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Executives

Malcolm Theobald – Vice President, Investor Relations

Simon Ayat – Chief Financial Officer and Executive Vice President

Andrew F. Gould – Chairman and Chief Executive Officer

Analysts

David Anderson - UBS

Dan Pickering - Tudor Pickering & Co.

Michael LaMotte - J.P. Morgan

Ole Slorer - Morgan Stanley

Bill Herbert - Simmons & Company International

Alan Laws - Merrill Lynch

Jim Crandell - Barclays Capital

Robin Shoemaker - Citigroup

Mike Urban - Deutsche Bank Securities

Doug Becker - Banc of America Securities

Pierre Conner - Capital One Southcoast, Inc.

Charles Minervino - Goldman Sachs

Geoff Kieburtz – Weeden & Co., LP

Brad Handler - Credit Suisse

Stephen Gengaro - Jefferies & Co.

Ben Dell - Sanford Bernstein

Schlumberger Limited (SLB) Q3 2008 Earnings Call October 17, 2008 9:00 AM ET

Operator

Welcome to the Schlumberger Limited third quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Vice President of Investor Relations, Malcolm Theobald.

Malcolm Theobald

Before we begin I'd like to review the logistics and format of today's call.

Some of the information in today's call may include forward-looking statements as well as non-GAAP financial measures. A detailed disclaimer and other important information are included in the FAQ document which is available on our website or upon request.

And now for the call participants and format: Joining the call from New York City are both Andrew Gould, Chairman and Chief Executive Officer, and Simon Ayat, our Chief Financial Officer. Prior to Andrew's overview of the third quarter and his comments on the outlook, Simon will first review the quarter's financial results.

And now I'll turn the call over to Simon.

Simon Ayat

Schlumberger third quarter income from continuing operations was $1.25 per share, up $0.09 sequentially and $0.16 above the same quarter last year. These results include a $0.04 impact from the hurricanes in the Gulf of Mexico.

Oilfield Services third quarter revenue grew 5% sequentially, reflecting strong growth in all geographical areas despite the impact of the hurricane season.

WesternGeco revenue grew 33% sequentially, reflecting the seasonal strength in Marine operations that was boosted by strong multi client data sales.

Oilfield Services generated $1.7 billion in pre-tax operating income, essentially flat as compared to the second quarter, with margins slipping by 155 basis points to 26.7%.

By area, Oilfield Services pre-tax operating margin highlights were as follows. My comments are on a sequential basis.

North America pre-tax margin decreased by 283 basis points to 21.1%, where the recovery and activity in Canada was more than offset by the hurricane effects on the U.S. Gulf of Mexico activity and the seasonal slowdown in Alaska.

Latin America pre-tax margin declined 287 basis points to 20.1% as more favorable activity mix in Peru, Colombia, Ecuador and Brazil were insufficient to offset increased third-party managed services in IPM projects in the Mexico/Central America geomarket. This effect was amplified by start up costs [inaudible] Burgos 7 project in Mexico.

For ECA, the Europe/CIS/Africa area, the pre-tax margin improved 86 basis points to 29% as Russia experiences strong seasonal activity rebound offshore East Russia. This improvement, however, was partially offset by the impact of declines in the North Sea for both exploration and development operations.

Finally, Middle East/Asia pre-tax margin moderated by 89 basis points to 35.5% as a more favorable activity mix in a number of geomarkets was insufficient to counter the effects of a less-favorable mix in Indonesia and a shift to lower margin workover-type activity in the Gulf.

WesternGeco pre-tax income of $355 million, reflecting an increase in pre-tax margin by 10.6 percentage points to reach 39.8%, showed a strong growth over the second quarter and surpassed the performance of the same quarter last year.

Marine had a strong quarter, with higher activity at better pricing while multi client margins improved with higher sales.

Now turning to Schlumberger as a whole, the effective tax rate was 21.4%, which was slightly higher than last quarter due to the geographic mix of earnings in WesternGeco. The ETR is expected to be in the low 20s for the total year.

Net debt was $1.7 billion at the end of the quarter, representing a sequential improvement of $300 million. Further, we ended the quarter with approximately $4 billion of cash and investments on hand. In addition, $2.1 billion of committed debt facility agreements with commercial banks were available at the end of September. This compares to short-term debt of only $2.2 billion, reflecting the strength of the Schlumberger balance sheet and leaving us with more than enough liquidity to meet all corporate and operational requirements.

Significant liquidity events during the quarter included $545 million for the stock buyback program and $1 billion for Capex, including $75 million of multi client surveys capitalized.

During the quarter we bought back 5.96 million shares for $545 million at an average price of $91.45 per share.

Finally, the quarter earnings included $44 million of expenses relating to share-based compensation costs.

And now I'll turn the conference over to Andrew.

Andrew F. Gould

The strong continuation in sequential revenue growth in the third quarter was led by further strengthening of gas drilling activity on land in the U.S. and Canada, a very active summer drilling season in Russia, and continuing growth of IPM activity in Latin America.

Margin performance was generally satisfactory apart from the heavy impact of the hurricane season on North America and higher than usual third-party managed services revenue at low margins in Latin America due in part to the start up of the Burgos 7 contract.

Among our technologies, growth was strongest for well services, wireline and drilling and measurement services.

