斯倫貝謝公司 (SLB) 2016 Q1 法說會逐字稿

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

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

Later, we will conduct a question-and-answer session.

Instructions will be given to you at that time.

(Operator Instructions).

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

I would now like to turn the conference over to Mr. Simon Farrant.

Please go ahead.

Thank you.

Good morning and welcome to the Schlumberger Limited first-quarter 2016 results conference call.

Today's call is being hosted from Houston, following a Schlumberger Limited Board meeting.

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 materially differ from those projected in these 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 to the most directly comparable GAAP financial measures can be found in our first-quarter press release, which is on our website.

We welcome your questions after our prepared statements.

I will now turn the call over to Simon.

Thank you, Simon.

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

First-quarter earnings per share was $0.40.

Excluding charges recorded in the first and fourth quarters of last year, this represents decreases of $0.25 sequentially and $0.66 when compared to the same quarter last year.

Our first-quarter revenue of $6.5 billion decreased 16% sequentially while pretax operating margin decreased 281 basis points to 14%.

These decreases, which were driven by continued activity declines and pricing pressures, resulted in decremental margins of 32%.

Highlights by product group were as follows.

First-quarter reservoir characterization revenue of $1.7 billion decreased 20% sequentially while margin decreased 480 basis points to 19% resulting in decremental margins of 43%.

These decreases were largely due to seasonally lower software sales and a fall in higher-margin exploration activity.

Drilling group revenue of $2.5 billion decreased 16% sequentially while margin declined 183 basis points.

These decreases were primarily driven by activity declines across all areas.

Despite these declines, decremental margins were limited to 27% on strong cost controls.

Production group revenue of $2.3 billion decreased 11% sequentially and margins fell by 335 basis points primarily on lower pressure pumping activity and further pricing erosion in North America land.

These declines offset in part by strong contributions from SPM resulted in decremental margins of 33%.

Now turning to Schlumberger as a whole, the effective tax rate, excluding charges and credits, was 16% in the first quarter compared to 18% in the previous quarter.

This decrease was largely driven by the significant sequential drop in pretax operating income we experienced in our North America business.

With these reduced overall levels of pretax income that we are currently experiencing, relatively small changes in our tax expense line will have a disproportionate impact on our ETR.

This can make our ETR more volatile as compared to prior years.

Looking forward, the acquisition of Cameron is not expected to have a material impact on our overall ETR.

However, due to the sensitivity of the overall geographic earning mix of the combined business, we do expect an increase in the ETR for the rest of the year as compared to the first quarter.

We generated $1.2 billion of cash flow from operations.

This is despite the consumption of working capital that we typically experience during Q1, which is driven by the annual payments associated with employee compensation.

As well, the payment of $260 million in severance during the quarter.

Our net debt increased $1.1 billion during the quarter to $6.7 billion.

We ended the quarter with total cash and investments of $14.8 billion.

Cameron had $2.2 billion of cash at closing and we paid the Cameron shareholders $2.8 billion in connection with the transaction.

Therefore, we effectively started off the quarter with $14.2 billion of total cash and investments.

During the quarter, we spent $475 million to repurchase 7.1 million shares at an average price of $67.43.

Other significant liquidity events during the quarter included roughly $550 million on CapEx, $600 million of SPM investments, $170 million of multi-client and $630 million of dividend payments.

Excluding the impact of Cameron, full-year 2015 CapEx is now expected to be approximately $2 billion.

This amount does not include investments in SPM for multi-client.

Cameron's full-year 2016 CapEx is expected to be approximately $200 million, of which $37 million was spent during the first quarter.

Let me take a few minutes to provide some additional financial details relating to the Cameron acquisition, which, as you know, closed on April 1. In connection with the closing of the transaction, we assumed gross debt with a carrying value of $2.8 billion.

During April, we repurchased approximately $1.2 billion of this debt.

This, combined with the effect of the purchase accounting adjustment to fair value to debt, will result in Schlumberger's pretax net interest cost increasing by approximately $13 million per quarter starting in Q2.

We still expect pretax synergies to be approximately $300 million over the next 12 months and $600 million in the second year.

These numbers consist primarily of cost as opposed to revenue synergies in the first couple of years.

However, we remain most excited about the opportunities for revenue synergy, which are very significant, are expected to grow considerably in the future years.

Although we are in the process of finalizing our purchase accounting, we estimate that the pretax amortization expense as a result of fair value adjustment to the acquired assets will add approximately $65 million on a quarterly basis to our corporate and other expense line.

The transaction will be accretive on both an EPS and cash flow basis within the current year.

As a reminder, going forward, we will be incurring merger and integration-related charges.

These will include transaction costs, the cost of integration team, one-off purchase accounting adjustments, as well as costs to achieve synergies.

This will be most significant in Q2, but they will continue for the rest of 2016 and into 2017.

We will separately call out these charges for you as they are incurred.

One last item is how we will report Cameron going forward.

