斯倫貝謝公司 (SLB) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Simon Farrant. Please go ahead.

Thank you. Good morning and welcome to the Schlumberger Limited third-quarter 2016 results conference call. Today's call is being hosted from New York following the Schlumberger Limited Board meeting. Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer; Simon Ayat, Chief Financial Officer; and Scott Rowe, President, Cameron Group. Scott will join the earnings call through the fourth quarter of this year to provide an update on the Cameron Group business, integrations and synergies.

Our prepared comments will be provided by Simon, Scott and Paal. Simon will first review the financial results, then Scott will provide the Cameron update and Paal will discuss the operational and technical highlights.

However, before we begin with the opening remarks, I'd like to remind the participants that some of the statements we will be making are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially 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 on our third-quarter press release, which is posted on our website. We welcome your questions after the prepared statements. I will now turn the call over to Simon.

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Third-quarter earnings per share, excluding charges and credits, was $0.25. This represents an increase of $0.02 sequentially and a decrease of $0.53 when compared to the same quarter of last year.

During the quarter, we recorded $237 million of pretax merger and integration charges associated with the acquisition of Cameron. This consisted of $149 million non-cash inventory purchase accounting item that will not recur. The balance relates to transaction costs, as well as a dedicated integration team and other costs to achieve synergies. We will continue to incur merger and integration charges for the rest of 2016 and into 2017.

Our third-quarter revenue of $7 billion decreased 2% sequentially. This decrease was entirely driven by reduced activity in the Cameron Group due to its declining backlog. Excluding the impact of Cameron Group, third-quarter revenue actually increased 1% sequentially.

Pretax operating margins increased 119 basis points sequentially to 11.6%. Margins increased sequentially in each group except for Cameron. These increases reflect the benefits from cost-reduction initiatives, as well as the effects of last quarter's itemized asset write-downs, which contributed to approximately 50% of the reduction in depreciation.

Operational highlights by product group were as follows. Third-quarter reservoir characterization revenue of $1.7 billion increased 5% sequentially while margin increased 292 basis points to 19.1%. The revenue growth was primarily driven by increased testing services and WesternGeco activities. Margins improved sequentially across all the Reservoir Characterization technologies, but most noticeably in Wireline and Testing services.

Drilling Group revenue of $2 billion was essentially flat sequentially, while margins increased by 241 basis points. The margin expansion was largely due to the benefit of cost initiatives and reduced losses in Venezuela due to further alignment of our resources in the GeoMarket to match the reduced level of activity.

Production Group revenue of $2.1 billion was also essentially flat sequentially, while margin improved 41 basis points, largely due to strong SPM activity. Cameron Group revenue of $1.3 billion decreased 12% sequentially. Despite the 12% reduction in revenue, pretax operating margin only declined 34 basis points to 16%. The revenue decline was driven by the decreasing backlog that has significantly impacted the Drilling Group line. However, strong project execution in OneSubsea combined with cost-control initiatives across the Group limited the margin decline.

Now turning to Schlumberger as a whole, the effective tax rate, excluding charges and credits, was 16% in the third quarter, essentially the same as Q2. Going forward, our tax rate will be driven by the overall geographic mix of earnings.

During the third quarter, we generated $1.4 billion of cash flow from operations. During the first three quarters of 2016, we have generated $4.2 billion of cash flow from operations. This is all despite making severance payments of approximately $117 million during the third quarter and paying $800 million of severance and one-off Cameron-related transaction payments during the first nine months of the year.

Our net debt increased $122 million during the quarter to $10.2 billion. We ended the quarter with total cash and investments of $11.1 billion. During the quarter, we spent $156 million to repurchase 2 million shares at an average price of $77. On a year-to-date basis, we have spent $662 million to repurchase 9.5 million shares at an average price of $69.64 per share.

Other significant liquidity events during the quarter included approximately $400 million on CapEx; $140 million on SPM investments; $160 million of multi-client; and $700 million of dividend payments. Our CapEx on a year-to-date basis was $1.4 billion, which includes two quarters of Cameron. CapEx for the full year of 2016 is now expected to be approximately $2 billion. These amounts do not include SPM or multi-client. And now I will turn the conference call over to Scott.

Hello, everyone. I am pleased to provide an update on the progress of the Cameron Group now that we are six months into the combination with Schlumberger. Cameron continued to have good operating results in the third quarter despite the challenges in the global marketplace and the contraction of our backlog driven by this prolonged downturn.

In Q3, our revenue reduced by 12% sequentially to $1.3 billion. Despite this drop, we were able to successfully hold operating margins at 16%, which is 19% decrementals off a nearly all-time high margin performance in the second quarter of this year. The higher margins are a result of relentless cost reductions combined with excellent project execution in our longer-cycle businesses.

We have now experienced seven straight quarters of reduced activity and pricing pressure in the marketplace and Cameron's shorter cycle Surface and Valves & Measurement businesses have experienced the full effect of the reduced activity, spending cuts and pricing pressure, but are now positioned to rebound with any incremental activity. Despite the duration of the downturn, these two businesses continue to be profitable and have strong cash flow as we have managed our cost structure and working capital well throughout the cycle.

