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Executives

Malcolm Theobald - Vice President, Investor Relations

Simon Ayat - Chief Financial Officer, Executive Vice President

Andrew F. Gould - Chairman of the Board, Chief Executive Officer

Analysts

Bill Herbert - Simmons & Company International

Daniel Boyd - Goldman Sachs

Alan Laws - BMO Capital Markets

Dan Pickering - Tudor, Pickering, Holt & Co.

Kurt Hallead - RBC Capital Markets

Geoff B. Kieburtz - Weeden & Co.

Jim Crandell - Barclays Capital

Ole Slorer - Morgan Stanley

Mike Urban - Deutsche Bank Securities

Mark Brown - Pritchard Capital Partners, LLC

Robin Shoemaker - Citigroup

Pierre Conner - Capital One Southcoast, Inc.

Brad Handler - Credit Suisse

James Carroll - Loomis, Sayles

Schlumberger Limited (SLB) Q3 2009 Earnings Call October 23, 2009 9:00 AM ET

Operator

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

At this time I'd like to turn the conference over to the Vice President of Investor Relations, Malcolm Theobald. Please go ahead, sir.

Malcolm Theobald

Thank you, Kent. Good morning and welcome to the Schlumberger Limited third quarter 2009 results conference call.

Joining me for today's call are Andrew Gould, Chairman and Chief Executive Officer, and Simon Ayat, 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. After the prepared statements we will welcome your questions.

However, before we begin with the opening 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.

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.

Third quarter income was $0.65 per share, excluding the $0.17 of charges we recorded last quarter. This is down $0.03 sequentially and down $0.60 compared to the same quarter of last year.

We continued to place a heavy focus on managing our cost base and have largely completed the headcount reductions that we announced last quarter.

Turning to the business segments, Oilfield Services third quarter revenue was flat sequentially while WesternGeco revenue decreased 17%. Oilfield Services pre-tax operating income of $1 billion was the same as the prior quarter. Oilfield Services margins improved slightly by 41 basis points sequentially to 21%, as improvements in North America and Latin America were partially offset by slight declines in Europe/CIS/Africa and Middle East/Asia. Overall, international margins in OFS were 24.7%.

By area, Oilfield Services sequential pre-tax operating margin highlights were as follows:

North America improved by 240 basis points to 3.4% on the increased activity in Canada following the seasonal spring breakup. This was partially offset by the impact of the decline in activity in the U.S. Gulf of Mexico due to operator caution during the hurricane season.

Latin America increased by 70 basis points to 18.3%, primarily as a result of efforts to restructure the cost base in the Venezuela, Trinidad and Tobago geo market and increased IPM activity in Mexico/Central America. These improvements were slightly offset by a decrease in Brazil due to start up costs for new contracts.

Europe/CIS/Africa margin was 23.7%, 53 basis points lower than last quarter primarily due to lower activity levels and a less favorable revenue mix in the North Sea and West and South Africa geo markets. These decreases were partially offset by the impact of higher revenues in the North Africa geo market and the more favorable revenue mix in Russia.

Finally, Middle East/Asia fell by just 32 basis points to 31.7% as the impact of stronger activity in the Arabian geo market and the favorable revenue mix in Indonesia were offset by effects of lower revenue in the East Asia, Qatar, and Gulf geo markets. In addition, we have begun to see the effect of price concessions across the area.

At WesternGeco, pre-tax income of $61 million reflected a decrease in pre-tax margins of 421 basis points to 13.1%. This decrease was primarily due to lower multi-client client sales.

Now turning to Schlumberger as a whole, the effective tax rate was 19.5%. This was higher than last quarter excluding charges due to less favorable geographic mix of earnings. As a reminder, the ETR is very sensitive to the geographic of earnings, and as such we may experience volatility on a quarterly basis.

Net debt was $660 million at the end of the quarter as compared to $990 million at the end of Q2. This improvement was driven by strong cash flow from operations. We ended the quarter with $4.9 billion of cash and investments on hand. In addition, $2.8 billion of committed debt facilities and commercial banks remained unused and were available at the end of September. This compares to short-term debt of only $1.2 billion, which, as a remainder, includes $320 million of our convertible debentures which will likely be converted to equity by the end of the second quarter next year.

Significant liquidity events during the quarter included $467 million of CapEx, $363 million of pension funding, and $276 million for acquisitions and minority interest investments. Additionally, during the quarter we were able to issue $450 million of notes due in 2013 at an interest rate of 3%. The proceeds from this issuance will be used to refinance existing debt obligations.

Oilfield Services CapEx is still expected to approach $1.9 billion in 2009, while WesternGeco is now expected to reach $490 million.

Our balance sheet remains very strong and continues to provide us with a tremendous amount of financial flexibility.

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

Andrew F. Gould

Good morning, everybody.

Oilfield Services revenue was flat with the second quarter as increases in both North and South America offset a further decline in the Middle East and Asia. As a result of this, coupled with the implementation of cost-cutting programs early in the year, overall margins increased slightly.

In terms of technologies, revenue increases in IPM, testing services and well services were primarily offset by revenue declines and completions, drilling and measurements and wireline.