Since the acquisition of Smith five years ago, our groups have served as the primary reporting for SEC purposes.

Starting in Q2, Cameron will become the fourth group in this structure, along with our existing reservoir characterization, drilling and production groups.

Additionally, the revenue of these four groups will be combined and reported consistent with Schlumberger's current area structure.

However, this will only be revenue reporting as we will no longer report operating income by area.

Paal will further elaborate on the rationale for this change.

Shortly after this call, we will be posting pro forma quarterly financial information in this format going back to Q1 2013 taking you through Q1 of 2016.

And now I will turn the conference over to Paal.

Thank you, Simon and good morning, everyone.

Activity fell sharply in the first quarter as the industry displayed clear signs of facing a full-scale cash crisis.

We experienced activity reductions worldwide with the rate of disruption reaching unprecedented levels.

The start of a new year and a new budget cycle represented a further fall in customer E&P spend and we expect a continued weakening in the second quarter given the magnitude and the rapid nature of the ongoing activity disruptions.

This outlook is backed by the latest 2016 E&P spending surveys, which indicate sharper falls than earlier figures.

Global spending reductions in 2016 are now approaching 25%, corresponding to a fall of 40% to 50% in North America and around 20% in the international markets.

Our first-quarter revenue fell 16% sequentially, a figure that represents the second steepest quarterly decline we have seen in this downturn that has now persisted for six straight quarters.

Rig activity fell in all parts of the world as customers further reduced budgets and continue to exert pressure on product and service pricing while our operations also suffered from project delays and job cancellations.

In North America, revenue fell 25% sequentially as the US land rig count declined by 31%.

By the end of the quarter, the US land rig count had fallen to around 400 representing a drop of 80% from the peak of October 2014 and marking a third phase of a downturn that is the most severe the industry has seen in 30 years.

The latest fall in activity has been particularly steep as seen by our North America land revenue, which is 29% lower sequentially on reduced activity and increased pricing pressure, together with the early onset of the Canadian spring breakup.

In spite of this downward acceleration in activity, our new technology sales remained solid and we also see growing customer recognition for the value of our integrated technology offering.

North America offshore revenue was down 18% sequentially driven by lower rig activity and project delays and cancellations.

In addition, multi-client seismic sales saw unprecedented low levels resulting in a negative operating income of $36 million in the first quarter due to the ongoing amortization of our multi-client library.

This loss, combined with the dramatic drop in activity and continued pricing pressure, cost our overall operating margins in North America to fall into negative territory.

Throughout the quarter, we maintained our focus on tailoring costs and resources to activity levels while safeguarding our operational infrastructure and technical capabilities.

Needless to say, this approach further reduced our profitability levels; however, our cash flow in North America still remained positive.

Turning to the international markets, revenue was 13% lower sequentially as customer budget cuts, project cancellations, seasonal winter slowdowns and foreign exchange weakness versus the US dollar all impacted results.

First-quarter international operating margins slipped to 21% driven by the significant activity reductions and persisting pricing pressure.

The Europe/CIS/Africa area was the worst affected while the Latin America and the Middle East and Asia areas were able to maintain flat margins compared to the fourth quarter.

And in total, our international sequential decremental margins improved in the first quarter to 27%.

Looking at the international areas in more detail, revenue in Latin America declined 9% sequentially while pretax operating margins remained steady at 23% driven by proactive cost management initiated in the previous quarter and the startup of a new integrated project.

In Argentina, activity softened further in the first quarter and revenue was also negatively impacted by the weakening of the peso.

Activity in Brazil and Colombia continues to be in freefall and was in the first quarter down 50% and 75% respectively compared to the first quarter of last year.

In Ecuador, we are executing well on our SPM projects with production in Shushufindi exceeding 90,000 barrels per day during the first quarter and we continue to invest actively in our integration projects in the country.

Revenue in Venezuela was down sequentially, but we did see higher activity in the [Faja] joint ventures compared to the fourth quarter.

In Venezuela, the rate of cash collections has been insufficient in recent quarters and in spite of concerted efforts together with our main customer, we have been unable to establish new mechanisms that address this issue.

Therefore, as we have already announced, we have decided that we will not increase our accounts receivable balance beyond the level reached at the end of the first quarter.

This means that activity levels in Venezuela going forward will be aligned with the rate of cash collections from our customers in the country.

In doing this, we are working in close coordination with all customers in Venezuela to continue to serve the ones with available cash flow and to ensure a safe and orderly wind-down of operations for the others.

We have been working in Venezuela since 1929 and in spite of this temporary reduction in activity, we remain committed to the oil and gas industry in the country going forward.

In Europe/CIS/Africa, revenue fell 18% sequentially while pretax operating margins dropped by 194 basis points to 19%.

The drop in revenue was led by Russia and Central Asia where a further weakening of the ruble and a seasonal winter slowdown both on land and offshore impacted results.

In the North Sea, revenue was also lower due to customer budget cuts, seasonal reductions in activity and also severe weather conditions, while widespread project delays and job cancellations in Sub-Saharan Africa contributed to another significant sequential reduction in revenue in this region.

