to fully realize the value for both them and for us. Given the current business environment we've engage with many of them in recent months to drive forward these changes with very positive response. Still given the level of the oil price and the industry-wide focus on reducing E&P investments, we clearly have a challenging year in front of us.

In this environment we have our entire organization fully focused on continuously engaging our customers to understand any changes to their plans, to tailor resources to activity in line with the targets and playbooks we have established and to manage commercial discussions according to the priorities we have put in place for each of the over 80 countries where we operate. Beyond our strong execution focus we also see the coming year as flush with opportunities for us which we intend to fully capitalize on as we look to further strengthen the Company going forward. With our wide geographical footprint, extensive business portfolio and clear financial strength we remain confident in our ability to outperform in any part of the cycle including the current market conditions.

Thank you. We will now open up for questions.

(Operator Instructions) Ole Slorer, Morgan Stanley.

Thanks for your insight, Paal. I'll start with the macro here.

I wonder whether you could help us understand your slight change in language from the third quarter. You highlighted both in the third-quarter release and the fourth-quarter release that negativity, the peer revisions, that is consistent.

But on the supply side you talked in the third quarter about pipe capacity and now you talk about an increase in supply. I just wonder whether you could elaborate a little bit and help us understand the difference in the magnitude?

Okay. So if you look at the high-level macro view that we have, nothing has really changed from what we said in the Q3 call. So looking at GDP at 3% we are still looking at solid growth overall in 2015 and oil demand is also going to be up.

So as we said in Q3 the issue is really on the supply side where I think it is very important that we separate between global production capacity and marketed supply. So if you look at the global production capacity in 2014 it grew by about 1 million barrels a day which is equal to the growth in demand. So the significant drop in oil prices is not driven by this overcapacity but rather by the higher marketed supply which is coming from North America and from OPEC.

So we believe that the supply side is currently going through a significant change where the key low-cost producers have shifted focus from protecting price to now protect market share. And the consequence of this is that at least for a period of time this is going to make the high-cost producers become the new swing producers where their activity is going to be even more driven by the variations in oil price and the economics of their projects.

And the tool used to drive this change to the supply side is the lower oil price, which is what we are seeing now. So the main new element from the Q3 call is that OPEC decided not to cut production so the reduction in the marketed supply will have to come from lower E&P investments. And that is really the only upside to our macro view.

And my second follow-up would be exactly on that. You highlight this time around in your release that the two effect of lower Quebec's increased decline curves from existing fields and delays in new field startups. So I wonder whether you could talk a little bit high level at what point do you see the impact of this will change market psychology on the direction of incremental capacity versus directional incremental demand, assuming demand plays out in line with your view there?

Yes, if we assume that oil demand is going to be up by 1 million barrels if you don't take lower investments in already reduced spare capacity, the market is already heading towards a tightening. I think that is very clear.

Now we do not expect the oil prices to improve significantly until there are signs of weakening supply and the weakening supply will either first come from North America or from international. The signs we need to look at are different from the two regions.

Given the strong growth momentum in North America I think what the market will be looking for here is a slowing year-over-year growth. While given the flat investment levels in the international market in 2014, capacity already reduced in 2014 so here I think we are looking for a further reduction in absolute supply. So I think these are the two main signals to look for.

And your guess again on timing?

I'm not going to guess, at least not in public.

Okay. Thank you very much.

David Anderson, Barclays.

Good morning, Paal. In light of your commentary around the supply response and you were talking about international and North America, there is clearly a pretty healthy debate out there about the economics of North America in unconventional. Just wondering, with Schlumberger's expertise in reservoir, can you help us understand how you think about that marginal cost supplier and in particular how you see the trajectory of spending and activity levels in North America over the next several quarters?

I think if you look at 2015 activity in North America and you look at the third-party spend survey, it indicates about 25%, 30% reduction. So it is clearly going to be a tough year going forward. As to the viability of the project there, I think there is still a broad range of operating costs in North America land. But I would say that as a general statement, the shift in OPEC from protecting price to protecting share is raising some questions around the US shale going forward.

And I think the new oil price dynamic is clearly going to test the resilience of several North American land producers from their ability to get financing, their ability to continue to drive cost efficiency and reduce cost per barrel, and also their ability to maintain production at current levels. So I think most likely, we're going to face a situation in North America land with lower activity, more focus on the lower-cost production areas for a while. That's our view at this stage.

