斯倫貝謝公司 (SLB) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger Q3 earnings conference call.

(Operator Instructions).

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

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

Thank you.

Good morning and welcome to the Schlumberger Limited third-quarter 2015 results conference call.

Today's call is being hosted from New York following the Schlumberger Limited Board meeting yesterday.

Joining us on the call are Paal Kibsgaard, Chairman and 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 statements we will be making today are forward-looking.

These matters involve risks and uncertainties that could cause our results to differ materially from those in the projected statements.

I therefore refer you to our latest 10-K filing and other SEC filings.

Our comments today may also include non-GAAP financial measures.

Additional details and reconciliations of the most directly comparable GAAP financial measures can be found in our third-quarter press release which is on our website.

We welcome your questions after the prepared statements.

Now I will turn the call over to Simon.

Thank you, Simon.

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

Third-quarter earnings per share was $0.78, this represents decreases of $0.10 sequentially and $0.71 when compared to the same quarter last year.

Our third-quarter revenue of $8.5 billion decreased 6% sequentially.

Almost 40% of the revenue decline was attributable to pricing.

Despite the very challenging environment both in terms of pricing and activity, pretax operating margins only declined by 101 basis points sequentially.

This was due to the continued strong and proactive cost management across the entire organization.

Sequential highlights by product group were as follows.

Third quarter Reservoir Characterization revenue of $2.3 billion decreased 5% sequentially as decreases in exploration spending impacted both wireline and testing services internationally.

Despite the revenue decline pretax margin -- operating margins remained essentially flat at 26.3%.

Drilling Group revenue of $3.3 billion decreased 7% primarily due to pricing pressure and activity declines internationally that have mostly affected drilling and measurements and M-I SWACO.

As a result of strong cost management Drilling Group margins only declined 94 basis points to 18.6%.

Production Group revenue of $3 billion decreased 5% sequentially while margins declined 173 basis points.

These decreases were primarily driven by pricing and activity declines in well services.

Now turning to Schlumberger as a whole, the effective tax rate was 20% in the third quarter.

This was lower than the previous quarter by about 1 percentage point due to the geographic mix of earnings between North America and the rest of the world, as well as the mix of earnings amongst the international GeoMarkets.

Our cash flow generation continues to be very strong.

During the third quarter we generated $2.5 billion of cash flow from operations.

During the first three quarters of 2015 we have generated $6.6 billion of cash flow from operations.

This is all despite making severance payments of approximately $150 million during the third quarter and $600 million during the first nine months of the year.

Net debt improved $400 million during the quarter to $5.2 billion.

During the quarter we spent $545 million to repurchase 6.9 million shares at an average price of $78.76.

Subsequent to the announcement of our transaction with Cameron in August, we have been repurchasing the maximum number of shares allowable under the SEC's regulations.

We filed our S4 registration statement relating to the acquisition two weeks ago today.

It is worth highlighting that once the SEC declares our registration statement effective and the proxy statement is mailed, we will be prohibited under the securities laws from repurchasing our stock until the Cameron shareholder vote.

We spent $590 million on CapEx during the third quarter.

Full-year 2015 CapEx, excluding multi-client and SBM investments, is still expected to be approximately $2.5 billion.

And now I will turn the conference call over to Paal.

Thank you, Simon, and good morning, everyone.

Schlumberger third-quarter revenues fell 6% sequentially driven by a continuing decline in rig activity and persistent pricing pressure throughout our global operations.

North America revenue fell 4% sequentially as we maintained focus on balancing margins and market share while international revenue was 7% lower as customer budget cuts and service pricing erosion impacted results.

Still in the midst of what will may turn out to be the most severe downturn in several decades our operating margins were maintained at levels much higher than in previous downturns.

In North America our pretax operating margins were held at 8.9% in spite of an additional drop in activity and pricing both offshore and on land, while international margins dropped to 23.7% as customer budget cuts, activity cancellations and lower service pricing took further effect.

In the first nine months of 2015, year-over-year revenue has dropped 34% in North America and 18% internationally, yet we have delivered nine month decremental operating margins of 34% in North America and 23% internationally which represents a strong performance improvement over the 2009 downturn.

We have delivered these results by proactively and decisively managing our cost and resource base, carefully navigating the commercial landscape with the aim of balancing margins and market share and at the same time accelerating our internal transformation program.

We also generated more than $1.7 billion in free cash flow in the third quarter which represents a conversion rate of 170% of the quarter's earnings.

Our ability to generate significant free cash flow even in this part of the cycle is a major competitive edge which we actively use to pursue new business opportunities as well as targeted M&A activity.

In terms of M&A, our main focus in recent months has been the proposed acquisition of Cameron announced on August 26, which will open up a significant growth opportunity for us as we look to establish the industry's first complete drilling and production systems spanning both the surface and the subsurface.

