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Schlumberger Limited (NYSE:SLB)

Q1 2009 Earnings Call

April 24, 2009 9:00 am ET

Executives

Malcolm Theobald – Vice President of Investor Relations

Simon Ayat – Chief Financial Officer

Andrew Gould – Chairman and Chief Executive Officer

Analysts

Michael LaMotte - J.P. Morgan

Kurt Hallead - RBC Capital Markets

Ole Slorer - Morgan Stanley

Alan Laws - BAS-ML

Geoff Kieburtz - Weeden & Co.

James Crandell - Barclays Capital

Dan Pickering - Tudor, Pickering, Holt

William Herbert - Simmons & Company Intl.

Michael Urban - Deutsche Bank Securities

William Sanchez - Howard Weil Inc.

Brad Handler - Credit Suisse

Pierre Conner - Capital One Southcoast, Inc.

Robin Shoemaker - Citigroup

Daniel Boyd - Goldman Sachs

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Schlumberger’s 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, Chairman and CEO Mr. Andrew Gould; Chief Financial Officer, Mr. Simon Ayat; and Vice President of Investor Relations, Mr. Malcolm Theobald. Mr. Theobald, please go ahead.

Malcolm Theobald

Thank you Greg. Good morning and welcome to the Schlumberger Limited first quarter 2009 results conference call. Today’s call is being hosted from Dhahran, Saudi Arabia where the Schlumberger Limited board meeting took place yesterday.

Before we begin with the prepared remarks, I’d like to remind the participants that 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.

Joining me for today’s call from Saudi Arabia are Andrew Gould, Chairman and Chief Executive Officer and Simon Ayat, Chief Financial Officer. Prior to Andrew’s overview of the first quarter and his comments on the outlook, Simon will first review the quarter’s financial results. After the prepared statements we will welcome your statements.

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

Simon Ayat

Thank you Malcolm. Ladies and gentlemen thank you for participating in this conference call. First quarter income from continuing operations excluding charges and credits was $0.78 per share, down $0.25 sequentially and down $0.28 compared to the same quarter of last year. We are continuing to focus on managing our cost base. In this regard we have largely completed the headcount reduction we announced last quarter. In order to better match our costs to the lowered activity and pricing levels, we will likely have a further similar reduction over the coming months.

Turning to the business segments, Oilfield Services first quarter revenue fell by 13% sequentially while WesternGeco revenue dropped 8%. Oilfield Services generated $1.3 billion in pretax operating income, down $344 million sequentially with margins declining by 248 basis points to 23.1%.

By area, Oilfield Services sequential pretax operating margins highlights were as follows. North America declined by 858 basis points to 13.7%, primarily due to the impact of the rapid and deep reduction in U.S. land and U.S. Gulf of Mexico shelf activity coupled with heavy pricing pressure. Latin America improved by 168 basis points to 19.7% due to project efficiency gains on IPM projects in Mexico/Central America and a favorable mix of higher margin exploration activity offshore Brazil. These increases were partially offset by reduced gain share from an IPM project in Peru/ Colombia/Ecuador and the impact of reduced activity in Venezuela/Trinidad and Tobago.

Europe/CIS/Africa was essentially flat at 25.9%. Higher margin activity in the North Sea and in Nigeria and Gulf of Guinea largely offset the combined impact of lower activity in North Africa, the less favorable revenue mix in west and South Africa, and reduced sales at [from]. Finally, Middle East/Asia was also steady at 33.1% as the more favorable revenue mix in several geo-markets offset the impact of lower activity overall in the area.

At WesternGeco pretax income of $55 million reflected a decline in pretax margins of 483 basis points to 9.9%. This decrease was due to the sharp decline in market client revenue primarily in North America as customers continued to reduce their discretionary spending.

Now turning to Schlumberger as a whole, the effective tax rate of 21.1% was in line with last quarter after adjusting for the Q4 charges. The ETR for all of 2009 is still expected to be in the low 20s.

Net debt was $1.5 billion at the end of the quarter as compared to $1.1 billion at the end of Q4. This increase is largely seasonal as we typically experience stronger Q4 tax collections on our receivables and we pay profit sharing and other related benefits in Q1. We ended the quarter with approximately $4.4 billion of cash and investments on hand. In addition, $2.1 billion of committed debt facilities with commercial banks remained unused and were available at the end of March.

This compares to short term debt of only $1.6 billion, reflecting the continued strength of our balance sheet and leaving us with more than enough liquidity to meet all corporate and operational requirements. In addition, during the quarter we established $3 billion near to medium term [north] program which provide for the issuance of various types of debt instruments such as fixed or floating rate notes in euro or U.S. dollar or other foreign currencies.

In March we issued 1 billion euro of 4.5% notes due 2014 under this program. The issuance of these notes was extremely well received. The proceeds from these notes will be used to refinance existing debt obligations and for general corporate purposes and will even further increase Schlumberger’s financial flexibility.