Looking at the areas in detail, activity in North America was unchanged sequentially as increased revenue in Canada from the muted post-spring breakup recovery was offset by decreased revenue in the United States. In the U.S. Gulf of Mexico revenue was impacted by a slowdown in activity due to operator caution during the hurricane season and by a further decrease in shelf drilling activity as a result of the continued uneconomic natural gas equation.

On land, revenue decreased as an improvement in oil-related activity was more than offset by pricing erosion in gas-related activity in the early part of the quarter. Alaska also recorded lower revenue due to a slowdown in activity for seasonal rig maintenance and operator budget constraints.

Sequential growth in Latin America came from the finalization of certain contracts in the Venezuela, Trinidad and Tobago geo market that led to recognition of deferred revenue in addition to revenue from current quarter activities related to those contracts. Revenue also grew in the Mexico/Central America geo market from the start up of the AGG3 contract and from increased activity on other IPM projects.

Europe/CIS/Africa was flat with the second quarter, where a combination of positive currency movements across the area, higher testing services product sales in North Africa, and stronger IPM activity in Nigeria and the Gulf of Guinea was offset by a number of factors. These included lower revenue in West and Southern Africa from reduced activity that primarily affected well services, a decrease in the North Sea from lower rig count and pricing that mostly impacted drilling and measurement services, and a fall in revenue in Libya on a reduced amount for testing services and well services technology as well as for completion products.

The North Sea revenue also decreased as a result of an incident in the Norwegian sector that resulted in a stimulation vessel being out of action for most of the quarter. The vessel re-started operations in mid-September.

As I mentioned earlier, revenue fell sequentially in the Middle East/Asia. In East Asia, completion of several exploration-related campaigns led to lower demand for wireline testing services and well services. In Qatar, revenue decreased primarily due to the completion of several large offshore development projects that resulted in reduced demand for all technologies. In the Gulf geo market revenue fell on lower income that led to a decrease in drilling and measurements and wireline services.

East Mediterranean revenue dropped as a result of lower land activity that reduced demand for well services technology; however, these decreases were partially offset by an increase in the Arabian geo market revenue on strong gas-related activity that resulted in higher demand for well services and testing services. Weaker pricing also contributed to lower revenue.

At WesternGeco, sequential revenue declines were due to lower multi-client revenues in the quarter and the rollover of marine contracts from high-priced legacy backlog into newer lower- priced activity. The combination resulted in lower revenue and margins.

Recent contract awards demonstrate the value of Schlumberger's technology leadership and operational differentiation. These included an award in Denmark from Maersk Oil and Gas for open hole wireline under high pressure/high temperature conditions, in Russia for Artic Gas for a series of services north of the Artic Circle, in West Africa for subsea completion installations, particularly in Equatorial Guinea, and in the North Sea for Apache for electrical submersible pump systems based on previous excellent service delivery.

Two events during the quarter also demonstrated our continuing investment to support operations in growing regions.

First, in Saudi Arabia we announced the opening of a new reservoir completions manufacturing center in the Dammam Industrial City. Representing an investment of $25 million, the center houses a team of design and manufacturing engineers specialized in the production of down hole reservoir completions equipment. The center also provides a collaborative environment in which joint oil company and Schlumberger teams can develop and manufacture completion solutions for application across Saudi Arabia and the greater Middle East. The new center represents a further step in our infrastructure in the area, which includes the Dhahran Research Center opened in 2006 and the new Oilfield Services base in Dhahran commission in November, 2008.

Second, we also announced the signing of a joint cooperation agreement with Universidade Federal do Rio de Janeiro to build a key international research center on the university's campus. The center will focus on research and development activities in deepwater pre-salt environments, with emphasis on the development of geoscience software for the exploration of production center, new technologies to meet reservoir challenges in pre-salt environments, and the creation of a geophysical processing and interpretation center of excellence covering time lapse seismic and compliant electromagnetic and seismic measurements.

Our outlook for the reminder of 2009 assumes a continued modest recovery in North American gas drilling but no other significant improvement in service pricing. Overseas, while rig activity is stabilizing, seasonal factors, together with pricing concessions made in the first half of the year that are still being implemented, leave some risk of further small revenue declines. WesternGeco's improvement will depend on the level of fourth quarter multi-client sales.

Looking further, we said in our second quarter outlook the shape of the economic recovery beyond 2009 and the subsequent recovery in oil and gas demand remain the determining factors for future activity increases. Since then, indications of inventory rebuilding across many industries, together with help from government stimuli, have helped to strengthen demand for both oil and gas. While uncertainties remain, notably the transition from current stimuli to industrial and consumer demand and the extent to which the recovery will be limited by high unemployment, the demand for oil and gas will increase somewhat over the coming months.

As a result, we see continuing stabilization of activity around the world; however, this will not be uniform across either geographies or for services by commodity type. We consider that world gas markets are oversupplied and will remain so for some time absent a strong recovery in industrial demand. Both new LNG capacity coming onstream, as well as ample storage and pent-up supply in North America, will serve to keep prices and activity low. In North America we feel the current slight recovery in drilling to be fragile and not likely to significantly improve service activity and pricing until late 2010.