And then just kind of sticking still on North America, in light of the headcount reduction -- headcount/CapEx reduction -- and keeping in mind that you are getting more capital efficient on the transformation, I was just wondering if you could help us understand your strategy during this downturn to align your capacity with activity levels. Should we expect a similar strategy that Schlumberger employed in 2009, or can we expect it to be a little bit more focused on utilization this time around?

Well, I'm not going to go into the details, tactics and strategy we have on pricing and pricing and share. That's going to vary all depending on I would say the basin, the customer type and so forth. But I would say that the general rule that we've applied in recent years that below a certain contribution margin we would rather stack the equipment than operate at the level that is unacceptable.

Okay. Thank you Paal.

Bill Herbert, Simons & Company.

Paal, so switching gears here a sec from North America to the international realm. And recognizing that the early data internationally has not been as transparent as it has in North America given the litany of capital spending announcements for 2015, but given where oil prices are today, it certainly seems that the indication points to a pretty hard landing in the international realm.

And while we share your view that the contraction internationally is going to be more benign than in North America, it is still going to be fairly consequential. So just as a starting point is down 10% to 15% internationally within the realm of reason where we sit today?

I would think to kind of venture out and even make full-year statements at this stage I think it is too early. There is significant lack of visibility. The way we are going about managing actually both North America and internationally is we are looking quarter by quarter now.

So we have taken actions to be in line with costs versus the activity that we foresee for Q1 and we will continue to stay very closely in touch with customers to look at plans going forward to make sure that we continue to tailor resources to the projected activity. Now we are aware of the third-party surveys and the 10% to 15% reduction in international spend for 2015 I think today is probably a reasonable starting point, although I wouldn't confirm it from our side for the full year.

Okay. And then secondly, kind of juxtaposing downturns as it were 2015 versus what prevailed in 2009, clearly you are a different company coming into this downturn than you were in 2009 given the internal transformation focus. In light of that do you think the decremental margins this time around are going to be better behaved than they were in 2009, or basically about in line?

I would be very disappointed if we don't see a significant improvement in our decremental margins in this downturn versus what we saw in 2009. We have had a very very strong focus on generating incremental margins in the past four or five years and over the past quarter we have basically converted our strong and clear expectations on incrementals into equally clear expectations internally on what good decrementals are. I'm not going to give you what the number is but like I said I will be very disappointed if we don't do significantly better than in 2009.

Very good. Thank you, sir.

Michael LaMotte, Guggenheim.

I'm trying to hone in on how you are actually approaching 2015 and maybe take it from the perspective of the message to the leadership of Schlumberger in terms of control of the business. You mentioned several things, you can control, maintain the targets on the transformation program, with the lack of visibility maybe tighten up the reaction time from six-month reviews to quarter by quarter. Is there anything else that we should be thinking about in terms of approaching the downturn of 2015?

I think you hit on several of the things. But if I was just to repeat to clarify them, what we have passed to our senior management team in the quite frequent meetings we've had over the past quarter, there are really three high-level things.

Firstly, the increased importance of staying very very close to our customers, firstly to actively support their efforts to reduce their cost levels but also to make sure that we very clearly understand their plans and changes to their plans. That's the first one.

The second one is what you alluded to that we stay focused on what we control. And that is to proactively adjust costs to activity levels and factoring in the benefits from the transformation and also having a clear plan on how we're going to navigate the commercial landscape in terms of activity and pricing discussions with our customers but also very importantly to continue to focus on deliver safe and high-quality operations, which is essential to our performance but also to our customers' performance.

And the third one which we are also balancing into the total picture is to capture the opportunities that we see in the current environment and we see the current environment as being flush with opportunities for us. Firstly to gain market share in light of our two main competitors looking to combine. Secondly to accelerate the transformation.

Our organization is now pulling very hard on it and we also see our customers being very open to adjust how we work with them and how we interact with them to gain some of the benefits. And then the third one is inorganic growth.

We see lots of opportunities for this based on our strong cash flow and also by our very solid balance sheet. So these are the high-level messages that we've already passed to our management team and that they are currently executing.

That's very helpful. Thank you.

If I could follow up on your inorganic comment quickly, does the current environment change the thought process around acquisitions? In the last few years they have been smaller, bolt-on has been used as a term to describe the strategy since Smith, does the appetite for a larger deal change in this environment?

No, I wouldn't say that the current environment has changed the strategic directions that we were looking to pursue. It is more about when these opportunities arise.

We have a clear view of where the Company is heading and what we want to do from an M&A standpoint. We have been executing a number of these things in previous years and as we go forward now we would look at whether the other opportunities that we have on our lists become accelerated opportunities, in which case we will pursue them.