In the Middle East and Asia, revenue declined by 11% sequentially while pretax operating margins remained flat at 22%.

The sequential drop in revenue was led by Asia with lower activity in China from the seasonal winter slowdown and also by weaker activity in Australia and the Asia-Pacific region as a result of continued customer budget cuts.

First-quarter revenue was also down in the Middle East region where solid activity in Kuwait, the United Arab Emirates and Egypt was more than offset by reductions in the rest of the region.

In terms of operating margins, the lower activity and pricing pressure seen throughout the area was offset by adjustments to our cost and resource base, as well as by further implementation of our transformation program.

Turning now to our technology offering, the Cameron transaction closed on April 1, 2016 and on this date, Cameron became the fourth Schlumberger product group joining our reservoir characterization, drilling and production groups.

We are very excited and pleased to welcome the Cameron employees under the leadership of Scott Rowe to Schlumberger and we are already in full implementation mode of the detailed integration plans we have jointly prepared over the past seven months.

In terms of financial reporting, Simon has already explained that we will report Cameron financial results as a fourth global group and also that Cameron's revenue will be consolidated with the rest of the Company on a geographical basis under the four reporting areas we currently disclose, while we at the same time will discontinue the geographical reporting of pretax operating income.

So let me explain the reasoning behind this change.

First, the Cameron group is a centrally run manufacturing business built around large plants that address global markets and where customer billings around the world is largely separated from where the costs are incurred.

Combining the Cameron group revenue with the rest of the Company will therefore give a good representation of customer activity for the entire Company.

However, Cameron has historically not allocated out the large central cost base because managing these allocations are associated with significant extra workload.

At the same time, the traditional Schlumberger business, although different in nature from Cameron, is also evolving towards a more regional and central setup as part of our ongoing corporate transformation.

Our geographical presence from both a customer interaction and wellsite execution standpoint will never change and will always remain central to how we run the Company.

However, the overhead structure that is employed to support our day-to-day customer operations represent a significant part of our cost base, which can be dramatically streamlined and reduced through the centralization drive of the transformation program.

Schlumberger is therefore also on a path where there is a growing distance between where we bill our customers and where we incur a large part of our costs.

Based on this, we have therefore decided to discontinue the reporting of pretax operating income by the geographical areas.

Beyond this, we will continue to report orders in backlog for the Cameron long-cycle businesses of OneSubsea and drilling and for the WesternGeco seismic business.

Next, let's move on from financial reporting to new technology.

The technical driver behind the Cameron transaction is our belief that the Cameron technologies will be critical enablers in the development of a new generation of integrated surface and subsurface systems that have the potential to make a stepchange in both drilling and production performance.

One example of this is our land drilling system of the future that brings together purpose-built surface and downhole hardware, which is relatively integrated into a complete drilling system overseen and managed by a common optimization software that will deliver a stepchange in operational efficiency.

Cameron brings expertise and technology in the areas of top drives, pipe-handling systems and blowout preventers, while the new system will also draw on the rig design acquisition and rig manufacturing JV we made last year.

Five engineering prototypes of the new system will be ready for field testing in 2016 in Ecuador and the US with full commercial introduction on track for 2017.

Another example is our new hydraulic fracturing system, which will be introduced in 2017 where we will bring together new hardware technologies and significant process reengineering, as well as a common operating and optimization software.

This system will span the complete range of surface components such as Cameron's CAMShale pressure control and wellhead systems together with our own perforating, fracturing, cleanup and flowback services, as well as our latest downhole completion technology and fracturing fluids.

Both of these systems will initially be deployed within our current CapEx budget of $2 billion for 2016, which itself has been reduced by $400 million from our initial guidance.

Our ability to invest through this unprecedented industry downturn on the back of our strong cash flow and balance sheet enables us to capitalize on the current market conditions to gain significant relative strength compared to our surroundings.

In addition to our traditional CapEx investments, we also continue to invest in new production management projects, leveraging our broad subsurface and integration capability.

An example of this is the Auca project we started off in Ecuador during the first quarter where we are building further on the highly successful Shushufindi project, which is now in its fifth year of operation.

Multi-client seismic surveys is another line of business opportunities we continue to invest in where our current focus is on the exciting Campeche Basin in Mexico and the largely unexplored areas offshore in Mozambique and South Africa.

As we enter the second quarter, we have a total of eight 3D vessels active and we have three of these using our unique IsoMetrix technology.

We also continue to make M&A investments in niche technologies that fill gaps in our portfolio or in our ability to develop specific new services.

We mentioned two of these in today's release with one being a novel downhole metal-to-metal seal technology for use in our completions product line, while the other brings expert consulting abilities in support of the expansion of our integrated project portfolio.

And finally, we continue to focus on returning cash to our shareholders through dividends and stock buybacks, which combined amounted to $1.1 billion in the first quarter.