Other significant liquidity events during the quarter included $273 million of pension funding and $748 million of CapEx. Given the current economic environment we have temporarily suspended our stock buyback activity. Oilfield Services CapEx is expected to approach $2 billion in 2009, while WesternGeco is expected to reach $600 million which includes $270 million relating to the construction of seismic vessels.

And now I turn the conference over to Andrew.

Andrew Gould

Thank you Simon and good morning or good afternoon everybody. Schlumberger first quarter revenue declined sequentially as activity continued to weaken around the globe in response to reduced customer spending as the global economic recession reduced demand for both oil and natural gas. The rate of decline in Oilfield Services accelerated considerably compared to the fourth quarter, largely due to the precipitous drop in North American natural gas recount.

Outside North America, low activity in Russia and the fall of many foreign currencies against the U.S. dollar remained the principal causes of weakness. Looking at the areas in more detail and starting with North America, the U.S. land geo-market recorded a significant decrease in sequential revenue as low natural gas prices and a lack of available credit for some customers resulted in a rapid and deep reduction in activity that was coupled with heavy pricing pressure.

Offshore, revenue in the U.S. Gulf of Mexico geo-market fell through weak shelf drilling activity and associated pricing erosion, although expected deepwater projects began operations much as expected. In Canada revenue fell as winter drilling activity was unusually low and the spring break-up came unusually early. These decreases however partially offset by high seasonal expiration related activity in Alaska.

In Latin America, the Venezuela/ Trinidad and Tobago geo-markets saw the sharpest sequential revenue decrease as a result of lower activity and related demand for drilling and measurements, well services and wireline technologies, coupled with reduced IPM activity. In Peru, Colombia, Ecuador revenue fell following the year-end sales in the prior quarter of SIS software and [offshore] lift products while the Argentina/Bolivia/Chile geo-market decreased on lower activity related demand for wireline drilling and measurements and well services.

Area revenue was also reduced by 2% due to the weakening of local currencies against the U.S. dollar. These decreases however were partially offset by increased revenue into the Mexico/Central America geo-market due to efficiency gains on IPM projects and in the Brazil geo-market as a result of robust demand for high technology, drilling and measurements and wireline services on offshore operations where IOC activity grew as originally scheduled.

Within Europe/Africa/CIS, the weakening of local currencies against the U.S. dollar, primarily in Russia and the North Sea, reduced area revenue by 5%. In addition, Russia experienced a sharp drop in revenue as a result of seasonal weather related slowdowns, further reductions in customer activity and heavy pricing pressure. Revenue for the North Africa geo-market was down due to lower demand for well services technologies and software products, while the Caspian geo-market experienced reduced demand for well services, drilling and measurements and wireline as customer activity slowed. Weaker formal revenue also contributed to the sequential decline in the area. These decreases were partially offset by improved activity in Nigeria and the Gulf of Guinea that resulted in increased demand for wireline services.

Lastly, in the Middle East and Asia area sequential revenue fell primarily due to reduced customer activity in the Arabian/Brunei/Malaysia/Philippines, Thailand/Vietnam and East Mediterranean geo-markets, in addition to seasonal weather related slowdowns in China/Japan/Korea geo-market. These declines in activity mainly affected demand for well testing, wireline and drilling and measurement services.

At WesternGeco the rate of sequential revenue decline slowed to 8% as continued weakness in North America multi-client revenue was partially offset by improved marine, with the start of several new proprietary contracts. Data processing also reported a sequential decrease across all areas except Latin America, while LAN was down due to completion of projects in the Middle East. Overall backlog decreased by $319 million to $1.5 billion, partly due to delayed contract awards pending the results of licensing runs in several countries.

Looking at Schlumberger as a whole we have already taken actions to right size our operations without diminishing our capacity to react to market changes. Our operating cost base has declined sequentially by more than $450 million due to prompt action over all variable cost categories until the effects of favorable exchange rate movements. Recent economic forecasts have yet to show any positive trends in GDP stabilization or growth, with the major forecasting agencies lowering their demand expectations accordingly.

Our visibility on 2009 has therefore not materially changed from the end of the fourth quarter. We do not see any significant recovery in North America gas drilling before 2010. Overseas, while activity declines will be limited, customers are actively seeking and are obtaining price relief to improve the economics of current projects. At the same time, exploration expenditures are being deferred in favor of projects that produce immediate cash flow. We are encouraged to see offshore deepwater activity resisting fairly well to the current budget cuts.

As we indicated on our fourth quarter comments longer term we remain convinced that any demand recovery for oil will need to be accompanied by increased investment to offset decline in the aging production base.

Malcolm Theobald

Okay Greg. Thank you Andrew. We will now turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael LaMotte - J.P. Morgan.

Michael LaMotte - J.P. Morgan

I guess maybe I’ll start with just the general commentary, deepwater as you said is sort of the one thing that still looks good. Do you see any green shoots anywhere other than deepwater? We’re definitely decelerating but any signs of growth anywhere?

Andrew Gould

Are you talking about the oil and gas business, Michael, or?