For oil, the current robust price will lead operators to maintain their spending levels and this, coupled with the lowering of their cost structures, may produce some modest increases in activity. We see continued strength in deepwater areas and some increases in selected land markets. We also feel that a more robust commodity price will lead to some increase in seismic activity, although new marine capacity will continue to depress pricing. The worst, provided the economy continues to show signs of recovery, is behind us.

And I'll now hand the call over to Malcolm.

Malcolm Theobald

Thank you, Andrew. We will now open the call for questions. Kent?

Question-and-Answer Session

Operator

Great. Thank you, sir. (Operator Instructions) Your first question comes from Bill Herbert - Simmons & Company International.

Bill Herbert - Simmons & Company International

Andrew, if you could provide us with some perspective, if you will, on two markets, one, Mexico. Clearly a lot being discussed in the press and [inaudible] in a period of, let's say, contemplation with regard to Chicontepec. What do you think the likely path Pemex takes with regard to Chicontepec and overall activity in 2010?

And then secondly with regard to Russia, what are your expectations there going forward?

Andrew F. Gould

Let me answer Russia first because that's easier. We think that there will be a fairly substantial increase in feet drilled, which is the measure we use to judge activity in Russia.

Bill Herbert - Simmons & Company International

And fairly substantial means what?

Andrew F. Gould

High double digit, from 10% onwards, but pricing will mean that the actual revenue transferization of that will probably be about half.

Now in terms of Mexico, everyone has read as much as I've read about the questions that have been asked by the new national hydrocarbons authority and by the congress, so I think there is absolutely no doubt that Pemex will come with a revised strategy for Chicontepec. I do not know what that strategy will be, and if I did I don't think I would be at liberty to say so on this call.

But I think that one should assume that when there's that amount of noise - and as you probably know, Bill, there are articles every day in the Mexican press about this - Pemex will have to look at their strategy.

Bill Herbert - Simmons & Company International

And then secondly with regard to seismic, you're waxing a bit more optimistic with regard to activity and sensibly so given what's happening with oil prices. Can you elaborate a little bit in terms of what you're hearing from your customers, tenders that you're seeing, and does your modestly improved outlook for seismic encompass both contract and multi-client?

Andrew F. Gould

The answer to the last part is yes, contract and multi-client.

What we're seeing in contract is the fact that, as you know, operators compiled large portfolios of new licenses during the last four or five years, and there are people who are wanting to do contract seismic because they have commitments and people who want to do contract seismic because they think they can take opportunity at much lower pricing to obtain seismic vessels or crews.

And in terms of multi-client, it's always a poker game until the end of the year, but I agree with you that higher prices should give a fairly satisfactory level of spend on multi-client.

Bill Herbert - Simmons & Company International

Equity income was up pretty sharply quarter-on-quarter. Do we know what drove that?

Simon Ayat

The equity income, we have two things on that line. We have the net interest expense and then equity from the minority shareholder, and this is just the usual thing.

No, I don't have the detail for the quarter-on-quarter. I'll look through it and probably by the end of the call we can give you color on it.

Operator

Your next question comes from Daniel Boyd - Goldman Sachs.

Daniel Boyd - Goldman Sachs

Andrew, can you talk about the mix this quarter, especially in the Middle East/Asia, where the mix seemed to have gone against you with less exploration as well as the completion of a few offshore contracts, yet margins actually held up pretty well. What does this say about margins going forward as the mix potentially improves?

Andrew F. Gould

Well, if I can deal with the mix question first, Dan, our position in Middle East/Asia in exploration and development means that when rigs go down we suffer disproportionately perhaps compared to a lot of our competitors because of our presence in exploration and offshore development.

And in terms of pricing, the Middle East has done a fantastic job of pulling in their costs. So despite the fairly substantial drop in offshore rig count, particularly for offshore development in Qatar, they've done a really good job of managing their cost base.

Daniel Boyd - Goldman Sachs

Okay, but I would assume that the outlook for margins here is more positive than it was last quarter?

Andrew F. Gould

It will depend to some extent on how the rig mix evolves, but generally it should going forward start to be a bit better, the rig mix.

Daniel Boyd - Goldman Sachs

On the last call you said $70 oil at the end of the year was the threshold that ENPs were looking for to take their budgets higher. We're now at $80, so could you give us some guess at what you would expect international spending to be up next year and what markets you might expect to be the strongest?

Andrew F. Gould

That's a long question, but let me deal with the first part.

The first part, don't forget it's not the spot price of oil that encourages my customers to change their spending; it's the notion that an increase in the price has reached some level of stability.

So last quarter I talked about $70 to $75, and I think today that most of my customers are still budgeting slightly below that. And I think that, if they gain confidence probably in the first half of next year that this price is sustainable, then they will increase spending. But today I think the increases we're seeing are inactivity based on their capacity to obtain more activity at lower prices within their existing budgets.

So, yes, obviously $80 oil would eventually, if it stays at $80, lead them to increase their budgets. I don't think they're ready to make that call yet.

And I'll leave the other one, if I may, Dan.

Operator

Your next question comes from Alan Laws - BMO Capital Markets.

Alan Laws - BMO Capital Markets

The very first question I have is sort of a follow up, I guess, to what you've already been asked, but I see that a number of projects were completed in your Middle East/Asia region. I also kind of wanted to get your thoughts on the recent reactivation of seven of the 35 halted OPEC projects and how this might impact the sector if suddenly all of them, plus the other NOC projects around the world, were greenlighted in 2010?