Looking at the areas in more detail, performance in North America was led by the Canada geomarket, as activities strengthened significantly following last quarter's spring breakup. Demand was strong for a range of technologies, from well services, wireline and drilling and measurements on land in the U.S., and improving weather in the North and expanding rig count across all geomarkets yielded a solid result. These positive effects were partially offset by a sharp reduction in activity in the U.S. Gulf of Mexico resulting from Hurricanes Gustav and Ike as well as by the seasonal slowdown in Alaska for rig and infrastructure maintenance.

In Latin America, sequential revenue growth was strong across the area, led by Mexico/Central America geomarket due to increased IPM activity. In addition, Peru, Colombia, Ecuador continued their robust performance of the second quarter on a more favorable mix of wireline and drilling and measurements technologies, while Brazil grew as exploration activity led to more demand for wireline logging services.

Sequential revenue growth in the Europe/Africa/CIS area was driven primarily by activity in the Russian geomarkets, particularly in the East, with the summer exploration campaigns in the North and South. Through demand for well services, pressure pumpings remain strong as well. Exploration was also responsible for the strength in the Caspian through both activity and service mix. In Africa, Libya was particularly strong, as activity grew in both exploration and development work, and Western Southern Africa also recorded exploration-related growth.

These positive factors were somewhat tempered by a decrease in North Sea activity in both exploration and development that matched an effective rig count reduction.

In the Middle East and Asia area, sequential growth was led by Brunei, Malaysia, Philippines geomarket, with increased exploration activity resulting in robust demand for exploration led wireline and well testing services. The geomarket also benefited from strong completions product sales. Good results in Qatar came through service mix that outpaced rig count, while the East Mediterranean and Arabian geomarkets also saw improvement. The area's sequential growth was, however, blunted by a decrease in the Gulf as activity shifted from drilling to workover-type services.

At WesternGeco, sequential revenue grew significantly, led by excellent Marine results and a strong recovery in multi client data sales. The third quarter is seasonally the strongest in Marine, and the results were backed by strong activity in the North Sea and the transfer of three vessels from multi client to proprietary service during the quarter.

In multi client, increased sales were seen in North America, Latin America and Europe, with the result in North America underpinned by a significant sale in the U.S.

Data processing also recorded higher revenue, particularly in Europe, North America and India. The positive combination of this performance, however, was partially offset by a decrease in land revenue, with activity reduced and contracts were completed in North Africa and Latin America.

At our investor conference on September 30th, we highlighted a number of unique Schlumberger technologies that both singly and together offer marked benefits in helping our customers improve performance and reduce risk. The manner in which these technologies can be integrated also offers substantial customer benefit, and a number of these were evident during the quarter.

I would draw particular attention to the StimMAP LIVE real-time fracture mapping and stimulation as well as to our full-azimuth Coil Shooting Q-Marine data acquisition as examples. I would also point out the continuing uptake of PeriScope and other members of the Scope family of technologies, with jobs performed in Texas, Alaska, Italy, Ecuador and Brazil.

As we enter the fourth quarter, the recent rapid deterioration in credit markets will undoubtedly have an effect on our activity, though we anticipate this will be largely limited to North America and to some emerging exploration markets overseas. The strengthening production profile of North American natural gas has also led a number of customers to reduce spending early.

At the present time, the rate at which the world economy will slow has become increasingly uncertain. We have always maintained that the one event that could slow the rate of increase in worldwide exploration and production spending would be a reduction in the demand for oil caused by a severe global recession. At the moment it is still too soon to predict to what extent current events will affect global activity in 2009, but we anticipate a slowing in the rate of increase of our customers' spending.

However, the weakness of the current supply base, the age of the production profile, and the decrease in reserve replacement ratios - all of which we have indicated on many occasions  are such that any significant drop in exploration and production investment would rapidly provoke an even stronger recovery.

Schlumberger has an unparalleled technology position, a strong balance sheet, an unmatched global presence, and an excellent and highly motivated work force. I have no doubt that we will emerge from the current turmoil even stronger than before.

We will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Anderson - UBS.

David Anderson - UBS

Andrew, I was just wondering, just looking at International land, is it fair to say the majority of your projected 2009 business is already locked up, either through contracts or long-standing agreements?

Andrew F. Gould

Specifically land, Dave?

David Anderson - UBS

Yes, just International land.

Andrew F. Gould

I would say for the drilling programs that certainly the first half year to nine months are locked up. As you know well, that's not true for workover programs. In other words, they're on a much shorter time scope and could eventually be canceled.

David Anderson - UBS

And then if I look more just towards offshore work, is it fair to say there'd be probably a much larger percentage of that locked up because it can be linked with drilling contracts?

Andrew F. Gould

Yes. I mean, I think that the fundamental cycle of three-year contracts overseas hasn't changed a great deal, so you can assume that one-third will rollover in 2009.

David Anderson - UBS

But with the contracts that are existing in place, can you envision any scenario in which you start to see contracts being broke? I think that's a pretty big concern in the investor community right now.

Andrew F. Gould

Well, the operators don't break contracts. They shut down rigs. You know, normally a contract is for a specific or an envelope of rigs, and they can always shut down rigs within the contract. So it depends on the drilling contract, Dave.