Michael LaMotte - J.P. Morgan

Yes. Well, I’m just talking about your business. I mean, Saudi Gas, you know there’ve been sort of pockets of growth. Algeria. Can you talk about? Because your overall tone just sort of seems to be that the market as a whole is decelerating still, you know, this is a market that’s contracting and I’m just trying to sort of see where the signs of recovery and life might be.

Andrew Gould

Well, there are always pockets that are different and you know, but if you ask for a global judgment yes, it’s still decelerating. And you know the – as we all know the overseas cycle takes 12 to 18 months to work itself out which is why I commented that I don’t have a great deal of clearer vision than I had at the beginning of the year.

Michael LaMotte - J.P. Morgan

Okay.

Andrew Gould

So you know yes, there are always pockets of resistance. There’s gas in the Middle East, there’s Brazil, there’s Australia, there are little pockets of resistance all around the globe. But I think the pockets of resistance today are more linked to the commitment to long term projects that customers have taken which is more expensive for them to stop or slow than to continue.

Michael LaMotte - J.P. Morgan

And are those pockets of resistance feeling pressure from the general slowdown in terms of pricing and competitiveness on those contracts, etc.?

Andrew Gould

Well I think that on large projects where not only the operator but also the service company has a considerable investment and in conducting smooth operations the tendency is for the operators want to re-negotiate price rather than re-tender and disturb the whole operation. So yes. Are all the majors and large independents and some of the NOCs aggressive on asking the service industry to reduce price? Absolutely. And as I said in my commentary it is better for all parties to negotiate rather than to run to re-tender.

Michael LaMotte - J.P. Morgan

And then lastly on the deepwater side if I guess there was some uncertainty in past calls about what the gross versus net rig additions would be. Do you have any thoughts there in terms of capital allocation, pulling equipment from idle rigs and putting them on the new rigs or I guess I’m generally referencing the CapEx down 10% in the company to deepwater.

Andrew Gould

Sure. There is a lot of CapEx associated with deepwater that you cannot pull from other rigs. So for example the cables, the [capstons] that are used in deepwater, they’re unique to deepwater and some of the units are unique to deepwater. But to the extent that we can pull tools from other theaters where activity is declining and put them on deepwater rigs absolutely we’re doing that.

As far as the CapEx, you know, I wouldn’t say the whole amount but some of the CapEx savings will be due to rationalization across different parts of the world.

Operator

Your next question comes from Kurt Hallead - RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

I was wondering if you might be able to give us some range of magnitude of the pricing relief that your customers are asking for in the international markets and just in context could you also give us some general sense on what product lines are most vulnerable and which may be least vulnerable?

Andrew Gould

Well I think the best way I can say this because I don’t want to give you a number is that it is much less than some of our dear customers are announcing. Some of the announcements they’ve made as objectives they are not achieving in terms of price reduction from the service industry. I would say that anything to do with deepwater probably has the most capacity to resist. Anything to do with bulk land markets has the least capacity to resist. And jack ups would be somewhere in between.

Kurt Hallead - RBC Capital Markets

And service lines related to working with jack ups, is that what you mean?

Andrew Gould

Well, I’m saying all service lines. I’m not going to distinguish between one service line or another because the pressure is fairly general. What I’m going to distinguish is type of activity. So I’m saying that in deepwater there is more capacity to resist. On land, you know, big bulk land operations, lots of land rigs, lots of competition, there’s much less capacity to resist. And jack ups and third generation semis would come somewhere in between.

Kurt Hallead - RBC Capital Markets

My follow up would be that you had a phenomenal performance in Europe, Russia and Africa in the quarter and I was curious as to how much of that was related to activity or business vis-a-vie how much of that can be contributed to the cost cutting efforts that you already referenced?

Andrew Gould

I think in activity I think that the serious decline was obviously Russia. The rest held up probably slightly better than even we expected, particularly the North Sea in West Africa. And the capacity to offset Russia largely came through pretty prompt action in last quarter of last year on cost reduction.

Kurt Hallead - RBC Capital Markets

So a mix of all?

Andrew Gould

Yes, mix was good and the cost reduction efforts took place early.

Kurt Hallead - RBC Capital Markets

And I just want to clarify one last thing, when the comments were made on cost cutting, the cost reductions that we saw $450 million in the quarter, did I hear you guys right in saying you expect to see a similar impact as we move into the second quarter?

Andrew Gould

I’m going to let Simon answer that Kurt.

Simon Ayat

So Kurt basically the $450 represent mostly valuable costs. There is a lot of cost associated with the revenue drop that you know naturally disappears, like cost of product. We had some favorable exchange gains but this has not much impact on the bottom line because a similar amount also was dropped in the revenue. So what we’ve got to see going forward is the impact on the reduction in headcount that as I mentioned, it’s almost completed, the first wave that we announced. So you will see a cost reduction although it will be from a different nature than the one that you have – we have already seen in the first quarter. This is mostly valuable element and the fixed costs will take a little bit longer to adjust to.