Andrew F. Gould

Sorry, seven of 35 what projects? I missed it. Sorry.

Alan Laws - BMO Capital Markets

Of the OPEC projects that were delayed at the beginning of this year have been greenlighted.

Andrew F. Gould

In oil or gas?

Alan Laws - BMO Capital Markets

I think they're across the board. They weren't specific in their release.

Andrew F. Gould

The sustained or, if you like, moving forward of projects in Middle East OPEC for gas we're seeing very clearly. And for oil, no, I haven't seen any reactivation of a major project so far.

But obviously if prices get sustained at these levels, some members of OPEC - and I think it's very important to say some - will increase their activity, but not the people who have large surface capacity.

Alan Laws - BMO Capital Markets

My follow up question to that would be how comfortable do you think the world should be with OPEC's 6 million barrels [inaudible] capacity?

Andrew F. Gould

Comfortable in what sense, Alan? Sorry.

Alan Laws - BMO Capital Markets

Being comfortable in it actually existing or it being under a level of decline while sitting there.

Andrew F. Gould

Oh, I think that the capacity in the countries where it exists is not going to be subject to an extremely fast decline, so the decline is more in other places than in the places where they have the surface capacity.

Alan Laws - BMO Capital Markets

That's kind of what I meant in the sense of it being the cushion.

Andrew F. Gould

Yes. No, I think the cushion is fairly intact. But that doesn't mean that reduced investment in other places will not eat into the overall production capacity of OPEC.

Alan Laws - BMO Capital Markets

And the other follow up I had was on the seismic side. Most people think of seismic as kind of rising in lead cycle and, given the state of oil and gas resources and demand - we ended sort of on a demand side, not on a supply side end of the cycle - I was wondering if you could provide some thoughts on the timing and magnitude of a seismic recovery if we kind of grind higher from here?

Andrew F. Gould

Well, I think that the seismic activity is even more sensitive to the absolute level of the oil price than the rest of oilfield services because seismic, particularly exploration seismic, is a cash expense; it doesn't bring any income.

So I would say that the strength of the recover in seismic is really going to depend very much on the absolute level of the oil price going forward. But, as I said earlier, the capacity of the seismic industry to capitalize on that is going to be somewhat limited for a period of time by the new marine capacity that's coming into the market.

Operator

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

Dan Pickering - Tudor, Pickering, Holt & Co.

Andrew, obviously a lot of moving pieces. If we just would assume that as we step forward into Q4 and Q1 and that revenues were flat, I'm trying to understand the cost-cutting impact. I know we're not doing more, but is there still some follow on impact to be felt from the cost cuts that you've done already and could you help us quantify that?

Andrew F. Gould

I actually think that the impact of cost cutting in the next six months could be outweighed by the concessions we've made in price. Actually, the balance is so fine, Dan, I don't know which way it's going to go.

Dan Pickering - Tudor, Pickering, Holt & Co.

So it sounds like basically from here margins would be pretty flatish if activity was flatish?

Andrew F. Gould

That's what we're hoping for. But, as I say, it's very difficult across the spread of Schlumberger, particularly in the Eastern Hemisphere, to judge whether or not the pricing concessions we've made are going to outweigh the cost cutting that we're doing, and today I would be a little bit pessimistic on that. Price will overrule cost to a certain extent.

Dan Pickering - Tudor, Pickering, Holt & Co.

That kind of plays into your discussion around potentially a little bit of further margin erosion?

Andrew F. Gould

Yes, yes.

Dan Pickering - Tudor, Pickering, Holt & Co.

You're cash flowing a significant amount down here kind of on the bottom, if you will. Help us understand next year maybe direction of your CapEx budget, and are there any other big requirements for cash next year? We've funded a bunch of pension this quarter. Are there any other big lumps of money we need to spend next year?

Andrew F. Gould

No, I think that you will see CapEx increase fairly substantially next year, if only because the number of deepwater rigs coming on is higher next year than it is this year. Actually, we have made pension contributions this year of around about $1 billion; I don't think we'll be doing that again next year.

Simon Ayat

No, it's [inaudible]. As we said earlier in the year, we dedicated a big part of our cash flow to refund our pensions, and we did so. We don’t have that kind of an expense next year.

Dan Pickering - Tudor, Pickering, Holt & Co.

For clarification, Andrew, you said that your CapEx will be up a bunch next year because of deepwater?

Andrew F. Gould

Schlumberger's CapEx will be up, yes.

Dan Pickering - Tudor, Pickering, Holt & Co.

Okay, so the $1.9 billion in Oilfield CapEx will go higher?

Andrew F. Gould

I think so, yes.

Operator

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

Kurt Hallead - RBC Capital Markets

Andrew, I'll give you kind of an open-ended question and let you kind of run with it. Over the past year I think a lot of us were trying to benchmark the downturn relative to prior cycle periods, and here we are in the early stages of stabilization. I wonder if you can give us your perspective on how you would benchmark recovery, maybe in the context of coming off the lows of '99 or 2001, and if you can kind of give us some breakdown between how you think it might play out internationally in that context as well as in North America?