David Anderson - UBS

And then if I could just ask one more question, looking back when oil prices peaked back in 1998, it looks like it took something like 12 months until OPEC activity really started to come down. I'd like to get your perspective on whether we should start to expect a similar pattern on OPEC and other NOCs this time around. I recognize there's a lot of changes in the market and there's not a perfect historical comparison, but perhaps you'd just give us your perspective as to how long you think it's going to take or how long oil prices have to stay low until you really see a dramatic reduction in their spending.

Andrew F. Gould

I think I would be dishonest to say that I know. I don't know, but I will give you my opinion.

My opinion is that this is 1998, but the same basic rules would apply and the period of time before they meaningfully impact activity is probably not dissimilar from what you just quoted, Dave.

David Anderson - UBS

So you think something like 12 months or so from the peak, just roughly. You think 12, 15, something like that?

Andrew F. Gould

Yes. It depends because there's no such thing as two OPEC members who behave the same way, so it's very, very generalized, what I'm saying.

Operator

Your next question comes from Dan Pickering - Tudor Pickering & Co.

Dan Pickering - Tudor Pickering & Co.

Andrew, I just want to understand a little bit better your thoughts as they are today. Maybe six months ago, a couple of conference calls ago, we were looking at International as a 15% to 20% kind of top line growth market for you guys in '09. I realize we don't know at this point, but I'm just trying to understand order of magnitude around your comment on the rate of growth slowing. Do you think it's - I mean, are we a single-digit growth rate now? Is it a few hundred basis points softer? Kind of ballpark for us.

Andrew F. Gould

Dan, I don't know. I'm sorry, I don't know. And we're going to take this quarter by quarter, but today I have a little bit better visibility on North America because you know as well as I do what's been happening very day. But on overseas, I just don't have a good visibility to allow me to look at a number.

Dan Pickering - Tudor Pickering & Co.

I guess the follow up then would be for both North America and International, you're talked historically about kind of Plan A and Plan B. Plan A is usually the markets continue to grow as you expect. Plan B is they soften. When do you pull the trigger on a Plan B in North America or on International? I mean, what's the timing? Walk us through the thought and evaluation process?

Andrew F. Gould

Well, I think that Plan B in North America, we will be thinking in Plan B mode unless the temperature drops and heating days become such that it's obvious that gas supply, coupled with the cuts that people have made in expenditure, means that we're going to get to the end of the winter with a low storage situation. But today we're certainly thinking in Plan B mode.

So Plan B mode means that we're careful on headcount increases, we're careful on Capex. We're extremely careful on discretionary expenditure. But we have, you know, when we have Plan B in place, we're working on Plan A at the same time. So if something does change in the spring, we can react.

Overseas, it's very, very different because no two areas behave the same, therefore we can't, if you like, apply a universal plan the way we can to North American gas. So I would say that the Plan B overseas, we haven't evoked any of it yet. We are being more careful. You know the areas we'll make a Plan B other than when things start to become a bit clearer.

But, you know, I have to say, between Simon Ayat to myself and Chakib Sbiti, this is the third time we've been through this. So we have quite a lot of experiences how to manage the different reactions of the different parts of the world not only on behalf of our customers, the reactions of our customers, but also the internal measures that need to be taken.

Operator

Your next question comes from Michael LaMotte - J.P. Morgan.

Michael LaMotte - J.P. Morgan

Simon, maybe the first question I can throw your way and maybe ask you to expand upon how the credit crisis is impacting your business specifically and maybe some of the things that you're doing differently in light of that to make sure that Schlumberger doesn't end up with any liquidity pinch.

Simon Ayat

Michael, as I mentioned in my comment earlier on, we have $4 billion of cash. We have established credit lines committed from the banks, although unused, about $2 billion. Our cash flow this last quarter, if you noticed, we made almost $1 billion after spending $1 billion on Capex. We never rely too much on the credit market. We did - so opportunistic when we felt that it is more cost-effective to borrow than using our cash. So we're going to live off our cash flow like we did before, and we don't see this credit market to be very severe as far as our needs for cash because we have a good balance sheet and we also work very conservatively.

Now as far as the receivables are concerned, we haven't experienced any delay in collections. Now this might start to affect us if there are delays for payments by our clients, but we know how to handle this and we mobilized our entire organization to make sure that the cash flow continued to come through.

So we don't have any immediate concern over the credit market.

Michael LaMotte - J.P. Morgan

And even specific, you mentioned receivables, any counterparty risk in terms of customers, issues related to their letters of credit, anything coming back your way?

Simon Ayat

We do reestablish the credit limits on some of the smaller clients, and the relationships with the normal, usual clients are contractual. And we have no issue with it for the time being.

Michael LaMotte - J.P. Morgan

Second question, Andrew, if I can put it to you, pricing in the business I think is in general predicated upon maintaining a perception of scarcity. As we start to talk about lower utilization rates for everything from rigs to tools, etc., we lose some of that scarcity premium. Can you maybe talk about the mix shift in terms of revenue growth over the last few years, price versus technology? You've used in the past an [IEA] chart showing 70% of the [MP] Capex as being inflationary.

I would assume that Schlumberger doesn't have that kind of price inflation embedded into its revenue growth over that time frame, but I'd like to get a sense from you in terms of where you feel vulnerable in terms of pricing.

Andrew F. Gould

Right. If you go back, I don't have to explain the dynamics of supply and demand on North American pressure pumping, I hope, but if you look more broadly across the segments in which we participate, they are not generally wholly driven by pure supply and demand. Obviously they are to an extent, right? So if you look across well services in North America, we know the answer.