In addition, we also completed the acquisition of Houston-based T&T Engineering, which specializes in design of land rig systems, as well as Utah-based Novatek, which is a leader in the field of synthetic diamond innovation.

We also signed a letter of intent for a joint venture with a part of the Bauer Group from Germany in a further evolution of our Land Rig of the Future strategy.

And finally, we entered into an agreement with IBM to jointly provide integrated production optimization services combining our production software platform with IBM's enterprise asset management services in an end-to-end offering.

Looking at our results on a geographical basis, North American revenue decreased 4% sequentially, a figure considerably less than the 27% sequential decrease seen in the second quarter and better than the 7% drop in the average horizontal rig count.

On land the revenue drop was driven by lower hydraulic fracturing activity and additional pricing pressure for both products and services.

In the Gulf of Mexico revenue declined on lower multi-client seismic sales, exploration rigs transferring to drilling and completion activities, as well as pricing concessions which were partly offset by higher new technology sales.

In Western Canada rig count almost doubled sequentially following the early spring break up, but was still down by roughly 52% year over year.

In spite of these headwinds operating margins in North America decreased by only 136 basis points sequentially to 8.9%.

And this strong performance is a direct result of our proactive approach to cost and resource management, the growing effects of our transformation program, strong new technology sales and efficient supply chain management.

As service pricing in US land fell further in the third quarter, we continued our approach of concentrating activity in core areas and for key customers while proceeding to stack equipment rather than operating at a loss.

In the rare event we select to pursue work at what we consider noncommercial prices, we view this as an investment decision and apply the same justification and approval process used for any other reinvestment we do in our business.

This has led us to move equipment and crews between basins as we look to balance market share with margins and as we pursue new technology opportunities.

We believe that this approach has enabled us to protect our profitability in North America land and has also helped us maintain our overall infrastructure and long-term ability to service our customers in this market.

In the international markets revenue declined 7% sequentially due to further customer budget cuts, rapidly changing activity driven by disruptions, delays and cancellations as well as by further pricing concessions.

Third-quarter international operating margins of 23.7% was down 72 basis points sequentially and 83 basis points year over year.

Our nine-month incremental margins were still held to 23% which represents a marked improvement over the 61% from the corresponding period in the 2009 downturn, which is a testament to both the strength of our international business and how well our organization is executing.

Within the international areas Middle East and Asia revenue declined by 8% sequentially while pretax operating margins decreased 171 basis points to 27%.

Activity in the Middle East remained robust during the quarter, particularly in Saudi Arabia, the United Arab Emirates and Kuwait.

But pricing concessions, changes to the activity mix as well as project delays had a negative impact on revenue and profitability.

Year over year area revenue decreased 27% while margins dropped by 61 basis points.

Our lump sum turnkey project in Saudi Arabia continued to progress well and, with steady improvements in drilling efficiency, well deliveries are now ahead of planned levels.

In the United Arab Emirates robust drilling production and seismic activity was boosted by further rig additions and we also recorded strong sales of Petrel and ECLIPSE software.

Drilling activity was also stronger in Kuwait as rig count increased; however, this was partly offset by operational delays and an activity shutdown in the neutral zone.

In Iraq we mobilized two rigs for the [Subere] lump sum turnkey project with the first well already completed, while revenue from the other operations in the country remained flat with the second quarter.

In Southeast Asia activity was lower throughout the region driven by a further drop in work offshore Australia as projects ended.

Lower rig count in Malaysia reduced deepwater exploration and development work in the South China Sea and continuing NOC budget cuts on land in China.

In Latin America revenue declined 7% sequentially while pretax operating margins fell 159 basis points to 20.7%.

In Mexico, Argentina and Brazil activity was further hit by a combination of delays and budget reductions while Colombia was weaker due to increased pricing pressure.

These effects were, however, partially offset by steady activity in Venezuela and Ecuador.

Year over year area revenue decreased 30% and operating margins decreased by 120 basis points.

In Mexico revenue dropped again in the third quarter and now stands at an eight year low as the significant budget cuts further impacted activity and profitability.

At the same time we begin multi-client seismic operations in the Gulf of Campeche and awards for the second and third license rounds of the Energy Reform Act remain on schedule.

Offshore activity continued to decline in Brazil as budget reductions impacted both equipment rentals and feed operations and in addition to this revenue was also hit by the weakening of the real.

In Venezuela activity was steady for both PDVSA and for the heavy oil joint ventures in [Faha], while in Ecuador SBM activity was flat as the [Shusupindi] project continued to perform in line with expectations.

In Europe, CIS and Africa revenues fell 6% sequentially while pretax operating margins increased 92 basis points to 23.2%.

Year-over-year revenue decreased 31% and margins dropped by 125 basis points.