Angie Sedita, UBS.

Paal, could you talk a little bit you had the 25% reduction in your CapEx and could you give us a little bit of high-level color on that cut, where the cuts are coming from? And I recall that in 2009 you did reduce your CapEx tied to technology, but based on your opening remarks it sounds like that would not be the case this cycle? And also how flexible are you on your CapEx outlook for 2015?

Okay. Like you say the current full-year CapEx estimate is at $3 billion but given the lack of visibility in the uncertainty this is still subject to change. So I will also say that part of the CapEx reduction is due to the efficiency gains that we are planning from the transformation. So you cannot directly translate the CapEx to a projected revenue for 2015 and I also don't think you can directly compare it to the CapEx reductions that we did in 2009.

I would also say that we have significant flexibility built into our manufacturing capabilities. We are, as I mentioned, targeting market share gains, in particular in the international market. So if we need more CapEx to serve these gains we have the flexibility to increase CapEx during the year and also we have the opportunity and flexibility to decrease CapEx further if the impact on the transformation is even beyond what we are targeting.

All right. And then an unrelated follow-up, obviously your customers are coming to you in the international markets talking and looking at the contracts and where you can pull out cost out of the system and you are seeing it in the US.

How much success, or have you begun conversations on where you can pull cost out of the system specifically in US frac? Is there other cost recovery opportunities besides proppants, truck, rail and what are you seeing along those lines?

So overall, or in the US?

Both, actually.

Our approach to these discussions with our customers -- and we are receiving invitations to engage in these discussions both international and in North America -- our approach is that we fully understand the need our customers have to reduce their overall costs. And we have engaged in a range of discussions where we are looking at volume discounts versus market share, further application of new technology, generally better planning and efficiency, maybe less use of backup resources, better terms and conditions and it also involves general pricing discussions.

So with the transformation we have significant opportunity to drive costs out of our system internally but some of these cost savings will also depend on our customers being open to work with us in different ways. And I would say there is a significant increase in that openness to start to realize these values. And I think our discussions in general are focused on how we can create more value together, obviously in addition to general pricing discussions.

All right. And I guess to add onto that, are you going back to your supply chain vendors for changes in cost reductions and proppants and other sources that you have in the US or internationally and are you able to pull cost of your system besides the efficiency side?

No, absolutely. And over the past three years or so we have fully centralized our shared services and supply chain organization including global category management.

So we are fully leveraging firstly our buying power. And secondly I would say a highly capable supply chain organization to drive a similar type of discussion with our suppliers as to the discussions we have with our customers.

Thanks. I will turn it over.

James West, Evercore.

Wanted to just touch on the transformation program again and kind of clarify a few things there. Obviously you are looking to speed up the transformation. I wanted to know if you could give us some sense of how much more quickly you can go through this and then secondarily, does the downturn, which I know we all don't like -- nobody likes downturns -- but does that not make the transformation easier to be in a downturn?

In some ways it does. Because when you are performing quite well and you are busy taking on more work and growing to change the way you work both internally and in the interfaces you have both with customers and suppliers, it is difficult to -- it is more difficult to drive change in that type of situation.

When you have a shift in market conditions actually as you have now we see even more interest internally and even more openness on the customer supply side to engage in doing things differently. So I would say yes, the changing market condition provides us with more opportunity to accelerate so then the key is just how do we put resources on to this from a central management standpoint to have the various parts of the program staff and given the financial means to accelerate some of the investments that we are making to realize these gains.

Okay. Great.

And then I have a follow-up -- not on that but unrelated. You made a comment earlier about going after market share as a result of your two major competitors combining.

Have you already seen customers come to you and have you already seen market share gains? I know it is early days but is it already happening?

I think it's a bit premature to say it is happening now. The transaction is not closed yet so I think as of now we are preparing for this. In discussions with our customers the topic comes up but I would say that this is more something that will take place if and when the transaction is closed.

Okay. Got it. Thanks, Paal.

Kurt Hallead, RBC.

Just follow-up on James's question on the potential fallout from the merger. As you indicated there is nothing yet shaking loose necessarily and that will come post-close. So you have indicated, or you have emphasized at least in your prior commentary, market share gains and with an emphasis on the international side.

Was wondering if you might be able to just give us a little bit of color on what you think may shake loose and how many basis points of market share gains could come out of this if not for Schlumberger specific maybe on a broader basis?

