斯倫貝謝公司 (SLB) 2016 Q4 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 fourth-quarter and full-year 2016 results conference call.

Today's call is being hosted from Houston 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 of Cameron Group.

Our prepared comments were divided by Simon, Scott and Paal.

Simon will first review the financial results, then Scott will provide an update on the Cameron business integration and synergies.

And then Paal will discuss the operational and technical highlights.

However, before we begin with the opening remarks, I would like to remind the participants that some of the statements we will be making today are forward-looking.

These matters involve risks and uncertainties that could cause our results to differ materially from those 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 fourth-quarter press release, which is 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.

Fourth-quarter earnings per share, excluding charges and credits, was $0.27.

This represents an increase of $0.02 sequentially and a decrease of $0.38 when compared to the same quarter of last year.

During the quarter, we recorded $536 million of restructuring charges, $76 million of Cameron-related merger and integration charges and a $63 million charge relating to the devaluation of the Egyptian pound.

The restructuring charges largely relate to workforce reductions and facility closure costs as we continue to rationalize our support structure and reduce our facility footprint.

All of these charges are described in our earnings press release.

Our fourth-quarter revenue of $7.1 billion increased 1% sequentially primarily driven by the Production Group.

Pretax operating margins only declined by 21 basis points sequentially to 11.4%.

This was largely due to the revenue mix.

Margins also benefited from the continued cost management actions across the entire organization.

Sequential highlights by product group were as follows.

Fourth-quarter Reservoir Characterization revenue of $1.7 billion was essentially flat sequentially as increases in testing and process and SIS were offset by declines in wireline and WesternGeco.

Pretax operating margins decreased 49 basis points to 18.6% as the increased contribution from software sales were more than offset by the decrease in high margin wireline activity.

Drilling Group revenue of $2 billion was also flat sequentially, although margin increased 81 basis points to 11.6%.

The margin improvement was primarily driven by the revenue mix and strong cost control.

Production Group revenue of $2.12 billion increased 5% while margin increased 134 basis points to 6%.

These increases were driven by stronger well services activity both in the Middle East and here in US land.

Cameron Group revenue of $1.3 billion was essentially flat as increases in OneSubsea and Surface were offset by lower Drilling and Valves & Measurement activity.

Margins decreased 207 basis points due to the drop in Drilling projects.

Cameron was accretive to both Schlumberger's pretax operating margin, as well as earnings per share in 2016.

Now turning to Schlumberger as a whole, the effective tax rate, excluding charges and credits, was 15.8% in the fourth quarter, essentially the same as Q3.

Looking forward, the ETR will be very sensitive to the geographic mix of earnings between North America and the rest of the world.

We anticipate that the ETR will gradually increase over the course of 2017 as a result of the expected improvement in activity in North America.

Our cash flow generation continues to be very strong.

During all of 2016, we generated $6.3 billion of cash flow from operations.

During the fourth quarter, we generated $2 billion of cash flow from operations.

This is all despite paying severance payments of approximately $150 million during the fourth quarter and making $950 million of severance and transaction-related payments associated with the acquisition of Cameron during 2016.

Although receivable collection improved in Q4, we continue to experience payment delays from some of our customers.

Our net debt improved by $46 million on a sequential basis to $10.1 billion.

During 2016, we returned $3.4 billion of cash to our shareholders through dividends and share buyback.

We have also increased our dividend in seven of the last 10 years.

As you know, every January, we review the dividend with our Board.

Given the current situation and our level of the payout ratio, we have decided to maintain our dividend at $0.50 per quarter.

This will provide us with the flexibility to continue to invest in the business and take advantage of several opportunities as they present themselves.

We will continue to return excess cash that we generate through our buyback program.

During the fourth quarter, we spent $116 million to repurchase 1.5 million shares at an average price of $78.21.

For the full year of 2016, we spent $778 million to repurchase 11 million shares at an average price of $70.80 per share.

As a reminder, last year, our Board approved a new $10 billion share repurchase program, which will take effect once our current program is exhausted this year.

Other significant liquidity events during the quarter included $654 million on CapEx and we invested approximately $160 million in SPM projects, $130 million in multi-client projects.

Full-year 2017 CapEx, excluding multi-client and SPM investments, is expected to be approximately $2.2 billion.

And now I turn the conference over to Scott.

Thank you, Simon.

The Cameron Group had another good quarter under Schlumberger and I am pleased to report that we continue to exceed expectations with the integration.

I will give you a brief update on the fourth quarter and the full year, as well as provide some comments as to how we are thinking about 2017.

We delivered $1.3 billion of revenue in the fourth quarter, which was flat sequentially despite the reduced backlog.

EBIT margins were a healthy 14%, but lower than Q3 by 200 basis points, which is consistent with our prior thinking and communication on the last earnings call.

The lower margin is driven by the reduced volumes in our higher-margin Drilling business, coupled with reduced pricing throughout the downturn that is now fully flowing through the system.