Andrew F. Gould

So first I think that everyone needs to understand that the state of the general economy in this downturn is much worse even than it was in '86 and bears no comparison to '99 or 2001. And therefore there is this underlying question that everybody needs to ask themselves about demand. And if you remember, if you look back, the collapse in 1986 was due to a huge collapse in the demand for oil in the years before 1986.

So there is this underlying question which is still fundamental to the oil and gas business - what is happening to demand? And, you know, we have seen some encouraging signs, but we're not back into high demand growth and, in fact, if you looked at presentations I've made recently or people are making recently, the assumption on world GDP is absolutely fundamental to where demand is going to go. And if it's 3% or 4% or 5%, the amount of demand for oil, particularly, is going to be substantially different. So that's interesting.

The second thing is that, unlike 1986, for oil there is an overhang of 6 or 7 million barrels or whatever it is, but it is nothing like the overhang that existed in 1986 and, as you know, the ability of the industry to renew the production base is a lot less flexible than it was in 1986. So in terms of the need to sustain activity, any growth in demand coupled with a relative modest overhang of production will mean that demand will act as an accelerator on investment. So that's why I made all these remarks in my comments about the level of general investment.

So for oil, there's a fundamental difference in the economy and there's a fundamental difference in the supply situation.

Now for gas, I think we're in a new world. I do not know how this world is going to work out. Why are we in a new world? We're in a new world firstly because there's a huge amount of LNG that's coming onstream, and secondly because we have unlocked a new source of domestic gas production in the United States which means that we can turn the taps on gas very fast.

And I think that it is significant and it's really interesting to watch how this is going to play out, but the ratio of gas to oil prices has not been so wide for the last 10 years. And this can have all sorts of implications on demand, but it can also have all sorts of implications on investment because don't forget in Europe gas prices are indexed to oil.

Sorry, that's a very rambling answer, but you asked for it.

Kurt Hallead - RBC Capital Markets

So in the overall context of some of the things you put here, though, it seems like there's been - I don't want to put words in your mouth - but it seems like there's been a pretty significant shift in tone because, thinking of our call in the second quarter, there were some concerns about rig activity actually in the international market declining through parts of 2010. Now, if I understand or interpret your comments correctly, it looks like the international rig count is going to stabilize here some in the fourth quarter, with a potential improvement going out into next year.

Andrew F. Gould

Let me repeat what I said to the previous question.

I don't think our customers have seen this high an oil price stable for long enough for them to change their investment plans yet. But if it stays stable at these higher levels for the next six months, they will change their plans.

Kurt Hallead - RBC Capital Markets

And they'll change them quickly enough to effect 2010?

Andrew F. Gould

The back end of 2010, yes.

Operator

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

Geoff B. Kieburtz - Weeden & Co.

You described your thoughts about margins over the next six months; can you push it out to the next 15 months, what happens afterwards? Do you think cost measurement - I mean, I understand just from what you've said the activity levels are a little bit unclear, but are you still thinking international margins come down by some multiple 100 basis points?

Andrew F. Gould

We never said they would. The only thing I said was that we didn't see the same levels of decline as other companies have been putting out.

Geoff B. Kieburtz - Weeden & Co.

Okay. I perhaps misunderstood you.

Andrew F. Gould

And I repeat that, Geoff.

Geoff B. Kieburtz - Weeden & Co.

So generally speaking, margins look kind of teetering on the edge, maybe down a little bit, maybe up a little bit. You would apply that to throughout 2010?

Andrew F. Gould

At the moment, yes.

Geoff B. Kieburtz - Weeden & Co.

On the cycle question, again, maybe I misremember here, but I recall you some time ago speculating about the cycles in the industry maybe changing and becoming shorter and sharper. Did I misremember?

Andrew F. Gould

No, you're absolutely correct, and I think that's exactly what we may well experience provided demand holds up for oil.

I think the equation has changed for gas partly because of LNG and partly because of the capacity of the industry to unlock unconventional sources of gas.

Geoff B. Kieburtz - Weeden & Co.

On the cycle question, should we be prepared for this kind of violent cycles to repeat themselves in your mind?

Andrew F. Gould

Well, it's going to depend on the economy, Geoff.

I mean, really, really, the sensitivity of oil demand to 1% of world GDP is huge, so it really depends at what point economic growth accelerates and to what extent it accelerates.

And one of the factors that has changed in the last quarter which is, you know, giving us all a bit more confidence is that GDP revisions for 2010 and even 2009 have been consistently upwards since July.

Geoff B. Kieburtz - Weeden & Co.

And what is the significance to Schlumberger of your view that natural gas markets are structurally oversupplied?

Andrew F. Gould

I think North American gas activity will recover to a certain extent at some stage, but the sanctioning of large new LNG developments overseas is likely to go a bit slower than maybe we thought a year ago. A lot of them will get done anyway because we're talking 25-year projects, but there may be some hesitation to sanction some of them until there's a clearer view on gas.

Now if demand for gas evolves as all the forecasting agencies say it will, this surplus gets reabsorbed by about 2013 or 2014.

Geoff B. Kieburtz - Weeden & Co.

And this is good or bad for Schlumberger?

Andrew F. Gould

Anything that reduces activity is not good for Schlumberger, but I would say it's reasonably neutral.