If I was going to comment on the transaction, firstly at a high level I would say that the pending transaction first validates what we have been saying all along and that is at scale it is essential to drive performance in the business that we are in. Now from our experience making a large transaction to build and leverage scale it has a series of challenges and in general everything takes much longer than you initially think.

In addition to this, all the extra work that is involved with making such a transaction easily distracts you from running the base business. So as I've been saying we look at this transaction as an opportunity with a capital O for us and we do intend to capitalize on it. This is again linked to the gaining of market share.

In the international market I would say in many countries our market share has been limited by a glass ceiling. And this glass ceiling has been put in place by our customers to make sure that there is enough work to make a third player viable.

Now if the other two players were to combine into one then I think this glass ceiling can easily be broken. And that is why we are -- we have basically gone through pretty much all our contracts in all the international countries we operate in to make sure we have targeted plans for how we would look to capitalize on this market share opportunity if and when the transaction closes.

Okay. That's good. So many topics and so little time, so just wanted to try to calibrate some things with you.

You said you guys reduced headcount by 9,000 to address current activity levels, then you reference a couple of third-party E&P surveys with the US down 25% to 30% which seems low in my view and 10% to 15%, which if I were to interpret your commentary though you didn't state specifically might have suggest is you think that 10% to 15% reduction in international spend is too low, or too much?

Well, as I said I didn't make a full-year statement on it. We are going to focus on managing this year in quarters. I think the general statements I would make is that the impact on North America land we expect to be significantly more dramatic than what you would see in the rest of the world.

Okay. And then if I just may finish with one -- just curious about your views on what is going on with the market opportunities in Brazil given all the corruption scandals and so on and so forth. And maybe tying that back to the merger coming up here, which would give your competitor about 70% market share, if I'm not mistaken, of the recently awarded drilling package.

So first and foremost, with the mess in Brazil, is that going to lead to activity declines do you think in 2015? And then secondarily, how do you see the possibility of this drilling contract being rebid one more time?

I think as to the things going on within Petrobras I will let Petrobras comment on those things. Our relationship with Petrobras and our working relationship continues to be very good. Now Petrobras did recently announce budget cuts for the first half of 2015 versus the previously indication of flat spend. So there will be challenges in Brazil going into this year.

As for the new contracts, the latest information we have is that the wireline and E&M contract will kick in midyear of 2015. And what is going to happen to the market share within these contracts I don't know.

We are, based on the bid, happy with the contract. Now what Petrobras chooses to do in terms of market share allocations we will have to refer to them.

Okay. I really appreciate it. Thanks a lot, Paal.

Bill Sanchez, Howard Weil.

Paal, given your quarter-to-quarter kind of look here how you are managing the business I was hoping perhaps you could help us just calibrate 1Q relative to fourth quarter. I know we didn't see quite probably the yearend product sales one would expect.

You talked in your prepared comments just kind of some of the puts and takes in North America but I didn't hear much specifically around international. Just trying to see if you can help us calibrate how we should think about 4Q to 1Q here from an EPS perspective?

Okay. Well, if you look in the first quarter even for the first quarter there is still significant visibility challenges.

We do expect a significant sequential growth in revenue due to, like you say, last yearend product sales, the normal seasonal impact in particular in North Sea, Russia, China as well as in marine seismic and also the exchange rate impact in particular from Venezuela and Russia is going to be felt. And the last part, which is kind of new this year is further activity and pricing impact from the reduced E&P CapEx spend.

So what we have done, and we have tailored our cost base for revenues to be around the levels for the first quarter of last year. So this involves a range of cost measures taken in Q4 including the release of the 9,000 people that we quoted. So I would say I am comfortable with our cost structure with respect to this base case of Q1 activity around revenue levels of Q1 of last year. If activity is stronger, we have means to cover it and if it is lower we have the ability to quickly cut more.

Okay. So 1Q revenue 2015 equal to 1Q revenue 2014 overall?

I'm not saying that the revenue is going to be that. I'm saying that that is how we have tailored our cost base.

Okay. So if I just get back then to the headcount reductions then, so the reductions you have made -- first, assume that this, it seems like from the call that this is strictly a North America reduction, is that in fact the case of the headcount cuts you have made so far?

No. No, it is not. This is a global reduction and it is both a combination of I would say structure headcount as well as the capacity headcount.

Okay. So there is still room here as your quarter-to-quarter view changes for further headcount reductions on a global basis? Is that a fair comment, Paal?