Turning now to the short-term outlook, we expect market conditions to worsen further in the second quarter as customers continue to reduce activity.

Excluding the addition of revenue from Cameron, this market outlook together with our decision to reduce activity in Venezuela could lead to a sequential percentage fall in revenue for the second quarter, similar to what we saw in Q1.

Cameron revenue on the other hand is expected to be flat sequentially.

In this environment, we will continue to tailor service capacity and overhead costs to activity levels while preserving long-term operational and technical capabilities, which will represent a further burden on our operating margins going forward, in particular in North America.

Our overall view of the oil markets, however, remains unchanged where a steady tightening of the supply and demand balance is taking place.

The latest reports confirm that 2016 demand growth remains solid while OPEC production levels have been largely flat since the mid of 2015.

Production in North America continues to fall as decline rates are becoming more pronounced while the mature non-OPEC production is now falling in a number of regions.

As we navigate this landscape, a number of positive factors make me optimistic and confident with respect to Schlumberger's future.

First, the magnitude of the E&P investment cuts are now so severe that it can only accelerate production decline and the consequent upward movement in oil price.

Second, our financial strength enables us to continue to invest in a range of opportunities across a number of our businesses.

Third, the massive capacity reductions in the service industry will help restore a good part of the international pricing concessions we have made once oil prices and activity levels start to normalize.

And last, while we have reduced capacity significantly, we are safeguarding the core expertise and capabilities of the Company beyond our immediate operational requirements.

We, therefore, remain confident in our ability to weather this downturn much better than our surroundings.

Through our global reach, the strength of our technology offering, the strategic moves we have made and our corporate transformation program, we are creating the leverage that will enable us to increase revenue market share and continue to produce superior earnings and margins.

Thank you very much.

We will now open up for questions.

Thank you.

(Operator Instructions).

Ole Slorer, Morgan Stanley.

Thank you very much and thanks for a good rundown there, Paal.

On the CapEx numbers, agree very closely with those you outlined, but despite that, at least within Morgan Stanley, we have a pretty big debate about the exact timing and the exact impact of these cuts on production.

I think US and the Middle East is getting extremely well-understood, but would be very grateful if you could share your insights on some of those areas of the world that have headline rig counts that have gone down 80%, 90% in many cases, but very little data available.

So what's your take on what's going on across some of the key Latin American markets or West Africa or let's say China?

If you can give us a high level without necessarily mentioning any specific country or customer, of course, some insights into what gives you confidence that the markets are rebalancing.

Well, I would say if you look at non-OPEC production outside of North America, it is very clear that it is now in full decline.

If you look at non-OPEC production overall, it dropped by 930,000 barrels over the course of Q1.

About 50% of this was North America and the other half was international and OPEC.

The leading driver outside of the US in terms of this production drop is seen in Mexico, Colombia, Brazil, the UK and in China.

So 930,000 barrels of dropped over the course of Q1 is quite significant and non-OPEC production is now already 400,000 barrels a day down year-over-year.

So based on this, we believe that the current oversupply is expected to shrink to almost 0 by the end of 2016 and in Q4 of this year, non-OPEC production is now forecasted to be down 1 million barrels per day year-over-year.

So that basically increases the call on OPEC from today's levels to Q4 by 1.8 million barrels a day, which is quite a significant increase.

So yes, we believe, and I think we agree with you that the oil market is in the process of balancing.

Those are some big numbers.

What would it take in your view -- eventually the industry is going to have to go back to work again because once we undershoot on the supply side, prices will take care of that.

But what will it take in order to stabilize and grow production again globally given the contraction that you see and as you highlighted in service capacity and the lag between investments, or lack of investment for that matter, and production?

Well, I think we will need significant increases in E&P investment.

There is no way you can get around that.

But if you look at the current state of the industry today and you look forward to 2017, there are limited sources of short-term supply that can be brought to the market.

What can be done next year is to draw down further on global stocks.

There is OPEC spare capacity that can be put into the markets.

We have the North America land DUCs and if you look at new investments that are relatively short cycle, there are two sources of that.

It is going to be the conventional land, international and it's going to be the unconventional land in North America.

Both of these resource types are relatively short-cycle businesses and production coming out of them is just going to be a function of the investment appetite.

So I think the sources of additional production for 2017 is limited to these items that I just mentioned and beyond that, I think we need a widespread significant increase in E&P investments to get supply back to where it can meet growing demand.

Okay.

Thank you very much.

David Anderson, Barclays.

Good morning, Paal.

In the past, you've talked about the massive overcapacity in land service markets and talking about the pricing recovery in the short to medium term looks really difficult.

Some of the smaller peers have been talking about stack capacity being permanently impaired in North America, so maybe the market is a little tighter than it looks.

So in your mind as we try to think about the lag effect that you've talked about here, how does that look for you -- the outlook on pricing and how that utilization and the capacity can all work together?

For North America?

Yes, in North America.

I'm just curious if you think some of this stack capacity doesn't come back and how that portends to margins.