Operator

Your next question comes from Ole Slorer - Morgan Stanley.

Ole Slorer - Morgan Stanley

I wonder if you could elaborate a little bit more on your views with respect to a global oil supply response to this very steep slowdown that we have seen in global activity, something you talked about before? And I think if anything this slowdown seems to have been steeper than anybody could have imagined. Or maybe not. But give us some clarification on what you see there and how you see it relative to what you saw half a year ago?

Andrew Gould

Well actually I’m still very much in the mood I was at Howard Wheel, Ole. That is that we need to see a stabilization of demand before the supply decline is really going to bite. And it’s the timing of – to me it’s more the timing of the stabilization of demand and even if there’s a slight increase in demand that is going to tip the scales rather than the decline in supply. Now obviously if the decline in supply goes on long enough, beyond the rest of this year and all the rest of it, that’s going to start having a material impact. But we really, really need to see the stabilization of demand I think to get to the situation where it’s likely to tip.

Ole Slorer - Morgan Stanley

With the GDP remissions having sort of started to turn positively again, at least not the same freefall that they’ve been through over the past six months should be –

Andrew Gould

I think that the oil industry as a whole service providers and our customers will be making a judgment in the third quarter. And that judgment will be very material to what our activity is likely to be in 2010 and that judgment will be made on the basis of how they see GDP progression at that point in time and what the oil price is at that point in time.

Ole Slorer - Morgan Stanley

So with that Andrew, any positions in any major markets where you’re concerned about Schlumberger’s safe and also elaborate a little bit on a lot of technologies mentioned again in your press release, whether there are any new trends and what these things could mean relative to the volume you see in business, the mix and the world pricing trends? I mean, how is this all going to shape out?

Andrew Gould

You know, there are always out of the 30 odd geo-markets there are always one or two that we’re worrying about, but not – none of them are really something that we – you know, we worry but not in any way losing sleep over it. In terms of technologies I said before that we have divided our portfolio into three. There is first the technology to match competitive threat that we will introduce as and when it is ready. Secondly there is technology to reduce customer costs which we will introduce when it’s ready. And thirdly there is some technology that we consider this is not the right market to introduce it in, because you will be introducing it at a lower level of pricing and therefore we will take the time to perfect that and bring it back to the market when we see activity starting to increase again.

Operator

Your next question comes from Alan Laws - BAS-ML.

Alan Laws - BAS-ML

Your margins were better than your peers. You attribute a lot of the margin preservation to mix. I was wondering how much has to do with the established footprint in market share position? Essentially are you kind of the last to feel any pain in most of the markets other than maybe North America?

Andrew Gould

Actually given our size I think we’re the first to be attacked. So I don’t think you can attribute to that. It is true that our footprint helps in these circumstance, but I am afraid I have to compliment the management team. We made the decision that we’re going to have to cut costs in October last year and they have done an excellent job.

Alan Laws - BAS-ML

Do you still see this as a typical cycle and do you think that the pace of margin compression with your backdrop that you laid out there is going to be smooth? Or do you think it’s going to be choppy?

Andrew Gould

Actually I don’t have any reason today not to think that this is not like any other eastern hemisphere cycle. So let’s leave aside North America. Eastern hemisphere cycles typically take about 18 months to roll over, and if you consider that this cycle started in Q4 of last year, then if it follows the pattern of all the previous cycles it will rollover in Q2 of next year. Now there are always factors that can influence that one way or the other, positively or negatively. You know negatively would be that the recession deepens, positively would be what Ole just mentioned that supply starts to rollover sooner than you think. But I don’t have – we don’t have, in fact I was discussing this with Chakib just before we came on the call, we don’t have any reason to believe this is not going to be a normal cycle.

Alan Laws - BAS-ML

On the deepwater side a follow up because of the impact of the Brazilian expirations seem to have on your related mix and on your results. With the general shift away from exploration that you’ve mentioned in the last few releases, can you comment on the decline in your kind of revenue or your profitability expectations versus what you may have been anticipating last fall? I guess what I’m really trying to get at it here is what the incremental expiration means for Schlumberger in a normal market if –

Andrew Gould

That’s a good question, Alan, and I think that obviously I don’t have to describe the effect on seismic to you. It’s dramatic. And in terms of the other high end measurement services that we perform, principally well and testing, obviously any reduction in exploration is unfavorable to their revenue mix. But it’s not dramatic at the level of the company. It makes our margin performance more difficult and it’s generally unfavorable.

Operator

Your next question comes from Geoff Kieburtz - Weeden & Co.

Geoff Kieburtz - Weeden & Co.

Andrew, several people have commented margins in eastern hemisphere held up extraordinarily well, but your kind of outlook comment emphasized the degree to which customers are getting price relief. I’m just having a little difficulty reconciling the strength of the margins and this comment that customers are getting price relief. Is there something about the first quarter that held up margins better than you would expect to be sustained? Or is this just a timing issue?