OneSubsea, however, continued to have outstanding margins, which exceeded 20% for the second straight quarter.

Our persistent focus on cost control and the acceleration of the integration program has allowed us to deliver high relative margins throughout 2016.

While the Cameron Group backlog declined again in the fourth quarter, our book-to-bill ratio remained flat sequentially at 0.8.

Additionally, we had several major awards in the quarter that demonstrate market-leading positions and our ability to capitalize on the limited opportunity set in the marketplace.

In our Drilling business, we received two different long-term service contracts totaling more than $350 million from Transocean.

Schlumberger will be providing comprehensive services to ensure maximum uptime and reliability of the Cameron pressure control systems on their rigs.

The structure of these contracts best align the incentives of service provider, drilling contractor and operator.

Additionally, we will be employing the latest technology on sensors, diagnostic and condition-based monitoring to drive further reliability and uptime in deepwater drilling.

This type of collaboration will systematically help to drive down the cost of deepwater development and potentially unlock future projects.

While secured in the fourth quarter, this award was not booked in the fourth quarter and will be booked over the life of the 10-year contract.

The reduction in the Drilling backlog of $258 million was primarily driven by the removal of five of seven Sete Brazil blowout preventer orders in the amount of $128 million, which we believe are unlikely to progress given the current issues in Brazil.

OneSubsea received two significant awards in the quarter as well.

One award was for the industry's first deepwater integrated subsea engineering, procurement, construction, installation and commissioning of a multi-phase boosting system for the Dalmatian field in the Gulf of Mexico for Murphy Oil Company.

Working with Subsea 7, we will deploy, install and commission a 35 kilometer tieback multi-phase boosting system to augment natural production for the Dalmatian field.

OneSubsea also booked our first Subsea trees for Statoil.

While we have had a long relationship with Statoil, we had previously not participated in their subsea production systems project.

The award of the two well Utgard project was a result of a multi-year effort to prove our technology and execution capabilities to Statoil.

We are very happy to be working with Statoil on this project and we expect to continue working with Statoil to drive cost reduction and improved productivity on their future projects.

Our V&M and Surface business responded to the increased activity in North America last quarter and we predict that these two businesses will outperform in the second half of 2017 given their strong market positions, coupled with their broad international reach.

The integration of Cameron into Schlumberger has been an enormous task.

Most of the heavy lifting of the integration is now complete.

We achieved our year-one target of $300 million of synergies in the first 10 months of the acquisition and we fully expect to exceed the $600 million target for the second year.

The transaction was again accretive in the fourth quarter, as well as accretive to the full-year results for Schlumberger.

We booked $180 million of synergy-related business in the fourth quarter with the majority of it coming from the Middle East.

We will continue to have an integration team in 2017 and our focus will shift from cost synergies to growth synergies.

Several technologies will be commercialized in 2017 that will drive incremental revenue and margin.

Finally, we continue to find opportunities around the world when we leverage the expansive footprint of Schlumberger.

The first quarter will be a low for the Cameron Group in both revenue and margin due to the reduced backlog and the normal cyclical nature of our business.

However, I expect the Cameron Group to grow continually from the second quarter onward as we leverage our North American position and capitalize on the growth from our expanded international presence under Schlumberger.

In summary, 2016 was a challenging year for the Cameron Group as we worked through the downturn and integrated into Schlumberger.

However, I could not be more pleased with the approach by Schlumberger throughout this integration and with the performance of the Cameron people and organization.

Despite the challenges, we delivered strong results throughout the year and we are positioned better than any of our peers to fully capitalize on the growing opportunity set in 2017.

I will now turn it over to Paal.

Thank you, Scott and good morning, everyone.

Our revenue in the fourth quarter of 2016 increased 1% sequentially to reach $7.1 billion as growth in North America land and robust activity in the Middle East largely offset continued weakness in Latin America and seasonal declines in other parts of the world.

Our overall activity and financial performance led to a second successive quarter with a small but positive increase in earnings per share.

In parallel with this operational stabilization, we have completed the restructuring of the Company, which, in the fourth quarter, included a further reduction of our global support structure to reflect current activity, peak capacity and customer pricing levels.

These latest actions followed a well-established playbook we have used to navigate the unprecedented industry challenges faced over the past two years.

In this, our focus has been on proactively streamlining our cost and support structure and continuing to drive the underlying efficiency and quality of all our business workflows.

In parallel, we have also significantly expanded our offering through consistent investments in R&E and a strategic M&A program.

And through these actions, we have further strengthened our market position compared to when we entered the downturn two years ago.

Next, I will review the fourth-quarter business trends from our global operations and I will focus my comments on the results of our activities for the Characterization, Drilling and Production Groups as Scott has already covered the performance of the Cameron Group.

In North America, overall revenue increased 4% sequentially driven by an improving land business in the US and Western Canada as drilling and completions activity increased and service pricing started to recover.