Within the area the bright spot in the third quarter was Russia and Central Asia where revenue continued to increase with deep summer drilling activity in Russia, Kazakhstan and Uzbekistan.

This increase was, however, partially offset by a weaker ruble.

In the North Sea increased drilling in the UK sector was insufficient to counter lower activity in the remote areas and was further offset by reduced activity in Norway from project delays and cancellations as well as currency weakness.

In sub-Saharan Africa activity increased in Gabon in the third quarter but was considerably lower in the rest of the region as operations were halted in Chad.

Exploration work dropped to a new low in Angola and offshore projects were canceled in Nigeria.

In Algeria and Tunisia activity was also down in the third quarter while in Libya our operations continue to be limited to one offshore rig.

Turning next to the overall market outlook, we see two clear trends emerging.

First, as we enter the last quarter of the year the global oil market is still way down by fears of reduced growth in China and the timing and magnitude of additional Iranian exports.

However, the fundamental balance of supply and demand continues to tighten driven by both solid global GDP growth and by weakening supply as the dramatic cuts in E&P investments start to take full effect.

We expect this trend to continue and as the oil market further recognizes the magnitude of the industry's annual production replacement challenge, this will gradually translate into improvements in oil prices going forward.

Second, in spite of the expected improvements in oil prices, the market outlook for oilfield services looks challenging for the coming quarters as we expect additional reductions in activity and further pressure on service pricing.

This is driven by the financial pressure on many of our customers where a year of very low oil prices is now exhausting available cash flow and corresponding capital spending and also leading them to take a very conservative view on 2016 E&P budgets.

In addition to this, the winter season will have the normal negative impact on activity which in the fourth quarter is unlikely to be offset by the usual year-end sales of software, products and multi-client licenses.

Based on this industry outlook we expect E&P investments to fall for a second successive year in 2016, which is the first time since the 1986 downturn when the spare capacity cushion was more than 10 million barrels per day.

In spite of the need for the industry to increase investment levels to mitigate the pending impact on global supply, we instead see an increasing likelihood of a timing gap between the expected improvement in oil prices and the subsequent increase in E&P investments and oilfield services activity.

This timing gap will increase response time as a direct consequence of the dramatic cuts in E&P investments which have clearly damaged the oil industry's financial strength and investment appetite as well as the operating capacity and capability.

So, while our macro view has not changed in terms of a tightening supply and demand balance, and an expected improvement in oil prices, we have to factor in that the likely recovery in our activity levels now seems to be a 2017 event.

We communicated in our previous earnings call that we were prepared to live with our existing cost base going forward providing we were close to the bottom of the markets and that the activity recovery was only a couple of quarters out.

As a result we carried our cost base forward into Q3, which had some negative impact on our operating margins, and we did not report any exceptional restructuring charges in the quarter.

The likely timing gap between the oil price recovery and the subsequent increase in oilfield services activity in combination with a more conservative spending outlook from our customers is causing us to now take further action.

We have therefore decided to proceed with a further round of capacity and overhead reductions which will result in a restructuring charge in the fourth quarter.

This charge will cover severance costs for additional headcount reductions reflecting both our updated activity outlook for 2016 and a further streamlining of our support structure.

In addition, and as part of our internal transformation program, we are now ready to initiate a significant restructuring of our global manufacturing and distribution network which will also result in a charge in the fourth quarter.

Here we will seize opportunities to streamline our engineering, manufacturing and sustaining infrastructure by consolidating sites into clusters both in central locations and in the field, while at the same time father modernize our processes by introducing state-of-the-art manufacturing automation in line with the best companies in other high-tech industries.

These changes to our manufacturing and distribution network are closely coordinated with the integration plans for Cameron which are already well advanced and which will be quickly implemented once the transaction has closed.

So far in this downturn we have proactively and decisively managed our cost and resource base, carefully navigated the commercial landscape with aim of balancing margins and market share at the same time as we effectively accelerated our internal transformation program.

With the above actions we are continuing this prudent approach with the aim of protecting and extending our solid financial performance into 2016 which is shaping up to be another challenging year for the oilfield services industry.

We further believe that our ability to respond to higher E&P investments in oilfield activity in 2017 will be improved by protecting our financial strength in 2016 rather than carrying excessive costs and inefficiencies as we await the recovery of the oilfield services market.

Overall we remain very confident in our ability to weather this downturn much better than our surroundings.

And through our global reach, the strength of our technology offering and our transformation program we are creating a significant financial leverage that will enable us to increase market share, deliver superior earnings and margins and continue to generate unmatched levels of free cash flow.

Thank you very much.

We will now open up for questions.

(Operator Instructions).

Ole Slorer, Morgan Stanley.

Paal, I wonder whether we could start with the macro and, maybe before that, Simon, congrats with another great set of free cash flow numbers.

Thank you, Ole.