Andrew Gould

I think timing issue is a good way to describe it, Geoff. We started cutting costs in Q4. The customers started negotiating with us in Q1 and therefore a lot of the price concessions that we have given will flow through in the subsequent quarters.

Geoff Kieburtz - Weeden & Co.

And given that you had a sounds like one quarter head start on the cost cutting side, how do you feel about your chances of being able to preserve these margins as the pricing rolls in but then the cost benefits also are being realized?

Andrew Gould

I think that to repeat Q1s performance will be extremely difficult.

Geoff Kieburtz - Weeden & Co.

And just on the cost cutting side, Simon made a comment about the second quarter and I wasn’t quite sure I got it correctly. Is there another round of headcount reductions planned for the –

Andrew Gould

Yes, I mentioned it at Howard Wheel but basically we said that we think over the coming months there will be an equivalent to the initial number which was 5,000 which will take place. But this will be much less noticeable because it will be spread all over the world.

In other words, the first one was very much North America and the second one will still be North America but a lot of it will be spread around the world, so it won’t be noticeable – quite so noticeable if you like.

Operator

Your next question comes from James Crandell - Barclays Capital.

James Crandell - Barclays Capital

What would be your best guess as to when you would see the bottom in eastern hemisphere revenues and margins by quarter?

Andrew Gould

Well I think that assuming the economy stages some form of recovery towards the end of this year, then this will be as I mentioned earlier a classic cycle that is likely to be in the first half of next year.

James Crandell - Barclays Capital

From both revenues and margins?

Andrew Gould

As soon as revenues pick up if our cost base has been cut the way we think it’s been cut, then the first few quarters it will flow through nicely.

James Crandell - Barclays Capital

Can you talk to the overall profit outlook for WesternGeco from here?

Andrew Gould

Well I said in Q1 that they would be profitable and they will have positive cash flow. I don’t think I can change my outlook, Jim. The huge uncertainty as always is going to be multi-client in the second half of the year and we really – we have quite a good feel for overseas multi-client but North America multi-client is going to be an unknown until the last minute.

James Crandell - Barclays Capital

Do you think that the world is moving increasingly on land toward an IPM model and do you think having a fleet of land rigs is going to be essential toward being the leading participant in that market?

Andrew Gould

Well you know I think over time that package drilling is going to become far more common all around the world. And I’m deliberately saying package drilling and not IPM. And the issue with land rigs is they’re very nice when the market is strong and they’re awful when the market is weak. So I don’t – we still don’t think that it is in all cases essential to own land rigs to participate in package drilling projects.

James Crandell - Barclays Capital

But you do expect the package drilling projects will continue to grow as a percentage of all the land business outside of North America?

Andrew Gould

Over time. If you look at the well density per square kilometer or square mile or whatever you want in North America and you compare it to overseas and you say that the U.S. industry is 40 years ahead of the rest, over time if you want to recover oil you have to drill. So you know there’s going to be more holes drilled and therefore yes I do.

Operator

Your next question comes from Dan Pickering - Tudor, Pickering, Holt.

Dan Pickering - Tudor, Pickering, Holt

I guess Simon could you talk a little bit about the working capital draw in the quarter? Pretty big number. Is that just Q4 good collections getting some of that in Q1 or is there something else going on there? And what should we expect for the rest of the year in working capital?

Simon Ayat

Well normally Q1 we do deteriorate in working capital as comparing to Q4. And in Q4 we have as we do every year good collections. There are certain customers that pay their cash allocations. And if you look back at Q4 we performed extremely well on receivables which reversed the situation in the Q1. The other item is the payment of the incentive bonuses and the profit sharing that takes place in Q1. So if you add these two it’s almost 70 to 80% of the deterioration in working capital. So we did expect it to be at this level as a matter of fact.

Dan Pickering - Tudor, Pickering, Holt

So it was in line with your expectations?

Simon Ayat

Yes.

Dan Pickering - Tudor, Pickering, Holt

Then I guess Andrew as we look at Schlumberger in its entirety as you look through the rest of the year, international margins outperformed our estimate this quarter, North America in line, you’ve got all sorts of mix and pricing issues going on. Kind of how do you think about the magnitude of margin compression for Schlumberger as a whole as we move through 2009? I mean, are we going to be able to hold margins steady?

Andrew Gould

I don’t think overseas we’re going to be. North America I just don’t know. And overseas I don’t – we had a timing where we cut costs before we renegotiated price so I don’t think we can hold Q1 margins through the rest of the year.

Dan Pickering - Tudor, Pickering, Holt

So the decrimentals that you’ve talked about generally in the international market, you haven’t really changed your expectation there it’s just the timing is a little different?

Andrew Gould

No. It’s just the timing, yes.

Dan Pickering - Tudor, Pickering, Holt

Last thing related to that I guess would simply be given what you’ve said it sounds like North America doesn’t get better until 2010, international is mid-2010. Can Schlumberger make more money in 2010 than 2009?