Typical lead times in these businesses range from three weeks to nine months and we expect to see revenue flatten in future quarters and begin to grow again in mid-2017 as onshore activity picks up around the world.

In our longer-cycle businesses, OneSubsea and Drilling Systems, we have been extremely successful in expanding margins throughout the cycle. OneSubsea and Drilling remained accretive to the overall margins of the Cameron Group. In fact, OneSubsea had record profitability at 23.5% this quarter. The profitability improvements and the marketshare gains over the last two years validate the vision we had when we created OneSubsea.

The Drilling and OneSubsea teams have done an excellent job improving our project delivery processes, driving costs out of projects and products and capitalizing on our installed base by expanding our service and aftermarket offering. Going forward, these improvements will be partly offset by extremely competitive pricing and lower volumes. These two businesses are now entering a period of revenue decline as our backlog has fallen for seven straight quarters. We are now entering the phase of the downturn that the other Schlumberger businesses have experienced over the past 18 months.

On a brighter note, our book-to-bill ratio for these two businesses was 0.8 in the third quarter, which was the highest ratio we have seen since the downturn began. This gives us visibility to revenue growth in 2018. The Drilling Systems business will contract the most as new equipment orders for floating and jack-up rigs are nearly nonexistent and our focus has now shifted to land rigs and capitalizing on our market-leading installed base of pressure control equipment.

Before I transition to the integration, I want to spend a minute on how we are positioning OneSubsea. We now have eight paid FEED studies and we are working on 30 customer engagements on our OneSubsea and Subsea 7 alliance. I fully expect to win a small tieback award that utilizes OneSubsea's equipment and Subsea 7's installation capability before the year is over. We see the tieback market as an area of growth in the deepwater sector. Operators are looking to spend significantly less and drive higher returns by capitalizing on existing host facilities.

OneSubsea is uniquely positioned with our standardized subsea tree, our single-well boosting system, our unified control system and our partnership with Subsea 7 to capitalize on this growth opportunity. We also have the capability to integrate this further with the deepwater drilling and production teams of Schlumberger to provide further turnkey solutions to operators who are looking to tie back these assets.

The success of the integration of Cameron into Schlumberger continues to exceed our expectations. I would like to confirm that the transaction is again accretive in the third quarter, as well as confirmed that we will achieve the $300 million synergy target in the first year of the combination.

In the third quarter, we booked $139 million of synergy-related work, which landed in every business segment in the Cameron Group. One notable award in the quarter was an integration project for Chevron in Thailand that consisted of surface wellheads and trees, wireline logging services, M-I SWACO drilling fluids and services, as well as the supply of barite. This is a great example of subsurface and surface integration across three different Schlumberger groups.

While there are still more cost savings to be had, our integration will shift focus to driving revenue synergies and capitalizing on the vast geographic network of Schlumberger. We see significant growth opportunities for Cameron in the Middle East, Russia, Latin America and India where Cameron can leverage the substantial presence and relationships that Schlumberger has in these geographies.

In summary, I could not be more pleased with how our Group is performing in the down cycle and how we are capitalizing on the opportunities that the combination of Schlumberger and Cameron has created. I will now turn it over to Paal.

Thank you, Scott and good morning, everyone. After seven quarters of unprecedented activity decline, the business environment stabilized as expected in the third quarter confirming that we have indeed reached the bottom of this cycle. Our third-quarter revenue still decreased 2% sequentially, but this was largely driven by the anticipated reduction in activity at Cameron as the product backlog continued to decline. Excluding Cameron, revenue increased 1% sequentially driven by higher activity in North America land, Middle East, Russia and Australia.

Since the start of this downturn and as it deepened into unchartered territory, our entire management team has worked relentlessly to protect the financial strength of the Company. This includes carefully navigating the commercial landscape by balancing pricing concessions and market share and also by proactively removing a staggering $6 billion of quarterly costs through headcount reductions, internal efficiency improvements and strong supply chain management.

This has enabled us to deliver unmatched financial results by maintaining pretax operating margins well above 10% and delivering sufficient free cash flow to cover a range of strategic CapEx investments, as well as our ongoing dividend commitments. We continue to carry forward this strong financial focus as seen in our third-quarter results where we delivered 19% decremental margins in the Cameron Group and incremental margins north of 65% for the other three groups combined, excluding any tailwind from previous impairment charges.

These results, which represent a small step on our path towards first restoring and subsequently exceeding our pre-downturn earnings-per-share and financial returns, are mostly driven by internal cost and efficiency improvements, which so far are only a minor impact from pricing increases and high-grading of our contracts portfolio.

Going forward, it is critical for us to recover the large pricing concessions we have made over the past two years to allow us to restore investment levels in technology innovation, system integration and operational quality and efficiency, which are all key enablers of our customers' project performance.

As indicated in July, we have, during this quarter, started pricing recovery discussions with a large part of our global customer base. While there is a general understanding from our customers that pricing will have to increase, there were no material movements during the quarter, but with the recent increase in oil prices, the basis for these discussions has now strengthened.

Looking forward to the activity recovery phase, we will only allocate investments, operating capacity and expertise to contract in basins that meet our financial return expectations in the same way our customers allocate capital to projects in their portfolios.