Overseas, we've had similar dynamics in the pricing market in Russia for the last two years, supply/demand. If you look at wireline, drilling and measurements, I think that yes, there is, particularly in drilling and measurements, an element of pricing, particularly in 2006 which was purely supply/demand driven and it was also true to a certain extent for wireline, though to a lesser extent. But in the last two years I would say that in those services it is technology that has driven pricing more than pure supply/demand.

Now I have to say as a word of caution that in tight markets when money is short, our customers tend to use a little bit less technology and it's up to us to prove that using technology is cost-effective for them. But I think that the answer to your question is that the big price sensitivity to inflation in the services where we participate, apart from pressure pumping, was really in 2005 and particularly 2006.

Operator

Your next question comes from Ole Slorer - Morgan Stanley

Ole Slorer - Morgan Stanley

Andrew, you highlight the credit environment and how certain of your customers are - they're not able to spend the same amount of capital as they otherwise would, but how about some of your competitors and particularly North America stacked up competitors in pressure pumping in wireline and workover. I mean, we've seen an army of these little companies enter the market over the past couple of years with huge ambitions and borrowed money. Are you seeing any signs that this is getting shut down now?

Andrew F. Gould

To be perfectly honest, no, not yet. I haven't seen any distress signals, Ole. You mean real distress selling type signals, right?

I think we are getting more phone calls than we got three months ago. I think we can see some deals that were made that are probably in negative equity territory and how those will unwind I think is still completely unknown. But there's not an avalanche yet of distressed people calling or sending people around to sell us stuff.

Ole Slorer - Morgan Stanley

Well, they've [inaudible] the offshore market? I mean, you highlighted quite a few offshore rigs that were coming into the market. It appears that a lot of these rig projects are relying on a lot of debt and very little equity and very few of them have gotten funded. Have you had any thoughts about how that could develop?

Andrew F. Gould

Well, I think it's going to - I think that both for seismic boats, by the way, and drilling rigs that the people who were financing these at the margin, they're not going to build them. They won't get built until their shipyard slot gets bought by a serious player.

Ole Slorer - Morgan Stanley

So on the seismic side, again, I certainly see your point there, but in terms of your own revenues, exploration Capex was meant to be the driver of much of the growth over the next couple of years. Historically, '98 for example, exploration Capex was one of the first things to get shut down. Could you discuss a little bit your [expulsion], how you see the seismic business or the wireline business evolve over the next 12 to 18 months?

Andrew F. Gould

So I think that the seismic business will undoubtedly be affected, but there are two ways that it can be affected. The first way is that, if operators decide to slow programs, in which case it will be moderately affected, not catastrophically. The catastrophic scenario is they start going into M&A activity. So if my customers start buying each other, then they shut exploration down altogether for a year or so while they evaluate the portfolios and the re-decide what they're going to exploit and all the rest of it. So yes, there is a risk that exploration revenue in the next year goes much lower.

But I am now going to restate the caveat, and that is that the supply balance is extremely fragile. Nobody knows how deep the drop in demand is going to be, but there is a limit to the drop in demand unless we have a sort of worldwide depression that's going to last 10 years.

And to the extent that - Dave Anderson's first question - if they shut down worker activity, non-OPEC production is going to start sliding even faster than it is at the moment. And to the extent that they shut down exploration now, they are going to increase the reserve replacement problem that the customers already have, and I'm not just talking about IOCs, I'm talking about everybody.

So the extent that they actually shut everything down, which they may well do, the recovery is going to be all the stronger at the first sign that demand is picking up again.

Ole Slorer - Morgan Stanley

But if oil demand is flat for the next several years, how long a time do you think it will take until we're back in balance?

Andrew F. Gould

If oil demand is flat, not very long, 18 months, I would say.

Operator

Your next question comes from Bill Herbert - Simmons & Company International.

Bill Herbert - Simmons & Company International

I was wondering if you could actually specify a little bit more, I mean, you talked about workover being the first sort of threshold of activity adjustment. Regionally speaking, what areas should we expect to see the first rates of adjustment in terms of spending growth to take place internationally?

Andrew F. Gould

Well, Bill, I hate to do this to you, but I'm not going to answer your question directly because I consider that as almost proprietary information. But it's not regionally, it's the type of customer you need to look at. So that's why North America is such a pure market, is because the customers rely on capital mechanisms to fund activity.

So, you know, then if you look across to the North Sea, there is a whole group of customers in the North Sea now who rely on capital markets to fund activity, and, as you know, there were a lot of small companies on the A market in London that grew up on the basis of funding from capital markets. It's a little bit true in some parts of the Far East, and it's certainly true on the West Coast of Africa today.

But, you know, beyond that I really don't want to go into how I think the various NOCs or big guys are going to react.

Bill Herbert - Simmons & Company International

Well, let me get this reaction from you. In the current environment, where we've had a retrenchment in oil prices and it's a much less certain macroeconomic environment, isn't it reasonable to expect really almost across the board, even from an NOC standpoint, that the sense of urgency just abates a bit at least?

Andrew F. Gould

I totally agree with you, but the reading of a sense of urgency will be different in function to the type of customer.

Bill Herbert - Simmons & Company International

Next line of inquiry, North America. I mean, you know, I think you've been sort of consistently candid about the fact that we're in the Plan A and Plan B world here for a period of years.