I think it would be great if it didn't come back, but I still think most of it is going to come back.

I think some of it today probably isn't operational because it needs maintenance, but I think when activity starts to increase, most of this equipment through some maintenance investment can be brought back in and that's why I still believe there is a large capacity overhang in North America land.

And with the current depressed service pricing, we need significant pricing increases to get back in to generate profit in North America land and that's why I don't think that pricing traction is going to be significant in the short term.

And that's why also I think the earliest contributions from North America land is going to be a bit out in time.

And as we talk about decrementals and how those look, your decrementals have held up remarkably well here, but you also talked about preserving your core capabilities.

Are we getting to the end of cost-cutting here and would you expect decrementals to get maybe a little bit worse here before it starts turning the corner?

You are right.

It is increasingly difficult to maintain decrementals around the 30% mark.

We did 32% even with the massive surprise we had in the first quarter, but, yes, we are getting to the point where some of our technical capabilities, which take a long time to develop, we are going to ringfence those and not cut them to be in line with current activity levels.

But with that said, on the field capacity, we continue to tailor that to ongoing activity levels.

This can be rebuilt within I would say plus/minus 12 months, while what we are currently undergoing now is a detailed review of our overhead structure to see whether there is an opportunity to bring that further down, but that wouldn't be done to serve the next couple of quarters.

It would be basically finding a way that we can lighten that burden more permanently.

But to do that, it requires significant review and that's the process we are currently going through at this stage.

Thank you.

Angie Sedita, UBS.

Good morning, guys.

Good morning, Paal.

So there's been a lot of discussion out in the marketplace about people and the challenges with people and if you could give us a little bit of color on what steps you've taken to retain your top talent both internationally, but also more importantly in the US and then your thoughts on your ability to bring these new people back in or bring back your old people back in when things do slowly start to turn around in 2017.

Okay, maybe I can just start by one thing first.

So if you look at our reported headcount numbers, we reported at the end of Q4 95,000 people and we reported 93,000 people at this stage, which indicates that we let go another 2000 people during Q1.

We actually released another 8,000 people during the first quarter, so we have now reduced our workforce by around 42,000 people from the peak in 2014.

So the delta here is that we are now counting around 5,500 contractors, which was previously not considered part of our permanent headcount, so our drop was 8,000 in Q1.

To your question around how we are managing this, we are obviously rightsizing field capacity continuously.

This capacity we can build back relatively quickly, probably within 12 months.

But even in the field capacity, we have introduced a program called Incentivized Leave of Absence and here for our senior field engineers and for key operational people, we are giving them basically half an annual salary, paid 20% upfront when they take this leave of absence and 30% of the salary is paid when they return back after 12 months, and we have several batches of this Incentivized Leave of Absence where we can call people back in the coming 12 to 18 months.

So that's a key part of how we preserve some of our core operational expertise.

And then on the overhead and support structure, we continue to look at rightsizing that, but in this, our technical support organization, which takes a long time to develop, we are also ringfencing that to make sure that we have these people available as we get back into growth mode.

Okay, okay.

That's very helpful.

And then you mentioned, and you gave a little bit of color on your preservation of your core capabilities, but also a greater willingness to balance marketshare with profitability.

Maybe a little bit more color there, particularly on the US, but in internationally as well and you referenced obviously still some pressure on revenues and margins going into Q2 and can you talk a little bit more how that plays out for the next quarter or two on the margin side?

Q2 is going to be another very tough quarter.

So the significant drop in activity that we saw during the first quarter is obviously now spilling over into Q2.

In addition to that, we are going to have the impact on Venezuela to deal with.

So again, we are expecting a significant percentage drop in revenue going into Q2, which again will make it difficult or challenging to maintain decremental margins around 30%, although we are going to continue to try.

What we see in certain markets and certain basins in North America and also certain markets international, that activity is coming down to basically critical mass type of levels and at that stage, it is not only about focusing in on cost reductions and managing margins, we are also considering what the startup cost again would be in the event we have to shut everything down.

So in certain cases, we are carrying, I would say, contracts and operations losses for certain regions where we believe that's the best investment, and actually shutting down and than having the lag in time and significant cost to start things back up again.

But this is a review we do for every country or every basin on a continuous basis, what's the benefit of taking the losses versus shutting down and then making the investments later on to start back up again.

Great.

That was actually very helpful.

Thank you, Paal.

James West, Evercore ISI.

Good morning, Paal.

So I don't think we have much of a debate here at Evercore ISI on the trajectory of oil prices, but I'd love to get your thoughts on prices given that you've said recently in public documents you are looking at kind of medium for longer.

I guess what do you see as medium for longer and then my follow-up would be what does that mean for activity improving for your businesses?

Well, our view on the medium for longer, the background for that statement is I think that is the pricing level that the industry can and will have to live with, and it's probably the pricing level that for some of the core parts of OPEC is also believing it is a reasonable target, although they have not told us, so that is our assumption.

