Schlumberger's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Schlumberger Limited (SLB)

Schlumberger Limited (NYSE:SLB)

Q4 2013 Earnings Conference Call

January 17, 2014 09:00 ET

Executives

Malcolm Theobald - Vice President, Investor Relations

Paal Kibsgaard - Chief Executive Officer

Simon Ayat - Chief Financial Officer

Analysts

Ole Slorer - Morgan Stanley

Michael LaMotte – Guggenheim Securities

David Anderson – JPMorgan Securities

Brad Handler - Jefferies

James West – Barclays Capital

Bill Herbert - Simmons

Angie Sedita - UBS Securities

Jim Crandell - Cowen Securities

Jeff Tillery - Tudor, Pickering, Holt

Scott Gruber - Bernstein

Jud Bailey - ISI Group

Robin Shoemaker - Citi

Edward Muztafago - Societe Generale

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger Earnings Conference Call. For the conference, all participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions) And as a reminder, today’s call is being recorded.

With that, I will turn the conference now over to the Vice President of Investor Relations, Mr. Malcolm Theobald. Please go ahead.

Malcolm Theobald

Thank you, John. Good morning and welcome to the Schlumberger Limited fourth quarter and full year 2013 results conference call. Joining us on the call today are Paal Kibsgaard, Chief Executive Officer and Simon Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paal. Simon will first review the financial results and Paal will discuss the operational and technical highlights.

However, before we begin with the opening remarks, I’d like to remind the participants that some of the 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. We welcome your questions after the prepared statements.

And now, I will turn the call over to Simon.

Simon Ayat

Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. Fourth quarter earnings per share from continuing operations, excluding charges and credits was $1.35. This represents an increase of $0.06 sequentially and is $0.31 higher when compared to the same quarter last year. During the quarter, we recorded a $0.09 charge relating to a provision of accounts receivable in connection with the client in Brazil who filed for bankruptcy during the quarter.

Fourth quarter revenue of $11.9 billion increased 2.6% sequentially. Of this $298 million sequential increase, the vast majority came from the year-end surge in software product and multi-client sales that we typically experienced in the Q4. Oilfield Services pre-tax income of $2.6 billion increased 4.3% sequentially. Pre-tax operating margin increased by 37 basis points to 21.9% largely due to the positive effects of the previously mentioned seasonal year-end sales.

Sequential revenue and pre-tax margin highlights by product group were as follows. Fourth quarter Reservoir Characterization group revenue of $3.2 billion increased 1% while margin improved 132 basis points to 31.7%. These increases were driven by traditionally strong end of year software and multi-client sales offset in part by the seasonal decline in the WesternGeco Marine activity and the conclusion of several higher margin exploration projects.

Drilling Group fourth quarter revenue of $4.5 billion increased 1.9% while margin declined by 69 basis points to 19.6%. The revenue increase was largely attributable to robust M-I SWACO and IPM activity in the Middle East and Asia area, while the margin decline was finally due to an over less favorable revenue mix.

Fourth quarter Production Group revenue of $4.2 billion increased 4.8% as a result of robust Completion and Artificial Lift product sales and pre-tax margin declined by 27 basis points to 17.3% as the impact of stronger results from our Schlumberger production management projects and end of year product sale was more than offset by continued pricing pressure in U.S. land. Now turning to Schlumberger as a whole the effective tax rate excluding charges and credits was 22.3% in the fourth quarter compared to 22.7% in the previous quarter. Net debt at the end of the quarter was $4.4 billion representing an improvement of $1.2 billion as compared to end of Q3. Most notably we spent almost $1.1 billion on our stock buyback program during the quarter. We repurchased 11.9 million shares at an average price of $18.67 during the quarter. In addition during the quarter we took advantage of the low interest rate environment by issuing $1.5 billion of 3.65% 10-year notes and €500 million 1.5% 5-year notes.

Other significant liquidity events during the quarter included $1.2 billion of CapEx and an improvement in working capital of approximately $1.2 billion. We were quite pleased with our working capital performance during the quarter. From a cash flow perspective we generated approximately $10 billion of cash flow from operation during all of 2013. This strong cash generation has allowed us to continue to invest in growth opportunities which we did by completing various acquisitions and investment in other companies most significantly our investment in (indiscernible) and investing $4.3 billion in CapEx and multi-client. While at the same time returning $4.2 billion of cash to our shareholders in the form of dividends and stock repurchases during the year. During the full year 2013 we repurchased 31.3 million shares at an average price of $82.82. From for a total of $2.6 billion while paying out $1.6 billion in dividend. As it relates to 2014 CapEx is expected to be approximately $3.8 billion in 2014 as compared to the $3.9 billion we spent in 2013. We expect the EPR for the full year 2014 to be in the low to mid-20s however this can vary on a quarterly basis depending on the geographical mix of earnings. Yesterday our Board of Directors approved a 28% increase in our annual dividend to $1.60 per share.