But let's start with the macro for now.

Where do you think that the weakening supply has played out differently or similarly to what you would have thought 3, 6 or 12 months ago in light of recent CapEx cuts?

I think it is playing out more or less as we have expected globally.

I think what you see within OPEC, there is really no change to overall production capacity, there is a continuous shift from spare capacity into marketed supply.

In North America the production is coming down more or less as expected as well.

And internationally we are starting to see signs of weakening supply as well.

I think in all these three main sources of supply, while production is starting to come down, I think there are also significant efforts to maximize production within each of these basins by in some cases taking more short-term actions to maximize production which might actually have a negative impact on long-term recovery.

I think there is only a limited period that this can be done.

And while the various players exhaust these type of opportunities, if investments aren't increased I think you will see a further acceleration of the drop in production.

And the timing of that acceleration?

Do you have a view on that?

No, it is still a bit difficult to say.

But I think there are clear signs now in all -- at least in North America and non-NAM and OPEC that production is weakening and we expect that to continue and potentially accelerates in the event the investments aren't increasing.

Okay, thanks for that.

Just sort of based on what you highlight here with respect to CapEx trends in respect of oil prices.

Just having a shot at your fourth quarter and first quarter next year, with a 10% EPS reduction into the fourth quarter and another 5% into the first quarter, would that be a reasonable trajectory?

Well, let me say this, Q4 looks challenging.

And visibility has actually dropped in the past month or two now.

So (inaudible) activity is down, but in Q4 we will see the start of the winter slowdown in the northern hemisphere.

We also see further budget cuts in several of the key offshore markets such as sub Sahara Africa, Brazil and the Far East.

We also expect rig activity in North America land to be down in Q4 due to the financial stress on many of our customers there.

And we expect very limited yearend sales of product software and multi-client.

So EPS will drop, but due to the lack of the visibility we have now, Ole, I am not really ready to commit to a number.

But I will also say that Q1, in spite of Q4 not having the seasonal uptick in yearend sales, we also see Q1 being below Q4.

Okay, that makes sense.

Thanks a lot.

James West, Evercore ISI.

Paal, so we have now pushed out the recovery to 2017.

But I wonder if you could elaborate a little more on how you see 2016 playing out.

Clearly you just mentioned 1Q is going to be below 4Q, does that mark the bottom in earnings and we're kind of going sideways for most of next year?

Or is there potential for a second half modest upturn?

Well, I would hope that Q1 will represent the bottom and there will be a gradually but slow recovery during the year or even sideways.

I think it is still too early to say, James.

I think we have -- even for Q4 now there is significant uncertainties in several of the markets and what is going to happen.

Beyond that we clearly see Q1 being below Q4.

But visibility even on Q1 is still very low.

So, I would hope that what you kind of depict will be the case.

But I think it is too early to say.

But I would say also that there is a limit to how long these reductions in investment and activity can continue.

And I think as the oil price now likely will start to move upwards, hopefully investments will turn around.

But anything meaningful will be late 2016 and into 2017 as we see it as per today.

Okay, got you.

And then, Paal, you specifically called out M&A in the press release last night.

And you had a number of smaller deals in addition to Cameron this quarter -- or last quarter, excuse me.

Are you preparing the market for something additional of size or is this just highlighting the fact that you guys are generating tons of cash, you've got huge flexibility?

Yes, it is still out there, we're not preparing the market for anything other than we focus significantly our entire organization on generating free cash.

Margins are a key ingredient to generate cash.

So both of those are key focus areas for us in terms of protecting and extending our strong financial performance.

And obviously in this type of market companies that can generate significant free cash has a broad range of opportunities.

And I think we have shown so far in the downturn that we will be opportunistic.

What opportunities are there and which one we will convert we will [revert] back to you when we have converted them.

But as of now we will continue to be opportunistic.

But there is no reparation or any message beyond that.

Okay, got it.

Thanks, Paal.

Angie Sedita, UBS.

Again, impressive free cash flow and decrementals there versus the peer group.

So, Paal, in you're prepared remarks you talked a little bit about the outlook for 2016 as far as E&P spending.

And I know it is obviously early to have much granularity.

But where we have less visibility is internationally.

And maybe you could just give us some color there on what you are hearing with your conversations with your customers around the world as far as the spending outlook for 2016 both land and offshore?

Yes, we don't have a lot of granularity, Angie, it is still just kind of broad-based statements.

Most of our customers haven't completed or just barely started their budgeting process for 2016.

But the general feedback is very consistent and that is they expect the vast majority of them that spend will be lower.

So, I can't give you granularity of geography or land and offshore.

I would say though that the part of the world that is still very, very resilient is obviously the D2C countries in the Middle East.

So I am not expecting anything significant there in terms of lower investments.