In that environment, there's still a big job for the industry to make sure that we can bring cost per barrel down to make projects viable in these pricing ranges, as well as having enough projects to generate supply that can meet future demand.

So it is an opportunity for a company like ourselves to work closely with our customers in collaborative ways where we look at jointly with them driving costs out of the system and production up from the assets that they have.

And I think by having this focus, there is an opportunity for the industry to be quite successful in the medium for longer scenario, but we cannot continue to operate in the same that we have done in the past.

So we see significant opportunity for Schlumberger in that type of scenario, but it requires the industry to change both in the level of collaboration between customers and the service industry, as well as new investments in more efficient processes, better quality and very importantly, total system innovation to drive performance.

And Paal, are you seeing that collaboration come through during this down cycle?

Are you seeing more impetus from your customers to actually collaborate more with you?

There are some signs of it, James, but I wouldn't say it's prevalent or significant at this stage.

We are obviously very interested in starting it.

We have some small projects going on with some key customers.

In fairness to our customers as well, they are in a very, I would say, significant cash crunch at the stage, in which case priority for them will have to be to navigate that through before they start changing their business model.

But I think there is an openness and willingness when things settle here to move in towards more collaborative relationships, and we are certainly ready to lead that.

Got it.

Thanks, Paal.

Jim Wicklund, Credit Suisse

Good morning, guys.

A little bit at a shift.

I figure that 25% to 30% of your operating income these days are coming from offshore and primarily deepwater work and I'm in Washington at the NOIA meeting and the consensus here seems to be that deepwater is going to decline, or at least not begin to recover, for at least the next couple of years.

You all have given us a great deal of view and guidance on the onshore outlook.

Can you talk a little bit about the offshore outlook?

Yes, I think it's fair to say that in terms of significant new projects being sanctioned offshore, I think that is not going to be the first area that our customers are going to start putting money into.

So I think it's fair to say that the land part of the global operations will see higher investments before the offshore and in particular the deepwater part.

Now, as to the percentage of our revenue and earnings, we haven't disclosed what deepwater and offshore is, but I would say that the current operating income we are getting from this part of our business is, I would say, significantly or massively reduced from what it was in more of a stable operating environment in 2014, so a lot of this hit, I believe, we have already taken.

It still means that we have off-site potential when these investments start, but we also have a very good presence both in North America land and even more so in the international land conventional market.

So in any situation where the investments are coming -- and they will have to come -- we are very well-positioned to capture our share of them and generate earnings growth from the onset of the increase, and then the offshore in deepwater comes later on and exploration coming after that, we have several new phases that can spur our growth in the coming two, three, four years.

Okay, Paal, I appreciate that.

And my follow-up, if I could, when we talk about international conventional and domestic unconventional, it would appear just from customer spending patterns that onshore US and the independents will probably come back first.

Will there be much of a delay and if so, how much between the recovery in North America and the recovery on international conventional land?

I think it's a good question, Jim.

I think if you go on historical ways of responding, I think it's right to say that, in previous small and large downturns, the North American players have been quicker and had more investment appetite to go fast.

I think the situation at this stage is somewhat different.

There is a potential significant supply challenge over the next couple of years and part of this will have to be addressed through international increased supply.

So I think a number of the players within the Middle East, I think Russia land and Western Siberia all have the capacity I think to invest more and have a short-cycle impact on production.

Now whether they will do that or not I think is still to be seen, but I think given the potential challenges of supply, I don't think North America by itself is going to be able to handle it.

It will have to come from other sources as well, in which case I think this time around you will probably see a faster response in my view from the international conventional land business as well.

Okay.

Thank you very much.

Bill Herbert, Simmons.

Thank you.

Good morning.

Paal, I was curious as to your views with regard to the threshold oil price required to drive 2017 international E&P capital spending growth.

Yes, I think it's going to be gradual.

I don't think it's going to be one magical number.

I think oil prices now for Brent being already in the mid-$40s is a positive sign.

Still we maintain our view that there's going to be a lag between oil price and increases and significant increases in E&P spend, and I think our customers will take a cautious view on how much they are going to spend as well given the balance sheet state of many of them and also the significant current volatility that you might also see going forward.

So I think you will see a gradual comeback of investment as oil prices increase, we believe, over the course of the second half of this year and that it's going to be I think a function mainly of how severe the supply situation is going to be.

I think that might be a good guide in addition to the movement of the oil price because if supply is clearly weakening, I think it's going to be much safer to increase investments going forward as well, in which case the appetite might come up together with the oil price.

So I think our customers will take a balanced but conservative view initially and I think the appetite might increase as we see how severe the impact on supply is going to be as the rest of this year evolves.

I guess the question is that, in the event that we continue to get an improvement in oil prices, although the rate of improvement slows over the back half of the year, that it begins to crystallize that we are on a sustainable path to recovery.

Do we need considerably higher oil prices from this point to drive decent E&P capital spending growth internationally in 2017, or is it sufficient that we are on a recovery path and resource holders continue to believe that the direction is higher and not lower?