In terms of technology, we saw the strongest growth on land and pressure pumping followed by directional drilling, drill bit and drilling fluids, as well as our ESP, PCP and rodlift product line.

Offshore, revenue declined again sequentially as the rig count dropped further and pricing remained under pressure in spite of the significant technical and operational challenges in this market.

The resulting business environment is potentially becoming unsustainable for us and we will either lead to a recovering service pricing or a narrowing of our service offering with redeployment of resources to markets that offer more adequate returns.

Internationally, revenue was up 1% sequentially as strong activity in the Middle East was partially able to offset the combination of continued weakness in Latin America and seasonal slowdowns in other parts of the world.

In Latin America, revenue declined 4% sequentially driven by Mexico where further budget constraints impacted activity and by Argentina where unfavorable weather conditions and continued union actions led to significant activity disruption.

On the positive side, our integrated project activity in Ecuador remains strong and we somewhat expected stronger conventional land drilling activity in Colombia as WTI oil prices climbed above $50.

Revenue in Europe/CIS/Africa decreased 2% sequentially due to the seasonal slowdown in activity in Norway and Sakhalin while activity in the rest of Russia and Europe, as well as in North Africa, was essentially flat.

In Sub-Saharan Africa, revenue was marginally down due to anticipated project completions, but we are now seeing a floor in activity and expect the recovery process to start in the coming quarters.

In the Middle East and Asia, revenue increased 5% sequentially driven by strong drilling and completions activity on land in the Gulf region.

At the same time, activity in Asia weakened further in the fourth quarter, but now appears to have bottomed out and we therefore expect a slow recovery to start also here in the coming quarter.

As we now move into the recovery part of the cycle, I would like to turn to the developing macro environment and what this means for our business.

First of all, we maintain our constructive view of the oil market as supply and demand continued to tighten in the fourth quarter as demonstrated by the OECD oil stocks, which declined for the fourth month in a row in November.

This tightening is partly driven by strong demand where the reporting agencies revised our global demand growth figures upwards in the fourth quarter to now stand at around 1.5 million barrels per day in 2016 and between 1.3 million and 1.6 million barrels per day in 2017.

On the supply side, non-OPEC production remains under pressure seen by the large year-over-year drop in North American production, which, as of December, had fallen by more than 600,000 barrels per day versus 2015.

Over the same period, new production from the completion of long-term large projects in Brazil, Kazakhstan and Russia was offset by falling production from Mexico, China and Colombia to result in a year-over-year reduction of 900,000 barrels per day for non-OPEC production.

In terms of OPEC supply, production surged to record levels in the fourth quarter to meet the increase in demand and to offset the falling non-OPEC production.

This lowered spare capacity down to 2 million barrels per day in November, which at barely 2% of drillable production represents a 12-year low.

The OPEC agreement to reduce production by a significant volume of 1.6 million to 1.8 million barrels per day has now established a floor to the oil prices and should accelerate the tightening of the oil market going forward.

These supply productions will take a few months to work their way through the distribution system, but we expect to see an acceleration of global stock growth towards the end of the first quarter.

Meanwhile, over the next several months, oil prices are expected to fluctuate around current levels until a steady reduction in crude inventories is fully established.

As the upcycle begins, growth in E&P investments will be led by the North America land operators who appear to remain unconstrained by years of negative free cash flow, as external funding seems more readily available and the pursuit of shorter-term equity value takes precedence over full-cycle return.

E&P spending surveys currently indicate that 2017 North America E&P investments will increase by around 30% led by the Permian Basin, which should lead to both higher activity and a long-overdue recovery in service industry pricing.

In the international markets, the recovery will start off slower driven by the constraints of the international E&P industry where the various operator groups determine their investment levels based on full-cycle returns and their available free cash flow.

At current oil price levels, this will result in the third successive year of lower CapEx spend, which will further weaken the state of the international production base.

Over the past two years, there has been very few FID approvals of new sizable oil development and outside of the Gulf countries, most of the international production is today depleting producible reserves with little or no reserves replacement.

This is equivalent to borrowing barrels from the future.

As a result, the activity and CapEx required going forward to replenish reserves in order to uphold production for the medium to long term will be much higher than the current decline rate may suggest.

This concerning trend cannot be reversed or mitigated by North America unconventional resources alone, which currently represents only around 5% of global crude production.

The future supply challenges of the industry can only be addressed by a broad increase in global investment.

Therefore, as international E&P cash flow improves in the coming quarters, we expect to see E&P investments accelerate in all main producing regions leading into 2018.

So what does this macro setting mean for Schlumberger?

First, we are very excited about our global opportunity set.

Following nine consecutive quarters of relentless workforce reduction, cost-cutting and restructuring efforts, we are looking forward to restoring focus on the pursuit of growth and improved returns for our shareholders.

And as outlined earlier, we will launch our pursuit from a competitive platform that is even stronger than what it was two years ago.