But broad-based pretty much everywhere else there are significant challenges and we expect 2016 budgets to be below 2015.

Okay.

Okay, that's helpful.

And then if you think about the US, and obviously it is a smaller market for you, but if you think about the US -- and you have said on a number of occasions that the pricing is unsustainably low.

And as we all know that many of these smaller companies are free cash flow negative, I mean how do you think this plays out in 2016 going into 2017?

Could even a modest increase then activity in oil prices lead to even modest improvements in pricing?

Or how do you think this plays out, any thoughts?

Yes, I'm not very optimistic on any turnaround in service and product pricing for oilfield services in North America land.

I think, yes, many of the small companies or most of the small companies are free cash flow negative.

They are in the significant financial stress and maybe some of them will go bankrupt in the coming quarters or in the coming year.

But there is still massive overcapacity.

And even the small companies that go bankrupt will likely be picked up by other investors and their assets will be returned back into the market.

So, no, I think the overcapacity is going to be with industry for quite a considerable amount of time.

So, I don't expect any real improvement in service and product pricing in the coming year in North America land.

All right, great, thanks.

I will turn it over.

Bill Herbert, Simmons & Company.

Wondering if we could talk a little bit about the flexibility of the US upstream value chain here as we are getting deeper into this downturn.

I mean the supposition has been and perhaps continues to be that the -- once the recovery narrative is embraced by the industry that the industry can respond quickly and assertively to an increase in spending and activity.

Do we still think that is the case given the duress of the industry and the fact that many are not only cutting into fat and muscle but now bone?

I think the industry -- I think the market is probably overestimating how quickly the industry can respond whether it is in North America or internationally.

I think the fact that now four quarters into very low oil prices, the financial strength of many of our customers is significantly weakened and their appetite to invest is also a bit down.

Any I think -- any improvement in oil prices I think will be to initially is going to go towards strengthening the balance sheet and then the oil companies will likely assess how sustainable are these increases in oil prices before they start investing.

So there is a delay, I believe, between an improvement in oil prices and the decision to increase budgets.

And then there is going to be a further delay between increasing budgets and realizing that into higher oil selectivity.

And then there is going to be a delay in between higher oil activity and higher production.

So I think the market is underestimating how long this period is going to take.

And just the fact that the industry is again looking to reduce investments when we have the significant pending supply impact coming just shows that I think we even have an increasing chance of a potential spike in oil prices if investments aren't increased in time.

Okay.

And then secondly -- so given the duress that you are prophesying here for the next several quarters, notwithstanding the fact that your decrementals in Q3 were still very laudable, they trended higher.

And I am just curious as to whether we see accelerating decrementals over the next quarters or do they stabilize?

Or what is your view with regard to the roadmap on that front?

Well, in terms of our decrementals we are working flat out to continue to manage them along the levels that you have seen so far this year.

So we are not giving up on that.

We have continuous efforts both in reducing costs and capacity as well as creating more leverage to offset pricing from our transformation.

So, we are going to continue to work very hard at delivering continuously very strong decrementals.

We see that as very important to sort of maintain our financial strength and also to help us generate the strong free cash flow that you have seen so far this year.

Okay, thank you.

Jim Crandell, Cowen.

Paal, based on maybe a more limited sample size we seem to see a number of companies calling for 20% to 30% reductions in their CapEx for 2016.

Is that a range that you think is reasonable at this point?

I think full-year 2016 over full-year 2015 that sounds like a high number.

At this stage I don't think it is going to be as much is that, no.

And based on your conversations with managements of some of the NOCs, would you think that the NOCs in Latin America, West Africa and Asia would be still one of the weakest points in the market?

I notice that Angola is cutting spending by 50% next year.

And do you think that is going to be indicative of some of the NOCs in those regions?

Well, that number again I think is high.

But I think the fact that this customer group has cut significant this year and will likely go down potentially further next year I think is a reasonable assumption.

But again, my commentary on 2016 is based on very high level discussions and I don't have details of what budgets and what numbers are going to be other than that it seems to be a consensus that overall spend will be down.

I think your 20% to 30% is very high, it is likely to be less than that.

But still expect it to be down.

And how would you -- in a declining market how do you think that that affects the market share of integrated services for Schlumberger?

I don't think it has a direct impact on anything in terms of up or down.

There continues to be a broad range of integration type of opportunities.

We are pursuing all of them.

Whether this is all the way from bundled services from a few of our product lines all the way up to full turnkey lump sum contracts as well as SBM opportunities.

So, nothing dramatic in terms of a shift of integration opportunities, it continues to be a key part of what we offer.

And this is a generally growing appetite from all customer groups to engage in those type of contracts.

Good, okay, thank you.

Bill Sanchez, Howard Weil.

Paal, I want to try to understand a bit more from you the magnitude of the pricing declines internationally that you are seeing and what the duration from here is going to be.