This follows last year’s 15.6% increase and increases of 10% in 2012 and 19% in 2011. This new level of dividend reflects our confidence in our ability to deliver this growth and at the same time generate superior cash flows and return excess cash to our shareholders. And now I turn the conference over to Paal.

Paal Kibsgaard

Thank you Simon. Our fourth quarter results presented a very successful year for Schlumberger was driven by continued growth in the underlying activity as well as strong year end product sales partly offset by the temporary shutdown of our operations in South Iraq in November and we expected seasonal slowdown in our businesses in North America, Russia and China.

Fourth quarter multiclient seismic sales were slow in the first two months of the quarter but we saw very strong sales in December driven by high demand for the latest surveys in our library which are based in our unique acquisition and processing technologies. Sequentially overall revenue was up 3% with topline growth posted in all four operating areas while pretax operating margins expanded by 37 basis points to reach 21.9%. Compared to the same quarter last year pretax operating income was up 23%. New technology sales remain strong in all three product groups and this together with further market share gains as well as focused execution and cost control contributed profitably to the quarter’s results.

For the third quarter in a row we also posted commendable sequential incremental margins, this time at 36% was generated $2.5 billion of free cash flow boasted by our ongoing efforts to improve asset utilization and reduce consumption of working capital.

Our international business progressed well in the fourth quarter with revenues tapping in all time high exceeding $8 billion and representing a year-over-year growth of 8%. At the same time year-over-year margin expanded by 349 basis points to reach 23.5% which is only around 350 basis point compared with the previous quarter peak recorded in Q3 of 2008.

Sequentially international revenue was up 3% and margins expanded by 23 basis points. In terms of pricing the international market continues to be highly competitive and we’re not seeing any kinds of a general pricing inflection.

Still the current market conditions suit us well as we’re able to drive our effective pricing approach to a strong new technology sales by commanding a premium on our execution capabilities as well as from the growing demand for integrated services. These factors are also reflected in our revenue for pricing indicator which in 2013 improved by 5% over the previous year.

In Latin America revenue was up 3% sequentially well margins expanded by 59 basis points to reach 21.2%. Compared to the same quarter last year revenue was down 3% while pretax operating income was up 13% driven by excellent margin improvement in the region inspite of the market headwinds faced in several key countries. The sequential results were driven by strong performance in Ecuador where Shushufindi SPM project continues to exceed expectations. In Argentina where we’re very active with the shale related work in the Wakamoto and by Mexico where we saw strong activity on land.

In Mexico where the energy reform was signed in December and we expect the first license grant to be held later 2014 with the earlier impact on our activity in 2015. The early indication from the (indiscernible) which were significant and opened earlier this week are very positive for us suggesting a solid gain in market share.

In Venezuela activity was sluggish in the fourth quarter after solid growth in Q3. Our working relationship with PDVSA is excellent and we continue to receive payments in line with the agreement we signed in May last year so we plan to further ramp up activity in the country in 2014. In Brazil the business environment remained difficult with lower activity in the fourth quarter for Petrobras as well as the local independent and the international oil companies. We have adjusted our cost base in the country and are prepared to manage what appears to be a challenging 2014 before activity growth likely resumes in 2015.

In the Middle-East and Asia revenue grew 5% sequentially while margins were flat at 26.1%. On a year-over-year basis revenues increased 18% while margins were up by 404 basis points. In the Middle-East sequential growth was driven by Saudi Arabia where we continue to move in resources to keep pace with the additional growth for the last eight month [ph] and by the United Arab Emirates activity is at a record high following our recent contract with them.

In Iraq our activity is back to normal following the shutdown in November linked to the security incident in our (indiscernible) base. We received excellent support in the local and central authorities during and after the incident and in 2014 we see strong growth in North Iraq while activity in the South will likely remain flattish in the first half of the year. Asia also supported strong sequential results driven by seismic activities in Malaysia and land and off shore activity in Australia. In China we find a strategic cooperation agreement with CNPC during the fourth quarter and we continue to ramp up activity on our tight gas SPM project in Guanzhong [ph] Petroleum in Ordos Basin. In Europe and Africa revenue was up 1% sequentially while margins were essentially flat. On a year-over-year basis revenues grew 9% and margins were up 298 basis points.