And in the current environment, given the fact that we've already had such a significant collapse in, for example, pressure pumping pricing, and we've had an adjustment in general, lower with respect to pricing paradigm for North America oil services, in the event that we get, call it, I don't know, a 200 to 400 rig adjustment in the U.S., what should we expect with regard to your North America margins? I mean, they've already adjusted lower significantly. How much lower can they go from here?

Andrew F. Gould

I don't, you know, it's a very difficult question to answer like that, Bill, but there's obviously, you know, in 500 - you said 500 rig drop?

Bill Herbert - Simmons & Company International

No, I mean, pick a number; 500 is fine, but [inaudible] anywhere from 200 to 400 rigs relative to the recent peak.

Andrew F. Gould

Well, you know, initially they're going to drop quite a lot because - I don't know exactly how much because, you know, then you get all the people that Ole was just talking about going to work for the bank. You know?

So, I mean, I don't want to give you a number because I don't know but you probably have to look back at our results. Do you remember what they went to '99, 2000, Simon?

Simon Ayat

No, I don't recall exactly.

Andrew F. Gould

The question though is -

Bill Herbert - Simmons & Company International

Well, but -

Simon Ayat

The cost of operation is going to go down as well.

Bill Herbert - Simmons & Company International

Yes, but I mean, I guess the difference is so - here's what I mean: We already had an adjustment here from your North American margins compressing from, call it, north of 30%, to in the low 20s. A lot of that came from pricing, and I'm just - you know, clearly absorption is going to get hurt with regard to an activity adjustment; some pricing as well. But I guess, you know, how severe will the rate of margin compression be in the event of a fairly meaningful pullback from this point forward?

Andrew F. Gould

Look, I can't say more, Bill. It will still be severe and I don't know how much.

Operator

Your next question comes from Alan Laws - Merrill Lynch.

Alan Laws - Merrill Lynch

My question has to do with the Latin America region. Lat Am's sort of been an area of strength for many in the sector. It's a big IPM area, you noted in your release, and talked about the rising costs in the area. And you insinuated in your recent comments that peers have been bidding aggressively in these areas under IPM.

First could you talk about the sources of the inflation and then comment on the rising price competitiveness for IPM work relative to the cost issues? Actually, maybe throw into that also  sorry to layer it on - you know, the financial needs or the ability to finance of the companies in that area, so what the step down in grown expectations from Lat Am region overall might be.

Andrew F. Gould

Well, I think the step down due to lack of funding is going to be balanced against the production performance of many customers in that area, which means that they really can't afford to step down a great deal.

I think that the inflation in the area is everything. It's materials as well as - particularly - as well as wages. And that will abate. I mean, it's quite obvious it's going to abate in some of the larger items right now, particularly in materials. Wages, I'm not so sure.

And I don't really want to comment any further than I've done in the past on the entry of other competitors into the IPM business in Latin America. Their pricing is one thing. Whether or not that affects the pricing of the overall IPM market depends how they perform.

Alan Laws - Merrill Lynch

Are margins headed back towards the teens, though, in that region given all this mix of factors?

Andrew F. Gould

No, no, no. You must separate Mexico from everything else. If you're trying to use - read across from the IPM [inaudible] editors to overall margins in the region, no. And also, the other thing that is very necessary if you want to expand in IPM is a very strong balance sheet because there's a lot of upfront investment.

Alan Laws - Merrill Lynch

Sure. An unrelated follow up and I won't layer on a bunch of details to this one, just in the Middle East you notice a change in mix and I just wondered if going forward are we seeing a change in activity overall in the Middle East that it's going to move toward this?

Andrew F. Gould

No. Listen, don't read across from this quarter's decline of 85 basis points or whatever it was. We have this every other quarter. I mean, it's just a shift in mix and, you know, we have no signs today - I'm not ruling out that we may have them in the next six months - but we have no signs today of a major shift in mix.

Operator

Your next question comes from Jim Crandell - Barclays Capital.

Jim Crandell - Barclays Capital

Could you talk about, Andrew, opportunities for Schlumberger in the current credit crisis? And under your possible scenario of exploration revenue going much lower if we see widespread mergers in the oil industry, do you think this would lead to material consolidation in the Oil Service sector?

Andrew F. Gould

I don't think that an M&A amongst our customers would necessarily lead to a consolidation in the Oilfield Services sector. It is correct, I think, to assume that some of the startup or recently formed Marine seismic companies will get merged into other Marine seismic companies because they won't be able to survive at the size they are in a down market. But I don't think that necessarily reads a consolidation amongst our large customers and a drop in exploration spend means that the rest of the industry will feel the need to consolidate.

In terms of us, as I said in the analysts meeting in Houston in the Q&A, in this market in terms of what we might do and not do, we will be more opportunistic than we've been perhaps in the last two or three years.

Jim Crandell - Barclays Capital

And my one follow up is if activity in North America holds in relatively well here in the fourth quarter, do the discussions with your U.S. customers on one-year contract renewals, are they materially changed by the drop in natural gas prices and the credit crisis?

Andrew F. Gould

Well, you know, our customers are probably smart enough to know that if activity's going to go down they should delay the re-tendering until they think that they can see what activity's going to be. But I actually - I haven't any signs of that yet, Jim. I'm just saying what I think they would probably do.