Operator

Your next question comes from Jim Crandell - Barclays Capital.

Jim Crandell - Barclays Capital

Andrew, my questions are about Iraq in two parts. Number one, are you happy where you are today in terms of your on the ground presence and infrastructure given how you see the business unfolding? And secondly, about Iraq - and I know we may differ on this - but if there were to be several multi hundred million dollar orders in Iraq next year, would Schlumberger be equipped to service them?

Andrew F. Gould

Well, as I said before, we are currently putting an infrastructure in place. I am very happy with the progress of putting the infrastructure in place. And if several multi hundred million dollar bids emerge, we will be in a position to answer them, yes.

Jim Crandell - Barclays Capital

Secondly, Andrew, I think it was one of your competitors on their call talked about how competitive the Brazilian market had become. Compared with other international markets, how do you see the sort of erosion in pricing on tenders in Brazil and how do you see it going from here?

Andrew F. Gould

I don't think we've noticed any significant difference in the level of competition in Brazil compared to anywhere else. I think the Brazilians are extremely good at procurement, so I'm sure the pressure will continue. But I don't think it's any competitive than any other major offshore market, Jim.

Are you talking about something specific?

Jim Crandell - Barclays Capital

No, I was just talking in regards to a conference call by a company that earlier had been done. I think they were talking in general that they thought that tenders had become more competitive out there, and I was just wondering what you had observed relative to that.

Andrew F. Gould

No, I don't think we've seen any dramatic increase in the level of competitiveness. Brazil's always been extremely competitive and obviously, with the current interest there is in the country, it is. But I don't think it's something exceptional.

Jim Crandell - Barclays Capital

Okay. And, Andrew, now that the IntelliServ deal has been completed with National Oilwell, could you give your views on what you think the commercial potential is of that technology and how quickly it will unfold?

Andrew F. Gould

Well, I think the first commercial potential of it is for it to arrive at the same level of reliability as mud pulse telemetry, which it's almost there but not quite. And the second is going to be much longer term - it's the capacity to develop new measurements in string, particularly for drilling optimization. That will profit from the fact that you have not simply an uplink that's very fast but perhaps even more important a downlink that's very fast. Because when we transmit commands today by mud pulse telemetry it takes a long time for them to get to the tool because they have to go all the way down the mud column.

But I wouldn't look for a revenue effect, a substantial revenue effect in the first couple of years.

Jim Crandell - Barclays Capital

Tell me if you disagree, but this strikes me as, over an intermediate to longer term time horizon, something that could be hugely significant for Schlumberger.

Andrew F. Gould

Otherwise we would not have gone into the joint venture, but yes, the capacity to communicate at those speeds and the capacity to extend the range of what our sensors can do because you have this high bandwidth not only at the bottom of the hole but also all the way up the hole could be - could be - a very significant development.

Operator

Your next question comes from Ole Slorer - Morgan Stanley.

Ole Slorer - Morgan Stanley

Andrew, you mentioned pricing pressure in seismic. I presume you refer to contract seismic. Are you offering any kind of discounts at the moment on multi-client?

Andrew F. Gould

No, nothing significant, I don't think.

Discounts in multi-client depend on two things: They firstly depend on which part of the library you're trying to market. If it's a very old totally amortized part of library that you already sold 15 times, you may be prepared to discount it. If it's a new high-value wire survey that you've spent a lot of money doing advanced processing on, you're unlikely to discount it. And you're successful depending on whether you shop the survey in the right place.

Ole Slorer - Morgan Stanley

The overlay of EM into a multi-client library, do you think that's going to be much impact on pricing and margins for multi-client relative to your competitors?

Andrew F. Gould

Well, I certainly think that some of the images we can produce and are producing in some places through overlaying not just EM but EM and other measurements on our multi-client library give the value of the data a huge uplift.

Ole Slorer - Morgan Stanley

Are you able to overlay old data with EM and then get an uplift in the value?

Andrew F. Gould

It depends. We will do that selectively where we think the market will buy it.

Ole Slorer - Morgan Stanley

Then a second question on exploration budgets amongst your customers in general, [inaudible] the most discretionary part of the budgets, do you get a sense that people have been underspending in the first half of the year relative to the full year exploration budget?

Andrew F. Gould

I think so. I mean, we have seen a very clear pickup in the number of inquiries or the number of requests for tenders. So obviously I think the purse strings have been let loose a little bit as we move towards the end of this year and the beginning of next year.

Operator

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

Mike Urban - Deutsche Bank Securities

A couple of mentions of Venezuela in the press release here this morning. You also said you've gotten the cost structure there in line, but it also looked like a couple of instances of activity, including, I guess, to quote you, close cooperation with PDVSA. What's the general outlook in that market? It's been quiet, for obvious reasons, for awhile. Are you seeing a pickup there? Are you wading back in? Is PDVSA wading back into the market? And, most importantly, are you getting paid for it?

Andrew F. Gould

I would say that the progress we've made on receivables is extremely satisfactory.

I think PDVSA is coming back into the market for services gradually. I don't think it will have a startling affect in 2009. And probably more than a lot of markets it will be extremely sensitive to what the oil price is as we go forward. But certainly, yes, there's more interest to Venezuela than we've seen for some time.