Currently, a noticeable part of our contracts do not meet these financial return criteria and this is our starting point for reestablishing sustainable customer relationships that will warrant allocation of our capital, capacity and expertise.

In addition to our focus on pricing recovery, we will in the coming quarters also aim to restore proper payment schedules from our customers, in line with the terms and conditions in our contracts, to address the payment delays we today are seeing from many customers around the world. Still, in spite of these payment delays, free cash flow generation in the third quarter remained solid at $700 million as inventory and CapEx investments was again tightly managed.

Next, I will review the third-quarter trends from our geographical operations and I will focus my comments on the Characterization, Drilling and Production Groups as Scott has already covered the performance of the Cameron Group.

In North America, revenue for the Characterization, Drilling and Production Groups increased 3% sequentially as solid growth on land was largely offset by a further revenue reduction in the Gulf of Mexico, Alaska and Eastern Canada, impacting all product groups. The strong growth on land was driven by the US where the Q3 rig count increased significantly and with more than half of the rigs being added in the Permian Basin.

The increased drilling activity is reflected in our Drilling & Measurements product line, which posted 31% revenue growth in US land compared to the second quarter. At this stage, we are seeing a growing trend in US land towards even longer horizontal laterals or super laterals aiming at further increasing reservoir contacts.

One example of this is a well we drilled for Eclipse Resources with a record lateral length of 18,500 feet, using our industry-leading PowerDrive Orbit rotary steerable system. This emerging trend has already created a significant increase in the uptake of our high-end drilling technologies and has also provided our Drilling Group with a clear path towards profitability on land. We have therefore shifted focus from maintaining presence to now gaining market share for our drilling business in North America land.

In the hydraulic fracturing market, the stage count increased by 17% sequentially, driven by higher drilling activity and also by customers now actively depleting their DUC well inventory. Still, the fracturing market continues to be completely commoditized and significantly oversupplied with a large number of very hungry players.

In addition, the significant increase in sand volume pump per stage is already starting to create inflation on both product and distribution costs, which will further obstruct and delay the hydraulic fracturing industry's path towards restoring profitability. Today, the North America fracturing business continues to be highly dilutive to our financial performance and this, combined with the short-term market outlook, means that we have not yet shifted focus towards gaining market share.

Instead, we continue to maintain our market presence while further concentrating activity around our core operating areas. Still, we continue to monitor the fracturing market closely and we are ready to deploy our significant stacked capacity on short notice, but only when the market environment can support positive contributions to our earnings.

So the main takeaway for us from North America land is the emerging technology trend linked to drilling longer and more complex horizontal sections, or so-called super laterals. This trend is already creating significantly higher demand for our unique drilling technologies and we are at this stage sold out of PowerDrive Orbit and in the process of adding further capacity from overseas and from manufacturing. This drilling technology trend will also add to the opportunity stack for our rig of the future where we plan to have two first-generation rigs in operation in US land in the fourth quarter.

In the international markets, our revenue excluding Cameron was down 1% sequentially as increasing activity in key countries such as Saudi Arabia, Kuwait, Russia and Australia was offset by continued weakness in Sub-Sahara Africa, the Far East and Latin America. As we now prepare for the recovery, also in the international markets, several trends have emerged over the past two years, adding further complexity to these already technically challenging markets.

First, in pursuit of improving project performance, many customers are now more actively pursuing the technical limit of the equipment and workflows we deploy in our operations. This poses additional challenges with respect to the expertise and technology we use in both the planning and execution phase of our work and further elevates the importance of our global support network, including engineering, maintenance and distribution.

While we are well-prepared for these additional technical demands, this trend is clearly redefining and elevating customer expectations and we see this as an excellent opportunity to further extend our market leadership position in the international market.

The second trend emerging in our international customer base is the growing interest in more commercially aligned business models from time-based performance contracts for individual wells all the way to production incentive contracts based on a feeperbarrel.

As an example, we are today engaged in various stages of SPM discussions in 20 countries around the world spanning all customer groups and all four operating areas, which clearly demonstrates the momentum this contract model now has within our overall offering.

While this trend is very encouraging, I would like to stress that these new contract models are only an addition to our offering and that we will continue to actively pursue traditional models for customers who prefer this type of engagement.

As we now look to further capitalize on these emerging trends in the international market, we have two major advantages. First, our unmatched scale in terms of people, equipment and infrastructure, which allow us to quickly adjust to the increasing technical complexity and additional demands from our customers while ensuring safe and consistent quality in our operations; and second, by having been present in all parts of the world for the past 80 to 90 years, we have established deep industry relationships and unprecedented local credibility, which makes us a natural partner to explore new contract models and translate these into successful business relationships.

With that, let's take a closer look at the trends we are seeing in the three international operating areas. In Latin America, the combined revenue for the Characterization, Drilling and Production Groups declined by 5% sequentially due to continued reductions in E&P spend and activity throughout the region. However, the two-year activity slide was clearly slowing during the quarter and we believe we have now reached the bottom of the cycle also in Latin America.

The sequential revenue drop came entirely from the Drilling and Production Groups while the Characterization Group posted a 2% increase driven by solid multi-client seismic sales in Mexico. Here, WesternGeco has shot 80,000 square kilometers of marine surveys in the prime deepwater acreage that will be included in the upcoming bid rounds with the first taking place December 5 of this year.