In North America, our strategy during this downturn has been to preserve our infrastructure footprint on land while reducing and stacking operating capacity to minimize financial losses during the trough of the cycle at the expense of market share.

This has served us well in the past year.

In parallel with this, we have continued to invest in the underlying efficiency of our operations, as well as in new technologies and further vertical integration.

As the market now starts to recover, we will aggressively redeploy our idle capacity in any product line and in any basin that shows a clear path towards profitability.

This, together with the strong market position of the Cameron product lines, will allow us to further expand the North America leadership position we have held in recent years in terms of both margins and pretax operating income.

Next, our international business is currently like a highly-compressed coiled spring.

Activity levels in key market segments such as exploration and deepwater are at record lows and although we do not expect a dramatic short-term recovery, the trends can only be positive from this point on.

In terms of geography, it is worthwhile to note that the earnings contributions from key international markets like Mexico, Venezuela, Brazil, Sub-Sahara Africa, China and Russia land have collectively dropped by more than 70% from Q4 of 2014 to Q4 of 2016, which by itself represents a huge upside as the international recovery starts to unfold.

In terms of our international operating capacity, the only way we have been able to protect cash flow and profitability in the international market has been to stack equipment and delaying major maintenance and repairs until the equipment is again needed.

This means that we do not currently have any significant spare capacity available.

Furthermore, given the major pricing concessions we have been forced to give, we have also had to reduce the technical support levels that we normally provide beyond our contractual obligations and direct both our operating assets and technical support towards customers to allow us to make a reasonable return.

Going forward, however, we can reactivate our equipment capacity and expand our support structure relatively quickly, but we will only do so where it makes financial sense.

In addition, we are now requesting pricing increases on contracts where the efforts we have made have helped bridge the trough of the cycle for our customers, but where the contracts hold no promise of delivering the returns we would expect in the current improving business environment.

Over the past three years, we have also expanded our addressable market by more than 50% through a series of acquisitions combined with internal R&E investment.

Our offering now includes special control, drilling equipment, land rigs, subsea infrastructure and surface processing facility.

In addition, we have closed a number of new SPM deals and we continue to see a broadening of this opportunity set given our integration capabilities, balance sheet strength and cash flow position.

All of these new markets carry significant growth potential with unique technology, business models and integration opportunities that will facilitate both market share gains and improving returns for Schlumberger in the coming years.

Furthermore, we are consistently able to convert our international market leadership into superior earnings generation as seen by our share of the top four service companies' operating income, which increased from 60% in 2014 to over 80% in the three first quarters of 2016.

Another way to look at this is that for every dollar of E&P spend in the international markets, we generate around 4 times the operating income of our closest competitor.

This is due to our presence, offering, scale and executional capabilities, which, together with our leverage towards the international market, demonstrate the upside we have in terms of earnings per share going forward.

While earnings growth is a very important part of our financial performance, full-cycle cash generation is even more critical and here we continue to stand out in the wider industry.

Over the past two years of this downturn, we have generated $7.5 billion in free cash flow, which is more than the rest of our competitors combined.

Furthermore, we have returned this entire amount to our shareholders through dividends and share buyback.

Finally, the breadth of our technology and integration offering together with our unmatched size and global footprint gives us an operating platform that enables us to support our customers in every corner of the world and through this capture more growth opportunities than any of our competitors.

With this focus and ambition in mind, our management team and wider organization entered a new phase of the cycle with renewed energy and a spring in our step fully restored.

Thank you.

We will now open up for Q&A.

(Operator Instructions).

James West, Evercore ISI.

Good morning, Paal.

I thought you made some pretty compelling comments around the international side of your business -- the coiled spring and also the reductions that you've seen in some major oil markets, which I actually was surprised at how big the reductions were.

It seems to me now though that you have better visibility at least on the international recovery and while some markets may not be up year-over-year, they will be up 4Q to 4Q to 2017.

Could you perhaps touch on the visibility when you expect certain markets to improve and if you have any views on the slope of the improvement that would be helpful as well?

I can give some general comments.

Obviously, visibility for the full year of 2017 is still not all the way where we would like it to be, but what is clear is that the recovery is on its way in all markets and all markets have now reached the bottom, including Sub-Sahara Africa and Asia.

So I would say excluding the seasonal slowdown in Q1, it should be up from here in basically all markets, but the pace and the timing is still somewhat uncertain.

Now I think the key here is that we look at 2017 as a starting point of a new multi-year cycle where the main challenge is actually going to be to reverse the effect of several years of global E&P underinvestment and then try to mitigate the pending supply shortage that we see unfolding.

So the only way to achieve this is through a global-based increase in global E&P investments as North America and unconventional production is not going to be able to address this pending supply issue by itself.

So in terms of how the markets are going to develop, the main thing we are doing now is we are preparing for a global recovery and we are really aiming at being ready to support our customers in every market around the world as these start to recover at varying points in time and at varying pace.