Jim Crandell - Barclays Capital

And one last question. Can you give us your thoughts on the Russian market? And I noted one of the big customers announced half a billion to a billion dollar cut in their budget here for '09.

Andrew F. Gould

Which one was that, Jim?

Jim Crandell - Barclays Capital

BP TNK.

Andrew F. Gould

Yes, I - yes. I wouldn't make a read across to the whole industry from that. But, you know, in Russia we will have the same problem with small customers as we have in the United States, exactly the same, and the large ones, I don't know how all of them are going to react yet, but I very much doubt, given Russia's current production profile that they will go in for massive cuts straightaway.

Operator

Your next question comes from Robin Shoemaker - Citigroup.

Robin Shoemaker - Citigroup

Andrew, I know you don't want to talk about areas of the world where you expect to slow down. That's proprietary and so forth. But in the past two downturns that you've lived through, the North Sea has been one. That's a high cost area that usually lead the way. And I just wondered if you would comment on what you're seeing in that market.

Andrew F. Gould

The only thing we've seen in that market so far is some very small startup companies or small new players who needed to call their credit lines have been delayed. That's the only thing we've seen so far, Robin.

Robin Shoemaker - Citigroup

Let me just ask one other question, then, unrelated. Is there any inclination of the Board to reconsider the share buyback program in light of what's transpired with your stock price and where you've been buying stock? And also if you could comment on the outlook for capital spending in '09.

Andrew F. Gould

Well, so I think that on the buyback we will honor our commitment to not allow share creep. But until credit markets settle down and we have a clearer view of where we're going in '09, I don't think we will be doing much more than that.

And in terms of the Capex for 2009, it's too early to say for all the reasons I've outlined to other callers, but obviously we are looking at - we have a six to nine-month cycle; we're basically talking about the Capex in the second half of 2009. And we will be looking at that very closely over the next couple of months.

Operator

Your next question comes from Mike Urban - Deutsche Bank Securities.

Mike Urban - Deutsche Bank Securities

Andrew, I wanted to clarify some of your comments. On one hand you said that the credit crisis and the credit issues are primarily a North American issue so far, and then you did go on to say though that overall you're anticipating a slowing in the rate of [break in audio]. Is that a Q4 versus '09 comment or I was just wondering if you could clarify that.

Andrew F. Gould

No, let me be totally clear. It is clear that the North America credit situation will have an effect on Q4 - not a huge effect, but an effect nonetheless. But when I talked about the credit crisis worldwide in '09, all I was saying is that it is going to have an effect, but we don't know what it is yet. And in fact the credit crisis, I think, by the time we get to '09 is going to be far less of a factor than what actually has happened to world oil demand because of the general economy.

Mike Urban - Deutsche Bank Securities

And than an unrelated follow up. You addressed the cost inflation issues in Latin America, but more broadly, as things perhaps slow down a bit - and certainly we've seen commodity prices come in - would you expect your costs and the cost inflation to come in a little bit globally?

Andrew F. Gould

Yes, absolutely. I think that it's going to be true for our customers, it's going to be true for us that a lot of the sort of really excessive inflation that we had is going to abate.

Operator

Your next question comes from Doug Becker - Banc of America Securities.

Doug Becker - Banc of America Securities

Andrew, I don't want to get too focused on semantics but I know you treat your words very carefully. Does your comment regarding a slowing in the rate of increase of customer spending imply that you still expect spending to be higher in 2009 versus 2008 as we sit here today?

Andrew F. Gould

As we sit here today, though I could be proved completely wrong in a week's time, that's what I meant, yes. But it's so dynamic that, you know, in two weeks time it could be completely different.

Doug Becker - Banc of America Securities

And then Capex guidance was lowered ever so modestly for Oilfield as well as WesternGeco. I don't want to read too much into it but was that a function of the outlook that you see or just the timing of the projects that are in queue.

Andrew F. Gould

I would say it is our capacity to deliver coupled with a little bit of prudence, and actually - well, probably this year what we're doing is just slipping some of it into next year because, as we're on the six to nine-months cycle, we know what we're going to get. It's just a question of when you get it.

Operator

Your next question comes from Pierre Conner - Capital One Southcoast, Inc.

Pierre Conner - Capital One Southcoast, Inc.

Andrew, my question's on Marine seismic and you've mentioned that your customers could slowdown there if it were a significant prolonged decline in prices. So, amongst that backdrop, recap your vessel delivery schedule from here and what of that is currently contracted as it's delivered, maybe what is your variability on changing the delivery, for instance, of some of the Eastern Echo vessels?

Andrew F. Gould

Well, next year we get two vessels in Q1 and then a vessel a quarter for the rest of the year. We're not anticipating any issues getting - some of them have contracts already. We don't yet see that getting the others contracts is a problem. And I think it will be difficult to delay shipyard delivery, but it would be possible, if the market gets really bad towards the end of next year, to mothball them rather than market them. We will probably [inaudible] and mothball old vessels and put the new ones into service.

Pierre Conner - Capital One Southcoast, Inc.

On the multi client sales, nice increase there in this quarter but obviously most of us concerned about what the future holds. You mentioned a large North American sale. Is that the majority of the sequential increase?

Andrew F. Gould

No, it's not the majority but it's a very large chunk, so we quite deliberately mentioned that to put you on notice, Pierre, that there was one very large chunk in it. But it's not the majority.