In Mexico, our drilling activity is also expected to pick up in early parts of 2017 driven by both Pemex and the successful players from the shallow water bid rounds that has already taken place.

In Ecuador, activity remains solid driven by our SPM projects, and we continue to progress in line with our fee development plans, both with respect to work scope and production levels.

As for in the regions, activity remained subdued due to severe budget constraints for most customers; however, we are seeing early signs of a recovery in several countries. In Argentina, there is clear optimism amongst the industry players that the new government will take the required steps to further encourage E&P investment in the country as they seek to reduce the oil import dependency, which should have a positive impact on E&P investments in 2017.

In Brazil, Petrobras continues to focus on arresting the decline in the mature Campos Basin and is considering opening up for new and more commercially aligned business models with the service industry, which could include fee-per-barrel contracts.

In Venezuela, our operations remain largely shut down outside the work we do for the IOC JVs in the Faja. However, we are in discussions with PDVSA on a new contract model, which will include a payment-assurance mechanism and we are optimistic that this contract will be finalized in the coming months and that operations could start in Q1.

And in Colombia, with oil prices around $50, activity is expected to increase in the coming quarters as Ecopetrol and several other players are preparing for offshore drilling campaigns in 2017.

Revenue in Europe, CIS and Africa declined 3% sequentially, excluding the Cameron Group, while strong sequential growth in Russia and flat activity in the North Sea and North Africa was more than offset by a further reduction in activity throughout Sub-Sahara Africa.

The drop in revenue was driven by the Drilling and Production Groups while the Characterization Group posted solid sequential growth. A large part of the growth in the Characterization Group came from Russia as summer season activity peaked both on land and offshore and with revenue growth further supported by a stronger ruble. Looking forward to Q4, we expect to see the normal seasonal slowdown in Russia due to winter weather while the outlook for 2017 activity continues to be strong.

The North Sea posted flat sequential revenue following a solid summer season where activity in Norway was particularly strong. Looking forward to Q4, we expect to see the normal decline in activity as summer projects conclude and winter weather sets in. Still exploration success in Norway and several large project startups indicate stronger 2017 activity in the North Sea.

Revenue in Continental Europe was up 19% sequentially on strong integrated project performance and deepwater exploration activity in Bulgaria. Higher oil prices will lead to increased production-related activity in this region with a 5% rig count increase expected in Q4 further supported by the restart of offshore activity in the Eastern Med in the early parts of 2017.

North Africa activity remains stable with flat revenue sequentially while we expect moderate growth in activity in Q4 partly supported by increased market share from recent tender wins for Sonatrach.

The market challenges in Sub-Saharan Africa continued in Q3 with yet another significant drop in activity and with the rig count now down by 75% compared to Q4 2014. However, with this latest drop, we do believe we have reached the bottom of the cycle also in this region and expect modest activity increases in most countries in Q4 with the exception of Angola.

In the Middle East and Asia, Characterization, Drilling and Production Group revenue grew 2% sequentially as strength in the Middle East and Australia was partly offset by continued weakness in Asia. Both the Characterization and Drilling Groups posted growth in the third quarter while Production Group revenue was slightly down due to a temporary reduction in fracturing activity in the Middle East.

In the GCC, the underlying drilling and rigless activity remains strong with solid revenues reported in all countries. In addition to this, we continue to progress on our early production facility project in Kuwait, which represents another exciting growth opportunity for us.

In Australia, revenue increased in the third quarter after seven quarters of decline driven by additional land activity for the Drilling Group, as well as higher offshore exploration activity for the Characterization Group, while in China, Indonesia and the rest of Southeast Asia the revenue decline continued in the third quarter and at present, there are no signs of any imminent activity recovery in this region.

Turning now to the oil macro, the supply and demand of crude is now more or less in balance as seen by the flattening global petroleum inventories and the start of consistent growth towards the end of the quarter, in particular in North America. In addition, oil demand was again revised upwards in September and is now forecasted to be around 1.2 million barrels per day for both 2016 and 2017.

At the same time, global supply is plateauing as non-OPEC production continues to experience significant declines and even offsetting record production levels from OPEC in September. Based on current investment levels, we believe that 2017 non-OPEC production will at best be flat as any production upside from the US, Canada and Brazil will be offset by further declines in the rest of the global production base.

Given the projected demand growth, this means that the call on OPEC will increase from the current record production levels suggesting that the production upside from Nigeria, Libya and Iran may be needed to keep the markets in balance. All of this means that the period of oversupply in inventory build is over and that market sentiments should soon change paving the way for an increase in oil prices and subsequently E&P investments.

There is also a case to be made for a more rapid draw on the global oil inventories and a more bullish outlook for the oil price in the event of a lower production upside from Libya, Nigeria and Iran, OPEC and Russia implementation of production cuts, or a steeper decline in non-OPEC production.

In terms of 2017 E&P investments, details are still limited; however, we maintain that a V-shape recovery is unlikely given the fragile financial state of the industry. Still, we do see upsides in 2017 in North America land, the Middle East and Russia and we are making sure we are optimally placed to capture a large share of this upside and importantly turn this additional activity into positive earnings contributions.