Russia and Central Asia will be a major contributor to the source both in the strong quarter both in terms of revenue and operating margins inspite of the seasonal headwinds on land. Go into 2014 we’re continuing to invest actively in the region and we see strong growth potential going forward. In the fourth quarter we also saw solid growth in (indiscernible) driven by both deep water exploration and development work. While activity in the rest of sub-Sahara Africa was down sequentially due to late schedule and operational delay as well as lower exploration activity in some of the frontier countries.

In the North Sea, we saw expected seasonal impact on activities driven by winter weather and the NW [ph] pricing increasing. While in North America business continues to be challenging due to reach and operational delay and as well as ongoing security challenges.

Looking at the 2014 outlook for the Europe and Africa region we still expect growth to be driven by sub-Saharan Africa and to a certain extent the North Sea while we expect the ongoing challenges in North America and Continental Europe to continue in the coming year.

In North America we posted a third quarter with revenue up 1% sequentially when margins were down 67 basis points to 19.6% driven by expected seasonal impact. On a year-over-year basis revenues grew 7% and margins were up 46 basis points. In the Gulf of Mexico, deep water activity remained high in the fourth quarter and the offshore rig county is expected to show strong growth also in 2014. In the land market activity was solid with the fourth quarter U.S. rig count remaining flat sequentially while the seasonal activity recovery in Canada stayed in line with 2012 levels.

The main challenge in the North America land market is still pricing and we saw further downwards pricing pressure in most product lines in the fourth quarter partly amplified by the renegotiation and roll over of several key contracts.

In hydraulic fracturing we continue to gain share in the fourth quarter driven by new technology sales and operational efficiency and we took the opportunity to allow another fracturing fluid operation in addition to the four fleets we added in Q3.

During the course as these progressed further on the field testing of our new fracturing diversion technology and we have now tested the technology in both new and existing wells with very promising production results. The results from the field test together with a series of other field experiments we have conducted for the past 12 months have let to us to two pair [ph] conclusions. First at high precision fracturing where we ensure that each perforation cluster is properly addressed clear offsite production potential for the industry as a meaningful percentage of the perforation clusters today are not effectively fractured.

And second the fracturing fluid which enables the control of solid coupling within the fracture can allow more the fracture height to be effective across and thereby further enhance the production from the well.

To address these opportunities we will introduce in the coming quarters the broadband family of fracturing services which will include new engineered tool systems and corresponding hardware completion solutions. We’re very excited by the production enhancement potential of these technologies and will share more information as we complete the remaining field test and commercialization milestones. In another market we’re focusing on in North America land due to a significant growth potential is the artificial lift market. In line with SPM in the past quarters acquired a number of Broadcom companies covering the key liquid producing shale basins in the U.S. and Canada.

We will now combine the offering from these strong basin specific companies in our existing artificial lift business in North America land to provide a life of well lift solution to our customers using our production engineering expertise and expenses monitoring and data integration capabilities.

Let me now take a few minutes to summarize our full year 2013 results and achievements before we turn to the 2014 outlook.

In terms of financial performance 2013 was a very strong year for us where we continue to outperform our competitors in terms of top-line growth, margin expansion, earnings per share growth and free cash flow generation. The results were driven by strong new technology sales and a relentless focus on flawless execution and cost and resource management throughout organization.

Building [ph] on this we also laid out a multi-year plan detailing how we will further transform the quality and efficiency of our global operations and hence better leverage the significant advantage of our sites. And finally we made a number of strategic moves to strengthen our business portfolio including the OneSubsea JV with Cameron, the (indiscernible) acquisitions in North America land, an investment in the U.S. SPM project covering both North America and Shale Liquids and China Piped Gas.

While these achievements are obtained in the past, there certainly has been demonstration of our ability to formulate or executive plan that drive our company forward and should also instill confidence in our ability to continue the current trend of our financial outperformance.

Let’s now turn to the outlook for 2014 where we expect the global economy to continue to improve building on a positive data point seen in the past quarters and translate again both a higher GDP growth rate and higher growth in global oil demand compared to 2013. Correspondingly we also expect the global oil market to be well supplied in the coming year driven by continued growth in North America liquids production, leading supply and demand relatively well balanced with fair capacity excluding Libya in the range of 4 million barrels per day and this continuous support for Brent crude prices around $100 per barrel. The international gas market is also expected to remain stable supported by strong demand in Asia and improving demand in Europe.