And I guess specifically where are we now -- or where are you I should say, in working through all of your contract renegotiations with your customers?

I can't give you a number, Bill, on this other than I think it is clear that the pricing impact internationally, although it is significant to our operations, it is still significantly lower than what you have seen in North America and North America land.

I would say that round one of the pricing discussions is complete.

There might be more coming in the coming quarters.

And I think as long as oil prices are down and the outlook is still relatively somber then there is a constant pressure on pricing internationally as well as in North America land.

So we continue to work through that.

We bid competitively on the tenders that are out there.

Customers are looking to renegotiate we engage in those discussions.

And obviously we are trying to minimize and protect how we -- what we concede in these type of discussions.

But that is a call we make in each situation around what market share we are looking at, what kind of terms and conditions we can get for some of these things and how we look at the overall business that we run.

This is a normal part of business.

When there is over capacity there is pressure on pricing and that is part of what we do for a living to manage that.

Do past renegotiations that you've, for lack of a better term, have kind of settled with your customers, do those get reopened here as we go into 2016?

Or these are just incremental discussions that you are still having on contracts that really haven't been negotiated to this point or renegotiated at this point?

Well, I think it is a mix of all of it, Bill.

I think you see it in North America land, you see it in international, overcapacity there is a continuous pricing discussion until we hit the bottom of the market.

And then it stabilizes and then we look upward from there.

So, there is a mix of renegotiations of contracts already discussed.

And some of them, which haven't been -- have not been changed already.

So, there is a combination of all of it.

Okay, Simon, a follow-up for you or a question for you.

Can you give us an idea of when the share repurchase blackout period will begin for you?

Okay, so as I mentioned in my remarks, once we file the S4 and it is accepted there will be a blackout period.

I am expecting to be about four to five weeks and could start maybe early November.

Okay.

And I guess we would expect repurchases to take place up until that point?

Yes.

Now I would like to take this opportunity just to remind you that first we are issuing a large number of shares.

And this -- the number of shares that will be issued, it is going to take place by our US-based subsidiary.

You're going to see a large movement in the capital structure of Schlumberger between our US subsidiary and the parent company.

In other words, the US subsidiary will be the one acquiring Cameron and as a result is going to acquire the shares from the parent company.

So you are going to see eventually when we close the transaction of Cameron a large swing in the capital structure between the US-based subsidiary and our parent company because of the structure of the acquisition.

And this would require the US subsidiary as I said to acquire shares from the parent company.

So there will be a large movement of cash from the US-based subsidiary into the parent company.

But when times will come we will explain it to you in more details and how it is going to work out.

Great, I appreciate the time, I will turn it back.

David Anderson, Barclays.

Paal, I was hoping you could expand a bit more on what you said on the exploration front?

In the commentary, you noted Gulf of Mexico continued to transition.

Now West Africa is starting to roll those exploration programs in.

What is the mindset of your customers at this point in terms of where that fits in the portfolio?

You talked about, first and foremost, about the balance sheets, obviously dividends, but is it just about getting development costs down first and is exploration just kind of pushed out?

How does that kind of fit in terms of your vision for the next couple years?

Yes, I think what you are saying is correct.

The focus on driving cost down is in development and exploration is basically eliminated.

That is how I think many customers look at it.

There are significant cuts in exploration activity and they continue both for seismic and for drilling.

The Q3 exploration rig count was down about 25% year-over-year and the seismic spend was also down in excess of 30% and that is following a pretty low year in 2014 as well.

So it is very challenging for exploration activity for us, but again the impact of this is still fully absorbed in our results, which are still reasonably good.

So, yes, in summary, our customers are more or less cutting completely exploration and focusing a lot more in driving further cost out of the development.

And on that side, on the development, as you integrate OneSubsea into Schlumberger, there seems to be a pretty big opportunity to pull in the rest of Schlumberger to help bring down development costs.

So as I think about you leaning on your reservoir expertise and well design capabilities, how receptive have customers been so far to Schlumberger taking a greater role in that offshore development?

It would seem to be it's a pretty big mind change -- mindset change for your customers.

I mean is that happening, do you feel confident in that?

Do you think projects can actually move ahead in 2016 because of that or is that a little too optimistic in terms of the timing?

It might be slightly optimistic on the timing, but I think -- so first of all, many of the things that you mentioned in terms of bringing together the capabilities of Schlumberger and OneSubsea is already happening.

But obviously we can accelerate and have an even further impact on this as we close the transaction and take full management of OneSubsea.

But I am very pleased with the progress that OneSubsea has made and the close working relationship we have had with OneSubsea from the Schlumberger side.

But I think over time and maybe not already in 2016 there is significant cost reduction potential in the -- for the deepwater I think both when it comes to the well cost as well as for the overall infrastructure.