With the unparalleled cost and cash discipline we have established, we are confident in our ability to deliver incremental margins north of 65% and a free cash flow conversion rate above 75%, which going forward will give us significant flexibility to both reinvest in our business, as well as steadily return cash to our shareholders. Thank you very much. We will now open up for questions.

(Operator Instructions). James West, Evercore ISI.

Good morning, Paal. Paal, you've talked a lot in recent quarters about the need for increased industry collaboration and it looked to me with the press release that you cited a number of examples of, of course, ISM projects, but also projects that look to me to signal more collaboration. Is that catching on on a global basis?

Yes. I think we are seeing a growing interest in this. It varies a little bit amongst the different customer groups, but I would say overall there is a growing trend of a desire to collaborate closer and also to implement more commercially-aligned business models, which I alluded to in my prepared remarks. This goes all the way from the basic models linked to either time of production for a well, all the way up to full field management around the SPM concept.

Got you. And then one market where we haven't seen a lot of collaboration historically has been the US land market, but you highlighted I think three or four different wins there. Could you talk -- I know you talked a little bit about the evolving super laterals in North America, but could you talk about the collaboration in North America, what you are seeing there and what the next steps are, if that collaboration could lead to more technology improvements, or technology advancements and use in North America?

Yes. We cited a few of these examples in the press release. So we are seeing signs of that taking place in North America land as well, but I would say, on a percentage basis, it's obviously a lot lower occurrence than what we have internationally, but it's still encouraging to see stronger collaboration, both on the drilling side linked to drilling more complex wells or these super laterals, as well as on the production and completion side around how we optimize completions using formation evaluation and a bit more sophisticated approach to fracking.

So we are seeing it happening, but still in fairness it's a fairly small part of the business volume, but these technology opportunities, both on the drilling side and on the completion side, is really why we are in this market. We are not in it for the commodity side of it. We believe that ultimately technology will play an even larger role in the North America land market and we continue to promote these capabilities and this part of our offering because we ultimately believe it's going to bring a lot more value for our customers.

Thanks, Paal.

Angie Sedita, UBS.

Thanks. Good morning, guys. So, Paal, as a follow-up to James's question, so on the SPM, certainly a growing market and important to Schlumberger overall. So could you talk a little bit about where you see the investment opportunities and the pipeline of opportunities over the next one to two years? I assume that's growing and are you seeing an increasing number of IOCs that want to partner up with Schlumberger on some of these projects?

Well, for SPM, we are seeing, I would say, a significantly growing interest across all customer groups. So far in terms of the discussions that are most advanced I would say are generally with the NOCs and the independents and even startup companies, but we have had discussions with IOCs on this contract model as well.

But in terms of the opportunity set, it is growing and it's very significant and as I quoted in my prepared remarks, we are today engaged in various stages of discussions in 20 countries around the world covering all the four operating areas. So, while this model used to be contained to a handful of countries, we today see a rapid expansion of the interest, and we have obviously staffed up significantly in our SPM product line to make sure that we can pursue all these opportunities, turn them into projects and subsequently execute the projects in line with our plans. But it's a significant growth opportunity and something that we are actively pursuing in all four operating areas.

All right, all right. Fair enough. And then on the international side, you talked about the price concessions and some of them oil-based triggers and some time-based and so does it happen as you hit a certain oil price or this time-bound concession that initially it moves into play, or you have a conversation first with these NOCs and how much of this do you think will actually be retendered in the end?

Well, the whole discussion around pricing, first of all, is going to take a little bit of time. We indicated in July that we are firmly putting this on the agenda and we have done so in the third quarter. We've had engagement and discussions with most customers around the world.

I think there is a general acceptance from the customer base that ultimately prices are going to have to come up. Not a lot of movement as we expected in the third quarter, but I would say given the increase we've seen in oil price over the past month or so and the potential trajectory we could see going forward, I think there's a much stronger basis for having these discussions at this stage and then we will have discussions individually with our customers depending on the contract model and the contract situation we have with them.

It could be at some stage that some of these contracts will be rebid and if that is so, then we will obviously participate in that, but I think, in many cases, there is room to negotiate within the existing contract framework to come into, I would say, a mutually agreeable solution, which will be acceptable both for us and for our customers.

All right. Thanks. I will turn it over.

Ole Slorer, Morgan Stanley.

Good morning. So let's go back to West Texas again. You highlighted that you see growth in Middle East, in Russia and in North America land. Middle East and Russia, you're clearly very well associated with that. Maybe North America land not so much. So you talked about -- so how do you, first of all, see your positioning? And you talked about mobilizing equipment in big -- ability to drill longer laterals. Can you talk a little bit about pricing and tightness and whether you get paid for this mobilization?

Yes. What we are mobilizing are drilling tools, which isn't excessively expensive. So we do that and we also will take some from manufacturing and this is all manufactured, or partly manufactured, in the US as well. So in terms of the reason for mobilizing more equipment into the drilling side is clearly that we have a clear path towards profitability.

So given the unique technology offering we have and the technical challenges of drilling these very, very long horizontals, we are able to get pricing, which is going to give us I think ultimately the returns that we are looking for. And this is why we are prepared to put more capacity into play on the drilling side of what's going on in West Texas.