In the U.S. resilient production levels and strong competition with coal indicates that a meaningful recovery in dry gas drilling activity continues to be pushed up in time. Also a recent storage with lower [ph] level have been higher than previous years driven by the cold weather. In terms of total E&P spend we expect investment levels to grow around 6% in 2014 with North America growth somewhat below this level and international growth somewhat above. We further see well related E&P spend growing at a faster rate than the total E&P spend in the coming year indicating a shift away from heavy infrastructure project which we see as a net positive for us.

Translating this macro picture into activity, in North America we expect strong growth and growth in Mexico driven by the influence of additional deep water rigs and on land in North America we expect solid growth in activity but for the pricing pressure we will likely have some impact on how much of this activity growth is translated into revenue and margin progression.

In the international markets we expect growth in Latin America to present by in Argentina, Ecuador and Venezuela. (Indiscernible) the main growth market will again be sub-Sahara Africa and Russia while an in EMEA growth will be spear ahead by Saudi Arabia, Iraq and United Arab Emirates and China.

Although we remain positive and optimistic with respect to the coming year as we again aim to cause solid double-digit growth in earnings per share, to firstly by further market share gains on the back of our new technology and secondly by our ability to generate superior increment to margins to the cost and resource efficiency of our execution.

In terms of how 2014 will unfold we expect the second and third quarter to again show the strongest sequential role while the first quarter similar to previous year should be decline in earnings and margins due to the normal seasonal slowdown and lower products and multi-client sales. We’re all proud of the progress we have made over the past 12 months and we have patience and ready and motivated to further improving our achievements in the coming year.

That concludes my remarks but before we open up for questions I would like to make a brief announcement. After all the six years in-charge of investor relations Malcolm Theobald on February 1st take on a new role in the company as President of our drill based business.

I would like to take the opportunity to thank Malcolm for his support and contributions as Head of Investor Relations and wish him the best of luck in his new assignment. Malcolm will be replaced by Simon Burns [ph] as Head of Investor Relations and Simon was previously in-charge of our North Sea GeoMarkets. With that we will open up for questions.

Malcolm Theobald

Thank you Paal. John we will now take questions.

Question-and-Answer Session

(Operator Instructions). And first go to the line of Ole Slorer with Morgan Stanley. Please go ahead.

Ole Slorer - Morgan Stanley

You have made a big push an emphasis on returns on capital efficiency of your previous two quarterly calls in particular and we can see the results now some pretty strong free cash flow as a percentage both of sales and EBITDA but can you talk just a little bit as to how much more efficiency is there squeezed out of the system now? Because you seem to have come quite a long way already.

Paal Kibsgaard

Well I mean as you see from my numbers and as you point out, we have stepped our focus on cash generation this year. We have put a lot more emphasis in that throughout the entire management and even it's starting to pay out. Now in the first three quarters of 2013 we generated around $3 billion of free cash flow and in Q4 alone we generated 2.5 billion on top of that which is the new quarterly record right? So the key drivers I think is both, it's management focus on working capital and asset utilization and we want to continue to perform over that into 2014. We indicated that on CapEx next year is going to be around $3.8 billion and the continued growth in the top line and the bottom line and I’m optimistic that reaching further step up the generation of free cash flow. It's essential how we manage our cash flow. Simon do you want to, a few things on that?

Simon Ayat

So basically if you look at our cash flow generation the last couple of years we suffered a bit from the increase in working capital and the increase in working capital as we have mentioned before was our way of setting up all the Smith acquisition that we made in order to distribute the product further worldwide. The current performance that we have seen is back to normal and I think we will continue to be performing very well as far as the working capital efficiency and as Paal mentioned we are finally got to a point where our CapEx as a percentage of revenue at a manageable level and I think the cash flow generation will continue to be strong as you’ve seen it in 2013.

Ole Slorer - Morgan Stanley

What is it in your business that gives you confidence that you can take CapEx down while your revenue is increasing? I mean that’s something which sort of no other company has not been able to do.

Paal Kibsgaard

By coming down to some of the elements that we have discussed around the internal transformation. There is a lot of focus and lot of things we’re doing to guide asset efficiency or asset utilization that revolves around better sharing between locations you know quicker turnaround in maintenance and a better transportation network setup as well. So, yes we’re going to continue to grow in 2014 an we’re taking CapEx slightly down and I think I’m quite comfortable with really different [ph] levels we’re making in the in-line growth with higher than what we anticipate. We have the option of further increasing CapEx but as of the $3.8 billion number that I’m indicating I’m quite comfortable with.