Pierre Conner - Capital One Southcoast, Inc.

Is there a component of library sales that are somewhat on a continuous basis, somebody that has a contract for a certain amount of sales, regularly or is it really completely variable?

Andrew F. Gould

Yes, there is a number of customers who have continuing multi client sales across a period of time. But don't forget there's always this year end Christmas shopping spree that takes place in the last five or six days of the year every year. And, you know, it's almost impossible to guess or to know how much that's really going to be.

Pierre Conner - Capital One Southcoast, Inc.

And then kind of unrelated but if I could, on some of these issues of what's contracted for the future, you addressed right on the first question right up the bat for the International. What about on the pressure pumping horsepower that is currently contracted for what duration for next year?

Andrew F. Gould

In North America, specifically?

Pierre Conner - Capital One Southcoast, Inc.

Yes.

Andrew F. Gould

I don't know. I would probably imagine that about something like half is contracted now through the middle of next year. But, you know, in this market it's so dynamic that I could be completely wrong, Pierre.

Pierre Conner - Capital One Southcoast, Inc.

And I understand contracted at price, but obviously activity depends on the customer.

Andrew F. Gould

Yes.

Operator

Your next question comes from Charles Minervino - Goldman Sachs.

Charles Minervino - Goldman Sachs

Most of my questions were answered so I just wanted to touch on one topic. You highlighted the establishment of a seismic data bank in Saudi to explore for natural gas. I was just wondering if you can give us some color on that, maybe timetables on when you think there could be some drilling activity out there for natural gas or when's the project going to be planned. Is that something we can be looking forward to as a potential positive offset down the road?

Andrew F. Gould

Yes, I think that - we didn't discuss this in the context of - I have discussed this in the past, so I'm quite happy to discuss it now, but while I don't think you should relate it to the establishment of a national data bank in Saudi, it is true that the gas programs in the Middle East - Saudi Arabia, the UAE, Oman, Kuwait - are very likely not to be affected by this because they are for domestic usage and in many cases to be substituted in place of oil that is currently used domestically. So I think the gas programs will be much less affected.

Charles Minervino - Goldman Sachs

Can you just remind us on the timetables for those? Is that a '09 event or beyond?

Andrew F. Gould

Well, some are and some aren't. I mean, Oman is starting now a lot of the work. Saudi is probably '09. And the UAE, a lot of the UAE work is probably '09 as well.

Operator

Your next question comes from Geoff Kieburtz – Weeden & Co., LP.

Geoff Kieburtz – Weeden & Co., LP

Andrew, earlier in the call you said this is not 1998. Could you elaborate on what you meant by that?

Andrew F. Gould

Well, I meant by that that there's a really positive factor and there's quite a negative factor. So the quite negative factor is we don't know how far demand is going to drop. And obviously the economic crisis is much more widely spread than it was in 1998 where, you know, basically it came out of Thailand or the Far East or Asia. So that's the, you know - so we don't know how far demand is going to drop. That's the slightly negative unknown.

The positive is that the supply situation is much, much worse than it was in 1998. You know, I am very serious when I say that a decrease in exploration and production spending at this point is going to accelerate non-OPEC decline, which means that as soon as demand flattens or turns around, the price of oil is going to go right back up again.

Geoff Kieburtz - Weeden & Co., LP

And I guess you, I think with Ole you gave an answer in terms of 18 months we would be back in balance if - and that was - what conditions do you see oil -

Andrew F. Gould

I'm saying that demand would stabilize some time in the first half of next year.

Geoff Kieburtz - Weeden & Co., LP

Okay, if demand stabilizes in the first half of next year, 18 months you would expect to see a rebalancing and I guess you mean upward direction in -

Andrew F. Gould

You would see a tightening in supply/demand which would change the momentum of the price.

Geoff Kieburtz - Weeden & Co., LP

What if we had a scenario - if we had a scenario like the early 80s where actually we had three consecutive years of declining oil consumption, cumulatively something more than - well, roughly 10%. I mean, would that be, you know, I mean, do you see the supply situation being so fragile that we could get back into balance even in the context of that kind of demand decline?

Andrew F. Gould

No, I don't. But then I think you have - I must point out the differences between now and the early 80s. And the first is the level of interest rates. In other words, at the moment we don't have a desire to control inflation through interest rates in the world system and probably it's a good thing.

The second thing is that the capacity for oil substitution in the developed economies in the early 1980s was huge. So, you know, a lot of that drop in the use of oil in the early 1980s or the mid 1980s was the substitution of other sources of power generation for oil. And today that just doesn't exist or it exists only to a much lower extent.

Geoff Kieburtz - Weeden & Co., LP

And my last question - you may or may not be willing to answer it - but what would you put the probability that Schlumberger's earnings in '09 are lower than they are in '08?

Andrew F. Gould

Personally, I don't know how to answer it and I'm not going to, Geoff.

Operator

Your next question comes from Brad Handler - Credit Suisse.

Brad Handler - Credit Suisse

Just a couple of maybe sort of smaller picture follow ups, I guess. Can you comment on perhaps  I don't know how to ask it exactly, but comment on multi client interest versus contract interest within WesternGeco? Is that somehow affected by all of the events that we're sort of thinking about currently?