So it is a bit early to say exactly what's going to happen in each one of them, but we are preparing and we are aiming to be ready as they kick in each one of them.

I think the main thing I would commit to though is that we are basically aiming to drive earnings growth faster than our competitors in every market that we are in.

E&P spend and revenue is very important, but what ultimately matters in the next phase is the ability to generate earnings and here we are very confident that we should be able to outperform our surroundings in every market that we participate in, including North America.

Okay.

Fair enough.

And then maybe a follow-up for Simon.

The level of share repurchases has been lower than I would have expected here given the improving visibility, improving oil prices.

Could you maybe comment on what level we should expect in the future, if you will be ramping that up, or if there's other investments that are more attractive like SPM or perhaps an M&A pipeline?

James, you are right.

We did take a bit of a break on the buyback during the last few months.

However, if you look at our payout ratio, including dividend, we are at a very high level and we look at the situation by looking at our free cash flow generation and the opportunities ahead of us.

I know that everyone thinks we have some excess cash, and we do, as compared to historically, but we have a lot of opportunities that we see coming our way in terms of projects, businesses and some strategic transactions.

So 2017, in our opinion, is going to provide a lot of these opportunities and we want to be ready to participate into them.

As far as buyback, we will always use the excess to do buyback; and, yes, when the opportunity presents itself, we will accelerate it, but you can count on us to continue to return to our shareholders a very significant part of the free cash flow and the operating cash flow.

But we will, when the opportunity presents itself, accelerate the buyback.

Okay.

Fair enough.

Thanks, guys.

Angie Sedita, UBS.

Good morning, guys.

So, Paal, maybe I could start off with SPM and you highlighted it in your comments and maybe you could talk a little bit about some of the opportunities you are seeing in the market as far as the type of opportunities and regions of the world that you are seeing some opportunities and just your long-term thoughts about the importance of SPM to Schlumberger.

Well, I think this is an opportunity set that is continuing to expand and we have been in this market or been operating around these type of business models now for over a decade.

We started off very slowly and we have accelerated in recent years as our capabilities have grown and as the opportunity set has also widened.

Today, we are basically engaged in discussions and negotiations all around the world.

We have around 20 countries that we are discussing SPM opportunities.

There's a range of the type of opportunities in terms of both size and resources, but I would say the general focus we have on SPM is the mature fields oil on land.

That's the main focus area.

And if you look at the size of SPM today, it is the size of an average productline within the Company and what we have said, which I will repeat, is that I think, over a reasonable amount of time, I would say three to five years, the growth potential is significant for SPM and I think it has the potential to grow from being a productline to becoming the size of the group.

So a significant growth opportunity, but it is going to be something that will complement the rest of the Company.

Our base business in terms of the individual productlines for individual services and products is still going to be the lion's share of what we provide to our customers.

Okay, great.

Great, thanks.

Very helpful.

And then you made some comments on US pricing, so maybe you could talk a little bit about what you are thinking on the outlook for pricing for [frac] in the US and is there any other pricing opportunities in the US, particularly directional drilling?

Yes, I would say where we probably have had the most pricing traction is on directional drilling actually.

So as I mentioned on the Q3 call, we were already sold out on PowerDrive Orbit, our rotary turbo system that we are deploying in US land and the trend of increasing lateral lengths is just further accelerating the uptake of this technology.

So we were sold out at the end of Q3.

We have added pretty significant capacity in Q4 and we are still sold out.

So this is the market segment that we actually see the biggest price increase and following on from that, we are also seeing very good growth in both our drill bits business and the drilling fluids business.

So that part we are already performing quite well in, so I am pleased with that.

On the fracking side, yes, pricing is moving now.

We need significantly more pricing before we are getting into I would say a sustainable operating environment, but that trend has been kicked off.

We are actively high-grading our contracts portfolio and we have active pricing discussions I would say with all customers at this stage.

So that process has started and will continue in the coming quarters.

Ole Slorer, Morgan Stanley.

Thank you.

Thanks for the color on 2017.

I wonder whether it would be possible to help me a little bit on the bridge from the fourth quarter to the first quarter.

There are some tricky seasonalities in Russia, North Sea and you also have positive seasonality in Canada and pricing momentum in North America land.

So how should we think about the move from the fourth quarter to the first quarter, also taking into account the multi-client seismic seasonality and product sales?

It's a fair question, Ole.

I think you hit on the main point that I would highlight as well.

The Q1 visibility is actually still somewhat limited.

There are a lot of moving parts, including the main impact of the normal seasonal drop in activity, right?

Now with that, you also have some positives, which is [not] the growth in North America.

So I'm not going to give you a specific number, but I would say that there is going to be the normal seasonal drop, but there are some offsetting factors as well, which is strong North America performance, as well as probably less of a Q1 impact when it comes to the year-end sales that we've seen in previous years.

So not ready to give you a number, but we are generally optimistic about the outlook for the coming year.