It's difficult to generalize, but I think your statement around the path I think is going to be critical as well.

The path of supply and the path of movement of oil price.

Like I said, it's difficult to come up with one specific number and I think the various customer groups and the customers within these groups will have different views of when they are getting comfortable to invest.

But I think both aspects, the oil price movement and the supply trends, is probably what they are going to look at when they make decisions.

But, overall, as I said earlier in the call, E&P investments will have to come up in order to address the supply challenges we will see in 2017 and onwards.

Okay.

Thank you.

Waqar Syed, Goldman Sachs.

Thank you.

Paal, you mentioned that international pricing concessions that you've given would start to go away as oil prices rise -- I guess that's what you said.

Would we start to see that at $60 a barrel Brent, or do we need higher prices to see those pricing concessions go away?

Well, I wouldn't tie it to a specific oil price.

I would more tie it to activity levels.

I think that's what's going to drive our pricing and if again we see a lag between the move in oil price and the E&P investments and our activity, but I think if there is a start of a [third] or at least a noticeable uptick in international activity, I think some of these pricing concessions that have been made we should be able to get part of them back.

And in fact, in many of our contracts, the concessions we have made are either time-limited, or they are tied to oil price figures as well.

So based on all of this, we believe that some of the pricing at least we will get back.

Okay, great.

And then secondly my follow-up, on your SPM investments, how are the returns on your SPM investments relative to the overall corporate returns and are they higher or lower; and then how does that differential change through the cycle?

Simon.

I'm going to take this question.

So normally, our SPM investments and our review of these projects, they are superior to our normal activity.

That's the reason why we have developed this type of business and it is even during the cycles, it's giving us a baseline of activity that produces higher margins and higher returns.

But you have to remember that this is a long-term project and in the beginning, the model that it is a negative cash flow which turns into a positive cash flow after a while.

So over a cycle, yes, it is better return and better margins.

Now, you invested almost about $600 million in the quarter in SPM.

How does -- what are your plans for the remainder of this year in terms of SPM investments?

I think if you look at both the fourth quarter and the first quarter of this year, the SPM investments have been higher than what you've seen before and we expect the second quarter to go back into more of a level that you've seen preceding these two latest quarters.

Okay.

Great.

Thank you very much.

Jud Bailey, Wells Fargo.

Thank you.

Good morning.

Paal, if I could ask you, you mentioned briefly in your prepared comments that you could -- the way the market is going -- you could see revenue in the second quarter potentially decline but the same amount as the first quarter.

It sounds like Latin America, it would stand to reason, could be worse because of Venezuela.

Would you see a material difference amongst the regions in revenue decline to get to the same percentage decline, or is there more of a shift to one area or the other in terms of the decline in revenue from 1Q to 2Q?

I think if you look at the four areas, we will see again a significant growth in North America purely based on how the rig count has fared over the course of Q1.

In Latin America, as you point out, we will have a significant impact of Venezuela where we are in the process of tailoring activity to the rate of collections, which will mean a fairly significant drop in activity in Venezuela in Q2.

And just for the record, I would just like to also say that our receivable balance in Venezuela at the end of the first quarter was around $1.2 billion and our revenue in Venezuela was less than 5% of the total for the first quarter and also for the full year of last year, just to give you some perspective of the situation there.

Then going to ECA and to MEA, I don't have the details of the projections here, but I think you will see similar type of revenue headwinds also going into the second quarter there as well.

Okay, that's helpful.

Thank you.

And then I guess trying to think about decremental margins on a similar revenue decline, do we think we can perhaps get a little bit better decrementals, or does Venezuela cause decrementals to maybe deteriorate a little bit from what you were able to do in the first quarter?

Yes, we've laid out the ambition of trying to keep decrementals around 30% since the start of this downturn, which was a lot easier to do five, six quarters ago than what it is to do currently and obviously, when you have shutdown of significant operations in a large country like Venezuela, it is much more difficult to deal with because like, for instance, in Venezuela, we are going to keep a large part of our local organization employed and on the payroll as we go forward and also we keep our entire asset base in the country to make sure that we are ready to go back and serve our customers there once cash flow is available to pay us.

So there are certain of these decisions that we are making now, which are somewhat headwinds to decrementals, but I would say that our ambition is still to try to fight this out and deliver at least close to 30% decrementals, although I cannot promise it.

Thank you, Paal.

Appreciate it.

Kurt Hallead, RBC Capital Markets.

Good morning.

Great rundown so far, Paal.

I was wondering, you mentioned two things about the international, the call on international oil coming -- excuse me -- call on oil coming from the international markets, part of that coming from OPEC and then you also indicated Russia.

Can you give us a little bit more color around Russia?

There seems to be a lot of discussion in the marketplace that neither Russia nor Saudi in particular can increase output from where they are currently.

Your comments seem to counter that viewpoint.

So can you just give us some views on Russia in particular?