I think we can simplify, we get standardize, we can engineer costs out of the system.

And what that will allow, if you can for instance reduce the well cost by say 30% you can potentially drill four wells for the price of three, which again will help you increase production and recovery from the deepwater field, which obviously will help the lower cost per barrel and improve the economics.

So I think we are in very, very early innings in terms of driving down costs for deepwater, both production and on the drilling part of it.

And I think what we are doing now with the Cameron acquisition is going to address both those dimensions.

Great, thank you.

Scott Gruber, Citi.

Turning back to international decrementals, you guys continue to post very impressive figures during this down cycle.

But at what rate of upstream spending decline abroad would those 25% to 30% decrementals be at risk of rising?

I know there is not a lot of clarity on exactly how spending will turn out next year.

But if spending is down 15% would you start to become concerned or would it take a steeper drop to really threaten those decrementals?

You're talking about 2016 spending?

Correct.

Well, I mean we have delivered I think very strong financial performance in the international market now for a number of years.

In 2014 we generated 69% incrementals on quite limited revenue growth.

And so far 23% decrementals on 18% drop in revenue this year.

So our performance so far this year is not a fluke, we have -- we have been very good at managing our international business.

So, I am expecting that even with still further headwinds in terms of top lines in 2016 we should be able to continue to hold the decrementals at a very respectable level.

Whether they are going to be at 23% or slightly higher it is a bit difficult to say.

But in terms of offsetting activity reductions through cost cutting I think we have proven that we can do that.

And beyond that it is how much leverage we can generate from the transformation to offset pricing.

So both of those are -- we are very active on trying to deliver both of those type of results.

And we are going to go very hard at it for 2016 to continue to deliver strong decrementals internationally.

Got it.

And then you already touched on the need for customers to repair their balance sheets, which will likely contribute to the delay in activity recovery.

Is there also an oil price threshold that you have in mind that needs to be achieved before your customers start to increase CapEx?

I mean, do we need to see $65 Brent or $70 Brent?

At what level do you think customers are comfortable expanding their budgets even if there is some delay?

No, I don't have a specific oil price number in mind.

I think it is going to be much more functional of how sustainable our customers see the increases in oil prices to be.

And I think it is more about having a stable basis for increasing investments before they go ahead and do it, right.

I am -- I still think that there are -- there is going to be conservatism based on the very tough four quarters that the industry has gone through at this stage.

And that is why again we are basically saying that there is going to be a lag between higher order prices and investments and even a lag between higher investments and realizable oil selectivity.

Anything further, Mr. Gruber?

No, that is it, got it, thanks.

Michael LaMotte, Guggenheim.

If I could follow up just on transformation quickly and ask you to expand upon two areas in particular.

First, your comments on the reorganization of the manufacturing operations and how long that is expected to take.

And if you could quantify the gross margin benefit perhaps of that effort.

And then secondly, in the press release this is the first time we have seen the references to the multi [skilling].

So if you could give us an update in terms of where we are in the progress of that effort as well?

Yes, on the transformation around the [gold] manufacturing and distribution, the charge we are taking is for consolidating facilities, moving much more towards campuses and clusters and also the introduction of some new automation manufacturing type of technology.

Similarly we are also looking to consolidate how we do global distribution going more from a global and local set up to a much more regional set up in terms of how we manage that.

So the process of getting it done, we have already embarked on.

And there are some charges associated with it that we will take in the fourth quarter and we will continue implementing our program in 2016 and 2017.

So, I am not going to be able to give you a specific impact on margins and what this is going to generate for us.

Although that we are very excited about doing this, it is going to modernize a core part of the Company and it is going to make us even more competitive in the international market.

Now in terms of multi skilling, this is part of how we are continuing to drive people productivity.

There is many other aspects of what we do there.

We have remote operations as another key part of this as well where we can centralize much more of our expertise and have them oversee more jobs centrally rather than being at the well site as well.

So all of these elements are a key part of the transformation program.

And we are still not at the halfway point of rolling this out globally and for it to have the full impact on our operations and our results.

So there is still a lot of runway left in both the multi-skilling, the remote operations and what we are going to do on manufacturing and distribution as well as all the other parts of the transformation.

So, we are excited about it and there is a strong pull from the entire organization on this and we continue to work hard at implementing it.

Great, thank you.

And if I could ask a follow-up quickly of Simon.

Would you be perhaps -- I noticed debt came down, total debt came down in the third quarter from the second quarter.

During the blackout would you be using free cash flow to further pay down debt or can we just assume that cash builds on the balance sheet in that interim?

So, good question, Michael.

Some of the -- most of our debt actually is fixed debt.

So we do have a certain percentage which is more reflective of commercial papers, etc., this will go down.