Okay.

So consensus isn't entirely unreasonable?

As I said, I'm not going to give you a specific number.

Okay.

Scott, I wonder if you could fill us in a little bit more on what you talked about and congrats with the first contract with Statoil.

Just coming back from Europe, having met with a lot of the large oil companies over there, it struck me to what extent the cost structure seems to be changing around at the moment.

So could you give us a little bit of a view on what you think the cost structures that -- in the Bering Sea -- we heard $40 and the well costs have dropped meaningfully as a result of headcount reduction on the rigs because of automation and remote drilling [cessation]?

So how should we think about the cost structures and what are you hearing from your customers now?

We also get a sense by the way that the cost structures have come down, at least from a cyclical standpoint, to a point where there is little room to squeeze more pricing out.

Yes, I think everybody knows that there was massive cost inflation in deepwater projects all through -- basically from 2009 through 2013 and the industry became incredibly challenged in 2013 and 2014.

So even before oil prices collapsed, there was a massive cost issue.

And I think operators across the world, both small and large, really started to attack this problem in late 2013.

And what I have seen in our discussions with our customers is there has been substantial movement here.

So obviously, it starts with the drilling rigs and the drilling contractors and I think everybody knows the status there and the oversupply, which has driven costs down substantially.

But then on the infrastructure, the production systems and the installation of those, the service side, we have been able to, through cost reductions, standardization and simplification, we've been able to get our pricing now back down to levels that we saw back in 2003 and 2004.

And so I really feel comfortable that the price of developing deepwater projects is down substantially and I think every basin and every reservoir is slightly different, so I'm not going to go into breakeven prices.

But what we are seeing on a regular basis is the ability to unlock developments that weren't there before.

Now, in that context, what I will say is megaprojects of 60 plus wells that we saw before and billions and billions of dollars of capital on those projects, I'm not super optimistic that we are going to have lots of those as we look forward, but what I do feel is that by coming down into a more meaningful size, call it between 10 and 20 wells, I think operators are going to be able to do just fine there.

And then the other market that we didn't mention was the tieback market and so we are seeing lots of activity on the brownfield side where you are adding two wells and potentially a boosting system to that and really driving more production out of that existing field.

So I am most optimistic about the brownfield side, but what I would say is we are seeing -- we are tracking a nice list of projects in that 10 to 20 well development and we will see probably at least 2 times the growth that we had in 2016.

Scott, thanks for that clarification.

Scott Gruber.

Scott, a question for you on Cameron.

It's great to hear that you have line of sight on the bottom at the segment.

Can you just provide some color on where revenues and margins could slip to in 1Q so we can dimension the starting point for future growth?

Yes, like Paal said, we are not giving hard numbers on Q1 guidance, but what I would say is the trend that you've seen over the last few quarters will probably, on the top line, continue into Q1 and like I said in my prepared comments that we do think that is the low and our shorter cycle businesses of Valves & Measurement and Surface really start to capitalize on the increased activity in North America, but also internationally.

And we feel very good about driving growth both top line and bottom line from that point forward.

Got it.

Let me come back to the international line of questioning that James began with.

Paal, I realize that the 2017 visibility is not perfect, but at a $55 Brent price and some momentum building over the course of the year, is it unreasonable to assume that we could see double-digit, year-on-year growth for the legacy Schlumberger productlines on the international front?

Well, I, again, would go back to what I said earlier.

I think it's too early to commit to numbers.

I think the current prices and building on what Scott was saying in terms of several projects having seen I would say significant cost reductions now, I think there is a basis for investing in the international market and I think it's going to be highly necessary in order to address the pending supply issues.

The main reason for the slower startup of international is just purely that investments are governed by free cash flow.

So I would say that, as soon as free cash flow starts to improve for the international operators, we will see higher investments.

Exactly how fast that is going to happen, I think that's the thing that is a bit difficult for us to predict.

But the fact that there are good investment opportunities and that there is a need to invest I think is both there.

It's just a matter of how quickly cash flow generation is going to allow this to happen.

Got it.

Thank you.

Bill Herbert, Simmons.

Good morning.

Scott, can you talk about the margin roadmap for 2017 for Cameron?

You referenced that top line would bottom in Q1, but what is a reasonable expectation for a margin trough for Cameron?

Yes, again, we are not providing specific guidance on any of the groups there on where it goes, but I will give some color in terms of (multiple speakers) impacting it.

So obviously, we've been able to expand margins in the higher backlog businesses, so that was Drilling and we saw a lot of those high margins come through in the first half of 2016, but now as that backlog has fallen off, we are still able to keep nice margins because we have the Surface business.

So we are getting parts in there and services, which has historically been a higher margin and so as the Drilling business shifts from projects to more services, we should be able to preserve nice margins.