Mike Urban - Deutsche Bank Securities

And then I guess the other market that's been troublesome in Latin America has been Argentina. Any signs of progress there?

Andrew F. Gould

Not from our standpoint; not a great deal, no.

Operator

Your next question comes from Mark Brown - Pritchard Capital Partners, LLC.

Mark Brown - Pritchard Capital Partners, LLC

In terms of fracturing in North America, do you have any comments on where you see pricing going and where you see capacity going overall.

Andrew F. Gould

Well, I think that, as we said in our press release, that pricing has probably bottomed late in the third quarter. I don't think we'll see any substantial increase until the second half of next year. And a lot of the capacity, I think, will overhang the market for another year and a half or so.

But these large fracs eke up capacity fairly fast and actually increase the cost of maintaining the equipment fairly dramatically, so there is a possibility - though it's only a possibility - that we actually work down the backlog of pumps or frac equipment perhaps faster than we've done in previous upturns. But I still think any significant tightening of the market is towards the end of next year.

Mark Brown - Pritchard Capital Partners, LLC

And in North America one of the few markets where you don't have the largest market share for Oilfield Services in general and at the same time your commentary is somewhat guarded in terms of the speed of a recovery, is this a market that you see yourself focusing on in terms of taking advantage of the service intensity going forward?

Andrew F. Gould

I don't think we have any plans, inclination, desire or anything else to decrease our position in North America. On the contrary, I think that if we were able to do it at a reasonable capital cost, we would increase it because it's an extremely important market in the way that both technology and operational capacity develops. We would always want to be a player.

Mark Brown - Pritchard Capital Partners, LLC

My final question is on the regulations that have been proposed on fracturing and the ingredients used. What is your opinion on what the probability of those regulations getting put in place, and could you comment on your coming out to propose the proactive disclosure of the chemicals used in fracturing?

Andrew F. Gould

Well, I think that, like everything else that surrounds this sort of issue, where there is a public concern, which is the regulators, then eventually some form of regulation is going to emerge, and therefore it seemed to us very important to be part of the discussion rather than to, if you like, not cooperate in the process of establishing what a regulation might be.

Now, what the final form of it will take I actually don't think we know yet, but I'm pretty sure that there will be some form of new regulation in order to satisfy the authorities and the public's desire to know that what is being done is safe. And that seems to me a perfectly natural thing to want.

Operator

Your next question comes from Robin Shoemaker - Citigroup.

Robin Shoemaker - Citigroup

I was wondering just one simple question. On the $276 million of acquisition spending in the third quarter, was there anything other than IntelliServ of significance there?

Andrew F. Gould

No, it would have been very small. There were a couple of things, but they were very small.

Simon Ayat

Minority interests, small ones.

Andrew F. Gould

Very small.

Robin Shoemaker - Citigroup

Then shifting to North America again, one further question. In terms of the prospects for recovery in pricing, we all know if the rig count increases there's really no magic level of the rig count at which you start to having pricing power, but if you're sized today for the market in North America and the rig count begins to increase, activity picks up, and you have to go and hire and begin to incur some expenses in meeting that higher level of demand, is there a potential to get pricing improvement at that point or in your view is it further out until we get to a substantially higher level of activity in North America?

Andrew F. Gould

Well, I think it depends very much what type of activity it is. If it's a continuation of what we've seen in the Haynesville, for example, where actually the types of service and the complexity and the intensity is quite high, then I think pricing will react quite fast because there'll be a limited field of players that customers will want to use. If it's just general spread across the board, then it will obviously take much longer.

Robin Shoemaker - Citigroup

And your expectation is the type of recovery, would it focus most likely on these high service intensive shale plays like the Haynesville and Marcellus?

Andrew F. Gould

Yes, I do, because I think that's where the highest initial production indexes come and are going to continue to come. Until gas prices get much higher, you're not going to have a return to the shelf in the Gulf of Mexico and things like that.

Operator

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

Pierre Conner - Capital One Southcoast, Inc.

Andrew, I wanted to just ask a little bit more about Latin America margins. Was there material impact recognized in that deferred revenue on the margins in the quarter?

Andrew F. Gould

No.

Pierre Conner - Capital One Southcoast, Inc.

So further, and kind of like Geoff I may have mishead, but I know we were kind of thinking that as IPM revenues grew that because of the pass through component it would put some pressure on the margin in that area. So are we in a position where the incremental activity spread across is expanding margins?

Andrew F. Gould

That's what happened in Latin America in this quarter, yes.

Pierre Conner - Capital One Southcoast, Inc.

So your expectation there, while your comments earlier about pricing remain, is that even if you will see an increase, that is not going to negatively impact the margins?

Andrew F. Gould

No. But I would remind you of what I said. We don't know what Pemex is going to do at this stage of the game, and Pemex is by far the largest IPM customer in South America - not the only one, but the largest.

Pierre Conner - Capital One Southcoast, Inc.

Shifting to seismic and the comments of potentially commodity prices driving incremental activity, but mixing that with the incremental capacity in marine, we might get activity but would you push out any - now, just contract; multi-client's separate - and that swings the number? What is your commentary on margin on contract further out?