Andrew Gould

You know I haven’t even thought about that. It’s too early to tell, Dan. It’s too early to tell. It doesn’t seem logical, so it really depends on the strength of the economic recovery.

Operator

Your next question comes from William Herbert - Simmons & Company Intl.

William Herbert - Simmons & Company Intl.

Andrew, forging ahead here with regard to international margins again, recognizing again that you have prophecy to your that pricing concessions are going to roll through the income statement and margins are going to decline, assuming a relatively stagnant drilling environment in which international as a whole isn’t going down significantly and you do witness some kind of stabilization if you will by mid-point of next year, do we witness a similar margin path internationally that we witnessed in the late ‘90s? In terms of magnitude?

Andrew Gould

In terms of the magnitude of the decline? I really don’t know, Bill. I haven’t thought about that a lot. I’m trying to think –

William Herbert - Simmons & Company Intl.

For example, we went from 20% to 10% I think, assuming my model’s right.

Andrew Gould

I’m going to be uncharacteristically optimistic here and say that given the importance of offshore, given a broader, much broader presence than at that time particularly in Russia, and given the service mix we have today I would be amazed if it went that low.

William Herbert - Simmons & Company Intl.

How about degree in terms of rate of change?

Andrew Gould

Oh, I don’t think the rate of change will vastly vary from previous cycles. You guys are almost done, right? And they then we’re talking about national oil company tenders rolling over which takes 12 to 18 months.

William Herbert - Simmons & Company Intl.

We lost money in WesternGeco in 2003. Do you foresee being able to make money at WesternGeco through this adjustment period? And if you do envision making money during the entirety of this adjustment period, what adjustments are you making in order to do that?

Andrew Gould

So let me deal with the last part first, okay? So we are cutting costs in WesternGeco, particularly variable costs around the vessels and the land crews proactively and we actually will lay off some vessels. Not very many but we will lay some off. So what are the differences between now and 2003? The first is 2003 was still quite shortly after we had merged Western Geophysical with Geco Factor and at the height of that we had 28 boats and we gradually worked up those boats so we were much more exposed then than we are now in the marine market. The second thing is and this is going to be a question for the whole seismic industry, not just for WesternGeco.

In 2000 and that period, everybody went out and shopped multi-client or speculative seismic on the basis of being able to borrow from the banks. Now hopefully this time around the banks will have the good sense not to lend everybody the money to go and choose a lot of speculative seismic which will encourage a must faster reduction of the marine fleet than we had in that cycle, Bill. The other thing is we had inherited a huge combined library from Western Geophysical and Geco factor and today our library is tiny. The balance sheet value is $285 million whereas I think, Simon, it was well over $1 billion, no?

Simon Ayat

Close to $1 billion, yes.

Andrew Gould

Close to $1 billion last time around. But we are very hopeful that we will be able to make money through the cycle.

William Herbert - Simmons & Company Intl.

Given the strength of your balance sheet and given your past sort of proclamations that were prices to contract by a sufficient magnitude that you would be more opportunistic from an M&A standpoint, how savory is the environment now with regard to acquisitions? Are seller expectations reasonable or is the environment pretty sort of inflexible and you’re not optimistic about doing something?

Andrew Gould

There are certain markets where we have made acquisitions in the past. For example Russia, the state of credit markets is making aspirations much more reasonable than they were even a couple of months ago. I think it will take time to work through the system and other places. For example, North America I suspect it’s going to take another quarter or so before people really realize, feel a little choked. So I would say expectations are adapting themselves, they’re not all there yet.

Operator

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

Michael Urban - Deutsche Bank Securities

In the Russia specifically market that has hurt you of late, there’s some view that that market is at least bottoming out. One, would you agree with that? And two, if so is it going to stay at low levels for some period of time or is there any hope of a recovery there and relatively near term?

Andrew Gould

I would agree that the Russian oil companies because of the devaluation of the ruble against the dollar have made huge ruble profits and will over the next few months. I also think that the decline in Russian production is now becoming a recognized fact. And without being in any way certain because there are a lot of uncertainties still to be resolved, it is not impossible that towards the end of the year we see some mild recovery in western Siberian activity.

Even this year there is a lot of seasonal related effect in the first quarter Russia revenue.

Michael Urban - Deutsche Bank Securities

I’ve kind of been polling folks on this one, so sort of interested in your view. Does the level of the oil price matter so much as the stability? So at $50 oil in 2008 costs maybe not but with costs coming down the way they are and if you have even stability at these levels does that change the outlook of your customers just more from a confidence standpoint?

Andrew Gould

Well obviously yes it does change the confidence of the customers, but I still think that given the nature of many of the projects that our customers want to undertake, even with the cost reductions, $50 oil is going to be tough.

Operator

Your next question comes from William Sanchez - Howard Weil Inc.

William Sanchez - Howard Weil Inc.

Andrew, just a follow up question on the pricing concessions. This is strictly something that you’re only offering or giving up on the traditional delivery of your services or are you seeing your clients wanting price relief on the existing IPM contracts you signed even though those are turnkey in nature?