OneSubsea, throughout the cycle, we've been able to expand our margins and mostly that's the pricing from 2012 and 2013 that's coming through the system while we are driving costs down and so OneSubsea margins will start to decline just because the pricing now is not what it was over the last three years, but we also believe that we can enhance bookings and do some things more creatively with the cost structure that keep relatively high margins in the OneSubsea business.

And then for Valves & Measurement and Surface, we should after Q1 start to see nice growth both on the top line and at the margin.

Right.

So I wasn't actually asking for a level of margin, but basically wondering, over the course of the year, when should we expect to see sequentially-improving margins for Cameron.

You will see improvements from Q1 to Q2.

In margins?

Yes.

Okay.

Great.

Thank you.

And then, Simon, a quick question with regard to the ETR.

You are guiding for a bleeding higher of tax rates over the course of 2017.

Does that encompass the prospect of the bending lower of the US corporate tax rate?

Well, to be honest, we are not clear what will happen in the future for the corporate tax rate in North America.

We hear what you hear, that there will be a business-friendly tax rate and we are looking forward to it.

But, no, it does not include that kind of details, but our comment more relates to the mix of revenue.

North America, as you know, it's a higher tax rate than international.

So once the business shifts to slightly better in North America, we will experience a higher tax rate and that is the comment that we made.

Okay.

Thank you.

Edward Muztafago, Societe Generale.

A question for Scott.

Just wondering maybe if we could delve a little bit more into the Q4 margin in Cam and specifically the downtick was pretty material.

Historically, we have seen where large project shipments in Q4 can cause some mix effects, so maybe I will just ask directly.

If there were any mix effects in the quarter, I would've expected maybe that given where margins are at with Subsea and the fact that North America is improving that maybe that would have been a little stronger in Q4?

Yes, I would say mix was a big driver and you see that with the Drilling backlog.

The Drilling has always been one of our highest margin segments and as that backlog comes down, it definitely has a major impact, and the backlog has deteriorated pretty substantially there in the back half of 2016.

So that was the biggest movement.

I will also say in Q3 OneSubsea had its highest margins ever, which we knew were not necessarily sustainable from that very lofty peak.

And so that has now come down.

Still in the very high levels, but it did come off the peak.

And then on the Surface and the V&M businesses, we've been able to maintain the margins throughout 2016 and now as we start to grow, we need to leverage the revenue growth, but, at the same time, in growing environments, we are starting to add people and resources and we are very focused on the profitability as we go forward.

Okay.

That's helpful.

So we had some atypically high margins in 3Q that came down, plus the mix and a little bit of perhaps lag in the margin improvement in some of the shorter-cycle businesses?

I think that is a good summary.

Okay.

Great, great.

And then, Paal, really like the spring comment in the international markets, so perhaps we could focus on maybe just one spring in the watch and that's Latin America.

You have a couple markets there -- Ecuador, Argentina, Colombia -- really operating at very depressed levels.

And historically, if we looked back at least at the peak anyway -- I won't say historically -- Latin America was probably 30% of global land rig count.

Can you talk about the evolution perhaps of the Latin American land rig market or the land markets over the next say 12 to 24 months?

Well, I would just generally say that, if you look at current activity levels, it will come up from where we are today.

I think the best example to illustrate this is probably Colombia where we've always maintained at a WTI [break] $50 in a positive direction.

That should yield a significant increase in land rigs -- or in overall rig activity.

So actually in the fourth quarter when this oil price event occurred, we almost immediately saw a significant uptick in rig activity in Colombia and we've seen actually a dramatic surge in activity in the country over the past three months.

So I think if this is an early indication, then you would see similar things happening potentially in Mexico and in Argentina as well.

Ecuador for us has been strong throughout the downturn driven by the activity on our integrated projects, and Venezuela in terms of activity, obviously there is significant potential activity there.

The reactivation of the business there is clearly going to come down to the ability of getting paid.

So I would say that we are at the trough.

There is an early indication of what potentially will occur coming from Colombia and then several of the other land markets I think will follow suit as soon as there is more cash flow available.

So could you see Latin America being or a scenario where Latin America is perhaps the surprise market for 2017, or is that perhaps a little bit longer turn in your mind?

No, actually I think all parts of the international market have the potential to surprise.

I think it is indeed a highly-compressed coiled spring.

Where it's going to break out first I think is still up for discussion.

We have a very, very solid baseline business coming out of Russia, as well as the DCC part of the Middle East, but I think all other businesses are extremely depressed in terms of activity levels and we expect several of them to show growth and come out of this environment during the course of 2017 leading into 2018.

But exactly which one is going to come first, I think it's too early to say.

Okay.

Thanks.

Appreciate it.

Bill Sanchez, Howard Weil.

Good morning.

Paal, your comments with regard to international capacity here and the fact effectively you have no spare capacity.

If I look at the CapEx guide for this year, it would suggest that relatively flat with 2016.

You don't have much of any expectation I'm guessing in activating currently stacked capacity internationally, I guess number one.