Well, I think if you look at Russia throughout this downturn, activity has been very strong and they have, I think, done a good job from the oil industry in the country to keep production up between 10.5 million and 11 million barrels per day.

So in spite of the challenges we have in Russia with the ruble and then the overall situation there, we've seen strong underlying activity and a very strong focus from the country and from the industry in the country to maintain and even try to increase production slightly.

So I think to higher investments, obviously Russia had significant oil and gas reserves and to increase investments, if there is an appetite to do that, I still think Russia has the potential to increase production, yes, going forward.

And I think to your comment on Saudi as well, obviously, Saudi is sitting on several million barrels of spare capacity, which they can put into the market if they so choose to.

Right, right.

And then just a quick follow-up on Cameron.

Fully understand your business plan and business model on integrating the hardware with the reservoir dynamics.

What has been the uptake on that?

Have you had some definitive successes on selling that business model to the oil companies as of yet?

I think it's still early days on that.

I think the overall concept I think is widely accepted, this whole focus on total system innovation going forward, combining hardware with sensors, instrumentation and software controls, this is the way of the future for the industry.

So I still think it's early days.

We are seeing some traction in OneSubsea, which has obviously been at this for several years already and also things around the rig of the future system I explain.

I think it would be quite interesting when we also roll out our new frac system in 2017.

So we have a lot of investments already going on, which means that it's not going to be years before you see the impact of what we are talking about.

I think -- I would expect there to be already some impact in 2016 and even more so in 2017 as we introduce these new technology systems.

All right.

That's great.

Appreciate that color.

Scott Gruber, Citigroup.

Thanks for squeezing me in and good morning.

Paal, in the release, you highlighted that you are cautious regarding adding capacity in North America once recovery begins, which I think you highlighted reflects a cautious stance regarding your views towards long-term oversupply and hence profitability.

But on the other hand, it appears that you have a good ability to take share in the US given the financial stress being experienced by your smaller competitors.

Can you just walk through that strategy a little bit more regarding balancing marketshare, US land and expanding your US business at what initially would be thin margins?

Why not be aggressive during the initial recovery in terms of reactivating equipment to take share and then have greater share when profitability levels could improve later on?

That's a fair question.

I would say our general philosophy is that we do not like contracts that are dilutive to earnings, so basically losing money isn't something that we ideally want to get into.

Now, we take on contracts at this stage of the cycle that are dilutive to earnings per share if we believe that doing that is going to serve us long term either from a share standpoint or from keeping our capabilities intact as we work through the trough of the cycle.

So in terms of being cautious and adding back capacity, if we are talking about being in the black and basically making profits, I have no issues at all releasing capacity and going for share, but if the share is associated with negative earnings, that's when we are going to be cautious and we are going to stick to basically preserving capabilities and infrastructure as long as pricing levels are at that stage.

But I think as soon as you get into the black, we are quite keen to unleash the older stack capacity we have available to gain share.

And then it's my understanding that those frac crews in the US are underutilized today even when active.

Do you have an idea roughly how much more you can expand your frac workload in the US without actually reactivating spreads?

The spreads we have today are actually quite well-utilized because if you have -- with the current pricing levels, if you have poor utilization on top of it, it is a disaster from a profitability standpoint.

So the fleets we have in operations are actually today reasonably well-utilized, so there might be some upside in capacity on it, but I wouldn't say significant.

We would have to reactivate new capacity in order to take on significantly more work.

Great.

Thanks.

Thank you very much.

So before we close this morning, I would like to summarize the most important points that we discussed.

First, our industry is now in the deepest financial crisis on record with profitability and cash flow at unsustainable levels for most oil and gas operators.

This has created an equally dramatic situation for the service industry.

Each successive quarter for the past 18 months has brought increasing costs in E&P spend that have led to falling activity and lower demand for oilfield products and services.

This is the toughest environment we have seen for 30 years and it is likely to get even tougher before the market turns.

Second, so far in this downturn, we have successfully managed a very challenging commercial landscape by balancing margins against marketshare and aggressively reducing capacity and overhead costs.

In parallel, we continue to focus on how to best preserve the long-term technical capabilities of the Company.

This approach, together with the benefits of our ongoing transformation program, has enabled us to outperform our surroundings and protect our financial strength.

And third, the current market presents significant opportunities for companies that has both the required capital and strategic bandwidth that enables them to invest.

In this respect so far in this downturn, we have closed our largest ever acquisition, made a series of small but still significant investment in specific technology niches and invested in integrated services and projects that will boost our financial performance going forward.

We are also actively investing in pre-funded multi-client seismic surveys that will underpin the return to solid exploration activity in several regions around the world.

Now we also regard the protection of our technical capabilities above our immediate operational needs as an investment in our future growth.

In summary, we remain convinced that the tightening of the supply/demand balance is well underway and while the operating environment remains tough, the market presents a range of opportunities, which we will continue to actively pursue.

Thank you very much for listening in today.

Thank you.

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