Andrew Gould

I don’t think we have seen any requests for price relief on an IPM project, Bill. My colleagues are confirming that to me. We have not.

William Sanchez - Howard Weil Intl.

Is there an expectation for that here as we move through the year or no?

Andrew Gould

No. I think that however the scope of the amount of IPM work that’s going to be available could well be affected by budget cuts in some of the customers who use IPM.

William Sanchez - Howard Weil Inc.

One follow up as relates to Latin America. I guess another quarter really no start up costs impacting margins. Just curious as we move through ’09 and the incremental Chicontepec award gets started, do we expect to see some margin pressures as a result of start ups or we pretty much are entrenched there and shouldn’t expect anything detrimental to margins?

Andrew Gould

I think our footprint in Chicontepec now is sufficiently mature that we can start the next APG without any significant start up costs. There may be some usual mobilization of rigs, that sort of thing, but apart from that no.

Operator

Your next question comes from Brad Handler - Credit Suisse.

Brad Handler - Credit Suisse

Can we come back to WesternGeco please and would you help us with I guess a little bit more some quarterly outlook. So for example first question, if there is typically some seasonal weakness in the second quarter as boats transit north is that something that we can expect to see again this year?

Andrew Gould

Yes. I think so. Yes. I’m not quite sure it will have such a dramatic effect as it did last year but we’ll certainly see it again.

Brad Handler - Credit Suisse

But there’s boats in transit for some summer work in the North Sea and that’s –

Andrew Gould

Yes and you know one of the things which I said before I’ll repeat it not because it’s useful for everyone to know is during the time that the fleet was flat out, we postponed dry docking boats which the classification societies will let you do for a certain period of time. But however now that we’re in a different market, we are going to do the dry docks that are required for the certification of the boats. So it is transit and dry docking.

Brad Handler - Credit Suisse

Last quarter you mentioned $1 billion in backlog in WesternGeco expected to work off in ’09.

Andrew Gould

$1.8 billion.

Brad Handler - Credit Suisse

I think that was total, and I was looking back and it was $1 billion that you thought would be worked off in ’09, right?

Andrew Gould

Probably yes. Sorry, total backlog was $1.8 billion.

Brad Handler - Credit Suisse

So is there any change to that $1 billion?

Andrew Gould

No. Not really. I mean there are parts of the part that were eaten up in Q1.

Brad Handler - Credit Suisse

Right. But there’s no delays of projects per se?

Andrew Gould

No. We haven’t seen – we have some pressure but we’ve not yet seen any radical cancellations or requests for major price relief. What we are seeing is our customers are pushing surveys out. In other words the backlog may last longer than we originally thought.

Brad Handler - Credit Suisse

So into – but the 2010, the remainder of that backlog might stretch out even longer?

Andrew Gould

It might stretch out a bit yes.

Brad Handler - Credit Suisse

You mentioned a commercial project for Coil shooting which sounds interesting and we’re aware of that technology a bit, I guess it’s interesting you mentioned three technology categories and this one might have been considered in that third one where pricing would not have – you might have waited to a different market? Just to take advantage of the tightness in boats because you’re actually loosening up supply effectively, right? So it’s an observation but if there’s any color you’d give us in coil shooting –

Andrew Gould

What I have to give you is that we had already performed extensive field tests with customers of Coil shooting. It would have been perhaps very difficult for us to take it off the market now.

Brad Handler - Credit Suisse

Is it an unfortunate truism that you do affectively add some capacity back into the market by –

Andrew Gould

No, because we reduced the number of boats that are required to do [y-asm] or [full-asm] of shooting yes, but we’re not giving away Coil shooting.

Operator

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

Michael LaMotte - J.P. Morgan

Andrew, care to weigh in on Iraq and possible opportunities that may emerge over the next 6 to 12 months?

Andrew Gould

Well I’ve been in the Middle East for the last eight days and everyone agrees that Iraq is going to happen, but nobody I’ve met can agree on the exact timing. So we will be in a state of preparedness on the basis that we think something will happen in 2010 but what’s going to happen and with whom we really don’t have a good view today Michael.

Operator

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

Pierre Conner - Capital One Southcoast, Inc.

If we could get back to Latin America, a lot of moving parts on the margin issues. You mentioned mix and offshore activity Brazil which should be a positive, efficiency gains I guess from rolling off the start ups on some of your IPM but then we have additional IPM start ups and so just good performance in the quarter in margins and I know that you’ve kind of addressed this a little bit but the additional IPM start ups will those tend to take margins down sequentially as you have more past due in there?

Andrew Gould

You know the – so let me hear where the margin question on IPM. When projects are stable, margin improvement comes through performance and in Mexico that means how many wells you deliver to Permanex and Permanex accept per month. It’s a cycle, right? So Q1 we did a lot better than Q4 probably because we were doing better in [bogas]. I suspect that – and in the south by the way. I don’t as I said before I don’t anticipate large start up costs in Chicontepec and the only question in Chicontepec is going to be how quickly we can get to the same levels of efficiency as we have in the current contract.