Yes, as Q1 evolves we will firm up our view on Q2 and the playbook we run through in Q4 to be rightsized for Q1 we will repeat if necessary during the first quarter to be rightsized for Q2.

Okay. If I could just ask one more, what should we assume right now (technical difficulty) of the headcount reductions that are being made currently?

I'm not going to predict the cost here but I will tell you that normally we recover our costs in the severance within the following time here. It is probably more than this number. So our recovery (technical difficulty) be within the 2015.

Okay. That's helpful. Thanks, I will turn it back.

Jud Bailey, Wells Fargo.

Paal, one thing that strikes us about this downturn relative to what we saw in 2008 and 2009 is the urgency of some of the large operators to cut back on their offshore spending very quickly. I would be curious to get your thoughts on deepwater activity in kind of the three main basins, Gulf of Mexico, West Africa and Brazil, how your customers are approaching that and how you see the outlook there over the next 12 to 18 months.

If you look at global deepwater activity it was down 6% or 7% in 2014 predominantly driven by Brazil. And in 2015 at this stage, and I am talking about deep water activity now, we still expect another 5% to 10% decline.

Where it is going to come I think is a bit early to say. The Gulf of Mexico looks likely to be reasonably flat. As I just mentioned on Brazil there seems to be potentially further cuts in Brazil and I think there is still a bit of lack of visibility in Angola.

But I would say 5% to 10% decline in activity is what we expect, which is more or less in line with what we absorbed in 2014. Now I think where the big savings in deepwater drilling spend is going to come in 2015 is going to be around the rig rates. We've started to come down in 2014 but where I think the big saving our customers are going to get from deepwater drilling in 2015 is going to come from the rig rates.

Okay. And that kind of leads into my next question is, one thing that we've heard from rig contractors is more so than in 2009 we are hearing from them that operators are approaching them more so than 2009 on trying to renegotiate existing contracts. I would be curious how are your customers approaching you in terms of pricing?

Are they looking to try to renegotiate existing contracts? And then also do you have a sense on the ability for you to sell them new technology to save time and cost, or are they just in the mode of trying to get cost down and not really looking at that aspect of it yet?

I think on the deepwater side for our products and services we do have discussions around trying to drive costs of the system. But I would say our customers in this market segment in particular are still very very focused on operational integrity and also looking at using the latest and best technologies to make sure that they drive performance through that.

So we haven't really had any significant I would say price book discussions or requests for price book reductions of the deepwater side. It is more how we can work together to drive total cost down through backup planning, through better execution, through less downtime rather than specific price book discussions.

Okay. Thank you. I will turn it back.

Rob MacKenzie, Iberia Capital.

I wanted to ask about technology adoption, something you highlighted again in your press release, specifically on US land. And my question is are you seeing a greater or lesser propensity of operators to adopt technology in the effort to drive down -- or drive up -- returns in this cycle? One might think you would but operators typically haven't always behaved that way.

You are right. In North America the land has been the situation, I would say that we are seeing -- or in 2014 we did see a growing uptake and a growing appetite to apply new technologies to drive both higher production and lower cost to improve cost per barrel.

So I would say the BroadBand family of stimulation technologies is a very good example of this. HiWAY was one of the first major technology innovations on the frac side in terms of fluids for quite a while. As we introduced it in 2011 it grew very fast but with the BroadBand family, which was introduced in the early part of 2014, this is currently growing at 4 times the pace.

So part of this is that we have engaged our customers in a slightly different way this time around for BroadBand. And we have met, myself and my team included, with a range of our customers at the CEO/COO level to lay out firstly what the technology does but also to give them introductory offers to basically demonstrate what these technologies can do. And I believe that while we introduce them in this way then the adaptation throughout these organizations actually is quicker and more significant.

So when they come to you as many of them say they are doing now coming to their vendors and asking for price concessions, how does that change the conversation?

I think our customers still look to drive down total cost or improve cost per barrel and when they engage in these discussions there is already a pretty clear understanding of what some of these technologies have already done for them. And when we have commercial discussions these improvements and these benefits that we offer are factored into the overall situation when we discuss pricing with them (multiple speakers)

That's all the time we have for questions today. So now on behalf of the Schlumberger management team I'd like to thank you for participating in today's call. Greg will now provide the closing comments.

Thank you. Ladies and gentlemen, this conference will be available for replay after 9 AM central time today through February 16. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 339697. International participants dial 320-365-3844.

Those numbers once again are: 1-800-475-6701 or 320-365-3844 with the access code 339697.

That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.