Andrew F. Gould

Well, I think one has to have a clear policy on multi client. Our library is actually very small and we have had a very strong discipline of not shooting multi client unless the cost of it is prefunded to a certain percentage. And the danger with a seismic company in a downturn is that people will shoot multi client just to keep the boats active, and I think that it's incumbent on us to be extremely disciplined and not do too much of that.

So, you know, it's not really a question of just expanding the library for the sake of expanding the library. It's only expanding the library where you're sure you have a definite customer interest in what you're doing.

Brad Handler - Credit Suisse

Is it relative to your efforts to shift your library, I guess, and your customers' interest in shifting the library to rich azimuth? Does that impact kind of how much you expect to be able to do in '09? Do you expect that trend will remain fairly stable or your comment about -

Andrew F. Gould

No, all indications at the moment are that - but it's early days - but all indications are that the '09 trend remains, for proprietary seismic, remains pretty positive at the moment. And a lot of that is to do with wide azimuth or rich azimuth, as you say.

Brad Handler - Credit Suisse

An unrelated follow up, please. You have helped us in the past by thinking about third-party content in IPM sort of on a quarterly basis.

Andrew F. Gould

Yes.

Brad Handler - Credit Suisse

Can you comment on what the fourth quarter outlook is?

Andrew F. Gould

Simon?

Simon Ayat

Well, this has remained the same. We are about the 40% to 50% azimuth frac this quarter because of what we mentioned of the startup of Burgos 7. It was a bit higher, meaning towards the 50%.

Brad Handler - Credit Suisse

So the outlook for the fourth quarter remains higher than - it remains in that 40% to 50% ban, which is higher than it has been in some quarters in '08, I think. Is that right?

Simon Ayat

Correct.

Operator

Your next question comes from Stephen Gengaro - Jefferies & Co.

Stephen Gengaro - Jefferies & Co.

Two seismic follow ups. The first: Is your sense that the more conservative accounting standards kind of across the board will help kind of overshooting a multi client in this cycle?

Andrew F. Gould

I don't know how to answer that, Stephen. I know that we, you know, at WesternGeco we have extremely strong guidelines in place not just on the accounting but on the approval of the prefunding in order to even start one. At other companies, I don't know whether there's been a big change in the way they account for multi client.

Stephen Gengaro - Jefferies & Co.

Okay, it seems like they have. But then as a follow up, can you give us a sense for your expectations, if you have any, for multi client investment in '09?

Andrew F. Gould

I don't think we have them. We haven't completed the planning cycle, so I would give you a wrong answer if I answered, Steve.

Operator

Your next question comes from Michael LaMotte - J.P. Morgan.

Michael LaMotte - J.P. Morgan

If I could ask a quick question on M&A opportunities outside of North America, if the change in operating environment increases the opportunities.

Andrew F. Gould

Yes, it does, Michael. But as you know, there are not nearly so many, particularly for Schlumberger, targets outside North America that are very attractive, yes - attractive from a company strategy standpoint, I'm saying, not from a price standpoint. But yes there are, but far less than in the U.S.

Michael LaMotte - J.P. Morgan

So if we look at distressed assets, probably the bigger market is still the U.S.

Andrew F. Gould

Yes.

Michael LaMotte - J.P. Morgan

If we look at maybe technology sort of niche opportunities that are in need of capital, would they be more outside?

Andrew F. Gould

I would say they could be either in or out.

Operator

Your last question comes from Ben Dell - Sanford Bernstein.

Ben Dell - Sanford Bernstein

Andrew, given the low level of visibility you seem to have on 2009 EPS and cash [inaudible] share and the fact that we obviously have down oil and gas prices and a weak credit market, do you not think it's prudent here to be cutting Capex more aggressively in the expectation that the environment could possibly worsen further?

Andrew F. Gould

Well, as I've said on several occasions this morning, we have a six to nine-month cycle, so basically that means out of the six to nine months, 80% of that has already been ordered and therefore - we're not in a phase yet where our needs are so low that we start to cancel that. But beyond that we have not finalized a plan. But yes, obviously we're taking into account what we think the activity scenario is likely to be.

Ben Dell - Sanford Bernstein

And just on a last macro question, you talked about the 1980s. In the 80s one of the things we'd seen was that the supply really turned out when the rigs and service capacity turned up. And we've seen in the gas market recently supply growth turn out when the [inaudible] of the service capacity's turned up. Do you think there's a genuine risk here that we get to 2009, 2010 and we have significantly more supply growth than most of us have estimated because that's when the capacity for services and rigs actually hits?

Andrew F. Gould

In oil?

Ben Dell - Sanford Bernstein

Yes.

Andrew F. Gould

You're assuming that people keep spending?

Ben Dell - Sanford Bernstein

Well, I'm assuming that margins drop and volume improves.

Andrew F. Gould

That's possible, but it's a long, long way from stabilizing. In other words, it's going to, you know, it's - the run up we've had in the last five years has been so inflationary that in fact if you relate the amount spent to the number of wells drilled, the activity increase has not been that huge.

Now to the extent that prices drop and that the customers spend more and activity increases, yes. But you're really talking about beyond 2010.

Malcolm Theobald

On behalf of the Schlumberger management team, I would like to thank you for participating in today's call.

Operator

That does conclude our conference for today.

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Source: Schlumberger Limited Q3 2008 Earnings Call Transcript
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