As I said on the fracturing side, still there's no clear path towards profitability and this is why we are still maintaining presence and basically holding the fort until we believe we can justify putting more capacity into play going forward.

Thanks for that. And if you look at 2017, we've heard out of Oil & Money in London, companies like Total talk very aggressively about stepping up activity next year, taking advantage of low oilfield services costs. Others like BP have been very vocal also getting going, yet you highlight Russia and Middle East areas where these type of companies are typically not all that active. So does that mean that you have a different view, or you don't believe that the type of IOC will step it up, or is it that we are coming from a very low base at the end of the year and sequentially we will be improving from here, but year-over-year it will be kind of flat? Could you help us a little bit with making sense of some of those statements?

Well, as I was trying to cover in the fairly detailed description I gave of the international market, we believe that there is early signs of recovery in most places around the world. If you look at next year for international, we expect solid growth year-over-year in the Middle East and Russia on a full-year basis, but we also see, I would say, an uptick in investment and activity in Latin America and in Europe/Africa. The only place where we don't see any signs of recovery at this stage is in Asia, but I would say the uptick in Latin America and Europe/Africa is more going to be from current Q3 activity levels. It might not be a significant increase on a full-year basis, but I think we have reached bottom in both of those regions, which would warrant higher activity.

So I'm not contradicting what the IOCs are saying and we welcome obviously more activity and higher investments from them. It's just that the main, very clear investment increases we are seeing are still going to be in Russia and the Middle East, but there are early signs of things picking up from bottom also in the rest of the world, excluding Asia.

Okay. Thanks for clarifying, Paal.

Scott Gruber, Citigroup.

Good morning. A question for Scott. You highlighted the 0.8 book-to-bill, which I believe was for OneSubsea and that this foreshadowed growth into 2018. The shorter-cycle businesses though like Cameron should be expanding at this point as well, at least that's our forecast. However, when I look back at a recent investor presentation, a high case for Cameron revenue in 2018 is actually flat and the midpoint looks like it was down a bit. Has the outlook for Cameron now improved? Is there line of sight to growth in 2018, assuming the short-cycle businesses kick in over the course of 2017?

Thanks for the question on Cameron. And just to clarify, we are -- in the earnings press release, we are giving the OneSubsea and the drilling bookings and backlog and what you can see there is, on the book-to-bill, the 0.8 was meant to be for both Drilling Systems and OneSubsea. So actually OneSubsea is higher than that and we are just below 1 on the OneSubsea side.

But on the 2018 general guidance for revenue and growth for the Cameron Group, it really depends on those short-cycle businesses and when activity returns and so there is a path for growth in 2018, but it depends on that land business in V&M and in the Surface segment. We are highly focused on growing in the Middle East. We are highly focused on growing in the Mid-Continent area of the United States and if we can see continued rig count increase, then we do have a path for growth.

Now, obviously, the Drilling business with the backlog number there will continue to decline and OneSubsea quite frankly has been relatively flat since the beginning of the deepwater downturn, which started in 2014. And so we won't lose a lot of revenue traction on OneSubsea. It will really come from Drilling and then the offset is the shorter-cycle business growth on the land markets.

Got it. And then an unrelated follow-up on the expanding opportunity in SPM. There's been a willingness to take on some oil price risk in SPM and link at least a certain number of payments to oil price. Paal, can you shed some color on just what percentage of the SPM portfolio has an oil price linkage now and where you would be comfortable taking that percentage over time?

Well, if you look at our contract structure today, I would say the lion's share of this is basically a fee per barrel, which is -- obviously the project has a link to the oil price, but our compensation is generally linked to the incremental production times a fixed fee per barrel.

Now, at this stage, at the bottom of the cycle, we are in some cases considering a share of production times the oil price rather than a fee per barrel times the entire incremental production, but that's based on individual projects. But I would say the portfolio as it stands today is generally fee per barrel, not directly exposed to oil price, but we are considering in some of the cases today to take a bit more oil price risk. If we can make the project work at current oil prices, we are fairly comfortable opening up and balancing the portfolio a bit with a bit more oil price risk.

It would always remain a minority of the book?

I would say generally that would be the philosophy, yes.

Okay. Great. Thank you.

Bill Herbert, Simmons.

Thank you. Good morning. So SPM -- back to SPM, sorry. Paal, at this stage, do you think SPM investments in 2017 are going to be up over 2016, which has been a fairly big year?

Sorry, I couldn't hear you. What was going to be up?

SPM. The question is whether your capital investment in SPM in 2017 is going to be up over 2016, which has thus far been a pretty big year.

I think it's too early to say. I would say, as a starting point, I would say probably not, maybe somewhat in line. But I think it's going to depend on the opportunities that we have in front of us. Obviously, there is a broad range of discussions. I think for the right opportunities, I am prepared to invest more into it, but I think we will have to do that on a case-by-case basis.

Okay. And then, secondly, at this stage, given your outlook for global E&P CapEx, which frankly sounds more constructive than I was expecting, which is good, do you think that Schlumberger's revenues in 2017 overall are going to be up?

Well, it's a bit early to say. We are still in Q3. The absolute E&P investment numbers for next year, I think it's still early to comment on absolute numbers.

Yes.