Andrew F. Gould

You know, higher utilization will help margin even from where it is now given the extent to which prices have declined. Obviously we don't have the same leverage effect that we had when we were at fully capacity, but when marine seismic was at full capacity. So there will be some effect, but actually I think for a period of time fairly minimal.

Pierre Conner - Capital One Southcoast, Inc.

And would you give us the same kind of perspective on WesternGeco CapEx? I think earlier you were talking about substantial CapEx; that was more Oilfield Services, I suppose. What's directionally 2010?

Andrew F. Gould

Well, don't forget we're still commissioning some Eastern eco boats. So, I mean, I don't know yet, but I'm going to guess that it'll be flat with 2009.

Operator

Your next question comes from Brad Handler - Credit Suisse.

Brad Handler - Credit Suisse

I guess a few of us are trying to tease you out a little on the margin guess for North America, so maybe I'll just ask that directly, perhaps if you're expecting a little bit of favorable mix just in terms of the exposure to the shale plays? And presumably you're taking share there. Is it reasonable in your outlook to think that you are looking for some decent incremental margin?

Andrew F. Gould

Well, I think you have to remember that our presence in the Gulf of Mexico deepwater is extremely significant to our margin performance in North America. And to the extent that we had the hurricane precautionary measures in the third quarter, the volume of work in the Gulf of Mexico declined considerably. And all things being equal, it's likely to increase considerably in the fourth quarter, so that can have a positive effect on the overall North America margin. And on land we think we saw the bottom.

On the other hand, we think the recovery in Canada is going to be fairly limited compared to what it's been in the past. But if you're asking the question overall, yes, we would say that there will be some improvement in margins in North America going forward. But in volume terms don't forget U.S. land is by far the largest volume, and therefore until that pricing moves they're not going to be hugely significant.

Brad Handler - Credit Suisse

That makes sense, but I guess, again, whether we define it as just because you're working the Haynesville or perhaps you're optimistic about product mix?

Andrew F. Gould

Yes.

Brad Handler - Credit Suisse

That helps the U.S. land outlook too, right?

Andrew F. Gould

Yes.

Brad Handler - Credit Suisse

Just one follow up on Latin America, then. You reference start up costs in Brazil. Can you help us calibrate how significant that is? Presumably the outlook for the fourth quarter -

Andrew F. Gould

Well, it's quite significant because, if you remember, we announced in our second quarter press release that we had been awarded an IPM contract to manage initially two and later four semi-submersibles for a Brazilian company called OGX, so mobilizing semis and start ups on that size of project is quite a significant number.

Brad Handler - Credit Suisse

It sounds like that actually may be going to five rigs?

Andrew F. Gould

You heard that before me. I don't know that yet.

Brad Handler - Credit Suisse

But in terms of our thinking about the fourth quarter margin, then, it's reasonable to assume that there's a little bit of pressure that's relieved in Latin America that way?

Andrew F. Gould

Absent any immediate reaction in Mexico, yes.

Operator

Your last question comes from James Carroll - Loomis, Sayles.

James Carroll - Loomis, Sayles

Two years ago, I think, at the last analyst meeting you talked about a couple new products, an in situ fluid analyzer and an in situ coring tool. The coring tool had a unique advantage over existing technology in that it would do quick turnaround of full size cores ready for lab measurement. I'm just curious. We haven't heard anything about it at all. Can you give us a little update on what's going on there?

Andrew F. Gould

I can tell you that the in situ fluid tool is doing extremely well, and the coring tool is still in field tests.

James Carroll - Loomis, Sayles

Can you just give us some idea about the speed and likelihood of North American shale drilling and competition technology as it relates to reservoir characterization and enhancement moving into the international markets? Where might it go? How soon might it go there?

Andrew F. Gould

I think that's quite a complex answer, Jim. First, it will go there, right? But secondly, it is no accident that shale gas was first exploited in Texas and Louisiana because in order to do that you need a huge amount of oilfield service infrastructure. And in a lot of places in the world that infrastructure just doesn't exist, which obviously has cost implications for the initial period in which you produce that shale gas.

The second thing is if you look at a Google map of Dallas/Fort Worth and you look at the well density, there are a lot of places in the world - for example, in Germany would be a good example - where that just will not be permitted.

So there's going to have to be some modification of the exploitation method for it to really fit into a lot of other places around the world. If I can give you one example of a place where there's no infrastructure, Pakistan has a huge amount of shale gas, but there is not the infrastructure in Pakistan to exploit it today.

So my view is it will happen, it will be more expensive, and it'll probably take a little bit longer than a lot of people seem to be prognosticating at this point in time.

Malcolm Theobald

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

Andrew F. Gould

Can you hold on one second, please? Simon can clarify the equity position in the quarter. Simon?

Simon Ayat

This is a question from Bill Herbert earlier on. The net equity did improve quarter to quarter. It is really across the board from the different affiliated company investments that we have, but notably the Arabian Drilling Company, which is a drilling joint venture we have in Saudi Arabia. I just wanted to clarify it.

Malcolm Theobald

Okay, Kent.

Operator

Thank you very much. And ladies and gentlemen, this conference will be available for replay starting today, Friday, October 23rd at 10:30 a.m. Central Time, and it will be available through Monday, November 23rd at midnight Central Time.

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Source: Schlumberger Limited Q3 2009 Earnings Call Transcript
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