And then in the rest of Latin America you know we have lower activity in Peru/ Colombia/ Ecuador and Venezuela/ Trinidad and Tobago; higher in Brazil; lower in Argentina. It’s a complete mix. So the dominating factors upwards in Mexico and Brazil and the dominating factors downwards were Peru/ Colombia/Ecuador and Venezuela/Trinidad and Tobago.

Pierre Conner - Capital One Southcoast, Inc.

So the mix in Brazil, the improvement in that mix, should continue and there should be continued growth in – I’m talking about even –

Andrew Gould

Well certainly as long as IOC exploration continues the mix should continue to improve.

Pierre Conner - Capital One Southcoast, Inc.

Relative to consolidation opportunities in North America and it seems like in this up cycle we’re muted on margin expansion through competition, particularly in pressure pumping. But what is your appetite? You mentioned a couple of quarters for some people to see a choke point. So what is your appetite for consolidation for the sake of consolidation or versus for technology gains, North America specifically?

Andrew Gould

We’ve never been – we’ve not been and I don’t think we would be doing acquisitions purely to consolidate market share. There has to be something more to it. So but you know we will as I said before be opportunistic.

Pierre Conner - Capital One Southcoast, Inc.

So even with a different complexion of the growth this time from expansion of all the players it’s still your strategy?

Andrew Gould

Yes.

Operator

Your next question comes from Robin Shoemaker – Citigroup.

Robin Shoemaker – Citigroup

One of the comments you made at a recent conference, one of the areas that you cited as not economic at current oil prices is ultra deepwater and I wanted to ask you what specifically – where you make that cutoff in terms of deepwater and ultra deepwater? And what kind of oil price is required to make the ultra deepwater play more economic?

Andrew Gould

Actually I think that ultra deepwater is probably north of 8,000 foot of water or something like that, deep is 10,000. It’s really huge stuff where the rigs are very expensive. And actually I think that the oil price we need is obviously to make the project economic, but it’s also to de-risk the projects. Because obviously the risk is much higher when you’re doing that sort of work. So I think we’re going to have to get back to the $70 to see a big resurgence of things like ultra deepwater or very remote Arctic for example.

Robin Shoemaker – Citigroup

You mentioned heavy oil, enhanced oil recovery, ultra deepwater not profitable at current levels. And how critical – I mean in the overall sense how critical are all of those areas to Schlumberger’s ultimate rebound from –

Andrew Gould

I think ultra deepwater for us would be icing on the cake. I think enhanced oil recovery was a growth business and therefore at the moment doesn’t play a big part in what we do, but could play a big part in the future. So to the extent that it restarts it will provide a growth opportunity. And heavy oil depends. If it flows we have a role to play. If it doesn’t flow naturally, then our role is somewhat reduced. So heavy oil not being I think needing prices way north of $70, particularly in Canada, it’s likely to take quite some considerable time. But it does not have a huge effect on us.

Robin Shoemaker – Citigroup

And then in Russia is this another factor in this slow or recovery that you expect there is mostly that kind of activity? I’m talking about enhanced recovery, sorry.

Andrew Gould

When I see EOR I was thinking more in terms of CO2 floods. So just the production enhancement activity in Russia we think will come back quite fast eventually.

Operator

Your last question comes from Daniel Boyd - Goldman Sachs.

Daniel Boyd - Goldman Sachs

Andrew I’d like to just follow up really quickly on North America and with margins. I recognize there’s a lot of uncertainty out there. Could you just add some comments on the expectations for further margin declines and once the recount and activity flatten out, would you expect margins to flatten out and intentionally pick up as cost savings roll through? Or would you expect there to be a further decline at that point?

Andrew Gould

So firstly I think that everyone is going to have a really rough time in the second quarter with North America margins just on the basis of very low activity. And actually I think that cost reduction will allow the industry, will allow us to stabilize North America margins but it’s going to take either removal of capacity or a fairly substantial increase in the rig count to move pricing power back the other way.

Daniel Boyd - Goldman Sachs

But you would expect a bottoming of margins in Q2 or potentially 3Q and then they should be on the upward move in 4Q?

Andrew Gould

I don’t know what’s going to happen in North America this year and I will not know and I don’t think I’ll have any idea until we see some improvement in industrial demand for gas.

Malcolm Theobald

On behalf of the Schlumberger management team I would like to thank you for participating in today’s call. Greg will now provide the closing comments.

Operator

Ladies and gentlemen this conference will be available for replay after 10:30 Central Time today through May 24. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code 985751. For international participants dial 320-365-3844. Those numbers once again are 1-800-475-6701 or 320-365-3844 with the access code 985751. That does conclude your conference for today. Thank you for your participation and thank you for using AT&T Executive Teleconference. You may now disconnect.

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Source: Schlumberger Limited Q1 2009 Earnings Call Transcript
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