I can give you some direction I think in terms of where we see the trends going and what the absolute number is going to be is going to be more a function of how the numerics of these trends play out. But we do expect, on a full-year basis, solid year-over-year growth in North America land, Russia and the Middle East. These are fairly predictable plans that we have in place.

We also expect to see modest growth from the current levels, not necessarily on the full-year basis, but from current levels in Europe/Africa and Latin America and the reason for this is that there are many significant oil-producing countries in these two regions, which have record low investment levels at this stage. And we see signs that at least we are going to come off the bottom here. Whether that is going to translate into year-over-year growth is too early to say, but at least an increase from where we are today. And really the only place where we don't see any of these recovery signs as of yet is in Asia.

So all depending on what the various numbers are on the three main trends pan out to be, there's a chance that revenue could be up. Obviously that's what we are hoping for and that's what we are going to work towards. And obviously market share and some of the other things that we are working on specifically around the land rig introduction, around SPM and some of the early production facility work that we do, we have opportunities I would say to come in with higher revenue in 2017, but I'm not going to commit to this as of yet. I think we need to work out the details of the plans over the coming two, three months and we can give you a further update in January.

Okay. Thank you very much.

David Anderson, Barclays.

Thanks. Paal, in your remarks, you had commented that you have two rigs in the future in the fourth quarter in the US. That seems well ahead of schedule. I'm also a bit surprised to hear it's to be deployed in the US. So I have two questions. One, are you in fact ahead of schedule on this technology and, two, can you talk about where, what types of field this is going into? I'm a little surprised it's going to be in the US.

Well, so I would say that generally we are on track with both the engineering and the manufacturing of the Rig of the Future. So these two rigs are, I would call them pilots, pilot versions. They don't have all the features of the Rig of the Future, but they have a significant part of it. And we are also going to be operating them around the overall software platform of how we want to do Rig of the Future going forward.

So they are manufactured in the US and that's why we would like to basically put them out in operation close to home at this stage to make sure that we can get all the support and all the feedback from their operational performance and feed that into both the engineering and manufacturing work that is going on for, I would say, the complete version of the rig, which is going to be rolled out, a number of them, in 2017. That's already in the plans for both the CapEx and the manufacturing for next year.

Okay. And then in your release, you talked about the continued free cash flow conversion and your ability to reinvest in the business. Can you expand a bit on what that means? Obviously, you are putting money into the Rig of the Future, but are there other areas that you are focused on to reinvest here? Is it a product? Is it a geography, or is it something else you are talking about?

Simon, do you want to comment?

Okay. I'm going to take this question. As we always said that the utilization of cash, the priority will be for the growth of the business. As you know, we ended the quarter with about $11 billion of cash on the balance sheet and today, we are weighing our growth opportunities compared to return of capital to shareholders through buybacks.

Our investments, the three elements of the CapEx, which remain to be very well tightly controlled, we are investing today almost 50% what we used to be at the height of the business and SPM and multi-client. So there is no other opportunities other than our inorganic growth if it proves to be a viable proposition economically and the future of the business. But, right now, our priority is the growth of the business and other than that, we will return it to shareholders.

Thank you.

Kurt Hallead, RBC.

Great. Good morning. Paal, commentary here in the press release and the results seem to be incrementally positive, at least on the reservoir front, driven by multi-client it appears. I know in your prior commentary on the cycle recovery, the reservoir piece of the business would probably lag in growth. Is there a shift underway, subtle or otherwise, in seismic activity that might push reservoir up a little bit further on the recovery curve?

No, I don't think there is yet a big turnaround, I would say, in the exploration market, or in the seismic market, but I think we have positioned ourselves very well in both of those markets. Whatever work there is I think we are able to generally pick up on the exploration side. And I think on seismic, as I again said in July, the performance of WesternGeco in a very, very tough market is quite commendable. We do quite well on both marine and land and we have been quite opportunistic on the multi-client side to make a significant investment in several basins around the world, in particular Mexico, but also Gulf of Mexico, the US part, as well as overseas.

And obviously, at this stage, we are able to generate revenue and profits from these investments, which you see very clearly in our results. So there's no, I would say, significant market turnaround, but I think it's a strong performance from the exploration-related businesses that we have, including seismic, and also within the testing services product line, which sits in Reservoir Characterization, we have won a series of early production facility projects where we have combined the capabilities that we had within the testing services prior with the processing capabilities that Cameron had. And this is again really strengthening the offering we have in this market and we see that also as a significant growth opportunity within Characterization.

That's great. My follow-up is you said earlier about -- if I understood it correctly -- that you were in a position to potentially go for some market share in North America. I wasn't quite clear on the perspective on the international front. So just wondering if you might be able to go through the thought process on the market share dynamics and how you see that opportunity, vis-a-vis pricing and profitability?

Yes. I would say, in the international market, we have, I would say, actively pursued market share for the past, I would say, 12 to 18 months I think with reasonable success. I think if you look at Characterization, Drilling and Production combined, take away Cameron, we have pretty solid revenue evolution in all three international operating areas in the third quarter and I'm quite pleased to see the progress we have made there.

Whenever you start aiming to increase your tender win rate, which we now have been focusing on for a good 18 months or so, it takes a bit of time before that translates into actual revenue, but you are starting to see some impact of that. So there's really no main shift internationally.