But as I said earlier, and I would like to repeat this, that you are going to see a large movement in our capital structure and perhaps eventually we will have a little bit more debt associated with the transaction coming from our North America or our US-based subsidiary.

And this to acquire the shares from the parent company.

So you are going to see a different type of movement and eventually there will be larger debt that we will have in the US subsidiary in order to acquire the shares (multiple speakers).

Post close.

At any time during the blackout period, as you highlighted, it will reflect into a reduction in the debt which is the current debt that is reflected in the [DP] that we issue on a daily basis.

Great, thanks, Simon.

Jud Bailey, Wells Fargo Securities.

Wanted to, Paal, ask you about a couple of different markets.

Outside of North America it seems like Latin America continues to trend as one of the more difficult international markets.

Could you maybe comment on Mexico and also particularly on Brazil given all the issues going on with Petrobras and some of the contract renegotiations and how you are thinking about that market and how it may impact you in 2016?

Yes.

Both markets, as you point out, both Mexico and Brazil have been very challenging this year.

Mexico even more than Brazil I would say.

So there has been significant budget reductions and they have continued throughout the year.

Like I mentioned in my prepared remarks, our Q3 revenue now stands at an eight year low, which is quite remarkable for a sizable market as Mexico is for us.

So, in terms of next year it is still very early for both of these countries, Mexico and Brazil.

But I think it is still going to be challenging as we enter into 2016.

Don't have a lot of details of it yet, but no positive signs either from PEMEX or from Petrobras at this stage.

Okay, thank you and I will -- my follow up is on just -- to circle back on international pricing.

Understanding you are kind of done with round one, but as you kind of look at the market today is pricing getting -- is it starting to decline worse than it did earlier in the year or is there any sign of it stabilizing?

Or do you get the sense that the pricing is slipping even more?

And are there any particular markets internationally where you are seeing more pricing pressure than others?

No, it is not I would say slipping further.

It is just there's a continuing pricing pressure in this part of the cycle.

It is quite normal, there is nothing special about it.

And as long as the outlook is negative then there will be continued pricing pressure.

Every bid that is out there is even increased competition to get it and that creates the downward pricing pressure.

So nothing exceptional.

I don't see it accelerating other than that it is not going away and we will just continue to manage it and navigate it the way we have been doing so far in the downturn.

Great, thank you.

Kurt Hallead, RBC Capital.

So, just I am curious, Paal, what you think about the -- going back to the M&A dynamic, that Eurasia deal kind of fell through, that's -- is that something that still could be -- come back on the table at some point going forward?

And what do you think more broadly about M&A?

Is the Schlumberger interest right now more in some geographic opportunities or is it in some product specific areas generally speaking?

Just to say the Eurasia deal first of all -- obviously we were disappointed that we couldn't get it closed within the several extensions of the timeline that we agreed with Eurasia.

But that deal is now closed for us, so I don't really have any more comments on that.

In terms of other M&A, we continue to be opportunistic.

I can't go into details of what that will entail or what we may or may not do other than that we have a broad view of the entire market and what opportunities are there, what we are interested in.

And we continue to evaluate companies on a monthly basis.

And if there is a willing seller and a good price then we might be able to do something more, but it is still too early to say.

So I can't promise anything or I can't make any further comments on what may happen other than that we continue to be active in assessing the market and look for opportunities to further extend and strengthen our portfolio and we keep generating the cash to allow us to do that.

Okay, that is great.

I will keep it there and we will see you in a little bit.

Very good.

All right, so before we close this morning I would like to summarize the three most important points we have discussed.

First, while the business environment clearly got worse in the third quarter, our focus on cost management and transformation has enabled us to deliver strong financial performance and generate significant liquidity which is a clear competitive edge in this part of the cycle.

Second, our forward visibility has again been reduced and we will consequently revert back to managing the Company quarter by quarter.

This means a further round of capacity and overhead reductions in the fourth quarter as we adjust resources to a lower activity outlook.

At the same time we will continue to accelerate our transformation program, with the next step being a significant restructuring of our global manufacturing and distribution network which will further modernize a core part of our Company.

And third, our outlook for the oil market remains unchanged with a continuing tightening of the supply and demand balance as the dramatic cuts in E&P investments start to take full effect ultimately leading to an increase in oil prices.

Given the conservative view our customers are taking on 2016 investment levels, and the general state of the industry following a year of low oil prices, we see an increasing likelihood of a timing gap between higher oil prices and the subsequent increase in E&P investment and oil selectivity.

In this environment we continue to proactively manage our business to preserve our financial strength into 2016, which will allow us to better navigate the market uncertainty and to respond faster to new business opportunities and ultimately higher activity.

Thank you for participating.

Thank you.

And, ladies and gentlemen, today's conference will be available for replay after 10 AM Eastern Time today, running through November 16 at midnight.

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(Operator Instructions).

That does conclude your conference for today.

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