And number two, what would be the trigger point on your comment for redeploying assets out of North America I guess if returns ultimately weren't suitable for you and what markets most likely will we see those assets venture to?

If you look at the CapEx guidance, it's more or less flat with 2016 and this is still only around [50%] of [D&A], so it still low, as you indicate.

Now we have, through the transformation program, a continued focus on driving asset utilization from the existing capacity that we have and actually the costs of reactivating the international capacity is not significant.

We are just saying that we aren't going to incur the cost unless there is an adequate financial return.

We can do it pretty fast.

It is not very [receptive] in terms of CapEx investment and a fair bit of this is built into the number that we are guiding to for 2017.

So in terms of capturing upside growth, I think we can capture quite a lot of upside growth even within this CapEx number that we are guiding to.

And when it comes to the potential redeployment of capacity, there is nothing unique about North America offshore or anything.

The only thing we are saying is that we will constantly look at what kind of returns we are getting in the contract that we operate in and some of the high-end assets, they are quite expensive and they are in potentially high demand and we will continue to look at deploying them where we can get the best return.

So the redeployment comment was around the offshore business, which we have I would say quite limited spare capacity of some of the high-end technologies and if we aren't getting the adequate returns in any part of the world, we will look to shift it around to where we can get the return.

Okay.

Appreciate the clarification there.

I know there has been a lot of questions around top line and thoughts on international.

Just curious on prior thoughts around the incremental margins.

Paal, you have talked about 65% I think ex-Cameron as being a reasonable incremental assumption.

As you see now being able to enter the conversations with your customers on clawbacks of these pricing concessions and I think just your overall outlook, is that still a fair type of incremental margin we should be thinking about 2017 versus 2016?

Well, we stand behind that number that we have given.

I think in order for that number to be achieved, I think we need to get into a steady line of growth, which I think will happen during the course of 2017.

It might not be for the full year of 2017, but -- and in addition to that, we will need some pricing contribution to that.

So the 65% incrementals we stand behind and we need to get through the trough, which we are basically done with now and then it's just a matter of how we manage this going forward.

But we are committed to the number and that's what we are going to aim to do going forward.

I appreciate the time.

I will turn it back.

Timna Tanners, Bank of America.

Happy Friday, everyone.

I just had a quick follow-up with some comments that Simon made earlier.

Wanted to know, given that you were making comments about having hit the trough and on an upturn in general for businesses, including international, how do we think about any further cost-cutting?

It's been a big positive for the Company having been able to contain margins very well and better than peers, but do we continue to model further cost-cutting measures or should we consider ourselves in the final innings there?

So you have seen that we have taken some charges here for further rationalization of our support structure.

This will obviously have a full-year impact and some of the cost-cutting measures that we have taken, including our transformation program, will have a full-year effect in 2017.

You will continue to see the management of costs and the cost control that will be ongoing in the Company, but, as far as we are concerned, there is no further actions beyond what we have taken, but it will have a full-year impact.

Okay.

So no further large cost-cutting measures that we should anticipate at current market conditions?

No, not as far as we are concerned now and based on what we have seen.

We've taken a charge to further rationalize, which will be implemented in the first quarter and it's already underway, but there will be no further cuts.

Got you.

And then finally on the follow-up to the commentary about considering exiting contracts or regions that failed to provide an adequate return, I was just curious, can you characterize how some of your competitors' behaviors are in those same markets and talk to us about what timeframe you might need to make a decision on whether or not you will continue in less-competitive markets?

Well, I think all parts of the business, North America land, all of international, North America offshore, it's as usual very competitive.

Now there are shifting trends in where pricing is going and generally I would say that there is more focus now I think generally in the industry to try to raise prices, but it is highly competitive and we take this from bid to bid in terms of how we play this.

But the behavior from our competitors, there is nothing special around that.

I think they are challenged similar to us in terms of pricing and profitability levels and we are coming off the face of the cycle, which has been extremely demanding for all players.

I think the direction that we all wanted to go is that we need to recover some of the pricing concessions that we have given.

But again this is highly competitive and it's a bit difficult to provide general comments because every bid that we submit is highly competitive and we are all trying to win them.

Got you.

Thank you.

All right.

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

First, the market recovery is clearly on its way and we look at 2017 as a starting point of a new multi-year cycle that will require a broad-based increase in E&P investment in order to reverse the effects of several years of global underinvestment and mitigate the pending supply shortage.

The growth cycle will initially be led by North America land, but followed by the international markets later in 2017 and leading into 2018.

And while E&P spend and revenue is very important, what ultimately matters in the next phase is the ability to drive earnings growth and we commit to delivering faster earnings growth than our competitors in all of the markets we compete in, including North America.

We have a proven track record of doing just that and our 600 business units spanning the globe are all ready, able and incentivized to deliver on this promise.

So after nine quarters of cost-cutting and restructuring, we are very excited about resuming focus on growth and improving returns for our shareholders.

Thank you for participating.

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