The main thing I was pointing out for North America is that, on the drilling side, we now have a clear path in US land towards profitability based on the technology uptake we are seeing linked to these super laterals and as soon as we can turn a profit, we are very keen to grow market share and we have basically shifted the playbook from holding the fort to going for market share in drilling in US land, but we have not yet done that for fracking because, at this stage, it is highly dilutive to our earnings and at this stage also, we are not seeing a clear path toward profitability.

All right. That's great clarification. Thanks, Paal.

Jim Wicklund, Credit Suisse.

Good morning, guys. Mexico. You've been shooting seismic there coming into this downturn. It changed the constitution more quickly than a lot of us had expected. They've been through several different rounds and now you talk about there may be some light at the end of that tunnel in 2017. That was always a market of fabulous potential and their budget had rivaled Petrobras's in the past. Can you talk about how you see Mexico evolving over the next year or two please?

Yes, I think I share your view of the potential of the market and I also think we are pretty much close to the bottom of it. We have seen a significant reduction in Pemex activity over the past couple of years and while this whole industry reform has been taking place, that reduction has not been, I would say, compensated by additional investments from the emerging international players.

But as these bid grounds for acreage now has progressed and with the deepwater round coming up, the first deepwater round coming up now in December, we see drilling activity picking up in 2017. Again, it might not be a dramatic comeback and we won't be back to, I would say, 2013 levels or 2014 levels anytime soon, but I think there is a momentum shift coming in Mexico. It's partly linked to the seismic work that we are doing and the related exploration activity with that, but I think also activity linked to the previous rounds that we've seen both in shallow water and on land, as well as the basic Pemex activity should pick up in 2017.

So a more enduring recovery? Okay, thank you. My follow-up, if I could, one of the first comments you made on the call, Paal, was you are not allocating assets to work that doesn't meet your return hurdles. And you said the process has started. We've seen a number of companies decide not to participate in markets or product lines or with customers where they don't generate an adequate return. Can you talk about a little bit a level down on granularity what exactly that means and what we should expect to see in that?

Yes. So, first of all, when you are in a cyclical business, you will have to be pragmatic when you are near or at bottom of the cycle, which we are and we are basically maintaining our presence pretty much everywhere in the world at this stage, even at bottom and even though we have a number of contracts, which, at this stage, does not meet our medium to long-term return criteria.

But what we are saying though is that, as we now are starting to come off bottom as oil prices are starting to move upwards, then we will need to have these discussions with the customers where we have these type of contracts and try to find a way where we can get pricing and terms and conditions and a work scope that will enable us to meet those financial return criteria at the same time as our customers can also meet theirs.

So I think these are the discussions that now are taking place. This won't be resolved overnight, but we are very clear on the fact that if we are to deploy capacity investments and expertise, there has to be a return in it. And at the bottom, we are willing to compromise, but as we come off bottom, we need to basically restore the return expectations that we have as a Company and as our shareholders have in order to drive the business forward.

Perfect. Thank you very much, guys.

Sean Meakim, JPMorgan.

Good morning. Thinking about OneSubsea, how are we seeing opportunities for larger projects shaping up for next year, or do you see it as mostly a brownfield tieback boosting kind of market for 2017?

Yes. Let me -- it's a good question and it's a market that's in a state of change right now, but let me just talk about deepwater in general. It's continued to be challenged and in this quarter, we saw five additional rigs get stacked during Q3 and deepwater rig utilization dropped to 55% in the month of September. So expect 2016 deepwater drilling activity as a whole to be down 33%.

And when we think about that for OneSubsea and projects as we go forward, we think this year tree awards is significantly under 100 and when we look at our project list, we are tracking anywhere between five and eight awards that could happen in 2017 and those would be the larger style awards that we've seen traditionally. But our focus really now has shifted to the tieback market and we do see a lot of opportunities on that.

I mentioned our eight paid FEED studies with Subsea 7 where we are doing a lot of work on the tieback side. And what we think there is that with a standardized Subsea tree, which is at a significantly reduced cost, a single-well boosting system, which we are the only ones right now that have that single-well boosting system, and then combine that with our unified control system and the installation from Subsea 7, we think we've got a very economical package to tie back one and two wells in the existing host facility.

So we are in a lot of discussions around that and really it's almost creating a market right now and so we hope that we can get some more excitement and more awards around that as we transition into 2017. And then as these big projects progress and move forward, we are offsetting that with this expanded tieback market.

Got it. Thank you, Scott. I appreciate that. And then thinking about capital deployment going forward and the free cash flow profile of the business, is it fair to say that following transformation and all the cost reductions, the capital intensity of the core services business should remain below historical levels? Just think about how we think about could capital deployed for that part of the business stay below D&A next year as well?

Yes. So I think based on what we are focusing on, from a transformation standpoint, we still have a long runway to go in terms of driving asset utilization for the existing asset base. And also what we have going in our engineering programs as well to also engineer and manufacture less expensive assets is also a key part of it. So both utilization and the cost per asset I think should lead to a lighter capital intensity of our business going forward. I think you've seen the signs of it in the past two, three years and we are going to continue to work very hard on further improving on that.

Great. Thanks, Paal.

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