Ole Slorer - Morgan Stanley

Just little clarification Paal you didn’t sound particularly upbeat about general pricing trends, either in North America or international for kind of commodity and the type of services. Yes you highlighted but in your case if I heard you correctly you had a 5% positive pricing indicator because of technology and again, could you kind of elaborate a little bit on exactly what you mean by that?

Paal Kibsgaard

Well the revenues were rich indicators basically we talked to revenue we generate for the unit rig activity and but using more revenue earnings well obviously that house [ph] but also by substituting existing basic technologies with new technologies really command the pricing premium that basically helps drive that indicator out. So on average in 2013 that revenue for pricing indicator grew by 5% over 2012 which obviously helps both in the top-line and on the bottom line.

Ole Slorer - Morgan Stanley

Okay you also highlighted the higher price contracts rolling off, how do you see 2014 kind of the headwind there and the tailwind on your technology and ability to push more value as through products offering.

Paal Kibsgaard

Well if you look at 2013 it's one of the highest years we have had in new technologies both in new technologies that we were introduced over past years and we track it very (indiscernible) and also the technologies that were introduced in the past five years which we also track very closely. So we have a number of new technologies that came on 2013 and a similar number is not even higher coming up in 2014. So we will continue to leverage what we have introduced in the past year and also augment it a significant number of new technologies coming out in 2014. So I’m quite positive and optimistic that through the new technology introductions we can continue to drive the effective pricing up. Now big contracts like for instance we saw in Mexico recently it's continue to be a big, quite aggressively and competitively on the basic pricing but having a number of new technologies that we’re introducing we should be able to continue to our improve that revenue for rig pricing indicator.

Operator

Our next question is from Michael LaMotte with Guggenheim. Please go ahead.

Michael LaMotte - Guggenheim Securities

Paal can I follow-up on the comment that you made about the new technology on the fracturing side. You commented the lesson of two things one just fracture stage effectiveness and two I guess in propagation but the technology platform that’s looking to be rolled out this year looks to be more than just fluids involving the hardware et cetera. Can you expand upon that?

Paal Kibsgaard

With further comments on the Broadband family until we have completed the key testing and the commercialization milestones. The few things I mentioned are around high precision fracturing where we cross address each perforation cluster as well as having finished with which better control to sort of coupling. There will be technologies in this family that will advance those, there might be some other things there is lot of we will talk about that when we have firmed out the key testing and we’re ready to roll it out.

Michael LaMotte - Guggenheim Securities

Okay but it's fair to assume at this point that it really is sort of an end to end solution as opposed to a single point solution the way highway was introduced. Is that a fair characterization?

Paal Kibsgaard

That is fair to assume, yes.

Michael LaMotte - Guggenheim Securities

Okay great. And Simon, quick one for you, the working capital frankly I have never seen a $45 billion revenue company use almost no working capital for the course of 12 months. First of all congratulations on that and second one is that something you can expect to continue in ’14 and what have been the major levers that have brought that about this year?

Simon Ayat

So as I mentioned thanks Michael for the comment first of all and as I mentioned in the last couple of years we were gearing up the acquisition of Smith in terms of strength in their level of inventories and (indiscernible). So it's consumed more than lot more [ph] in terms of working capital. The working capital performance is here obviously resulted also from collecting and improving our receivable you know performance. Going forward it should be back to normal, it should be less than the previous two years but I cannot promise you it would be the performance of this year and hopefully we will maintain it but you know growth always consume a bit of working capital. So you can assume it would back to normal not the level of the last couple of year’s consumption and it will be continue to be efficient because entire organization is basically focused on sharply to improve the working capital performance.

Michael LaMotte - Guggenheim Securities

Okay so when you say back to normal I mean is it still 1% of revenue plus or minus?

Simon Ayat

That would be yes more or less the case.

Operator

Next we will go to David Anderson with JPMorgan Securities. Please go ahead.

David Anderson - JPMorgan Securities

So Paal you were talking about your expectation for about I think I believe I heard 6% kind of overall E&P spend, guidance of earnings up double-digits. Can you talk a bit about how much that earnings improvement in ’14 is going to be related to the internal transformation on the efficiency and the asset turns?

Paal Kibsgaard

While if you look at the solid double digit growth in earnings per share it's kind of a combination of the two (indiscernible). So we aim to grow our foot line faster than the growth in the E&P spend. This is going to be driven by new technology which we just talked about but also the quality of our service and our integration capability. But we all plan to continue to expand margins even in a challenging pricing environment. That’s going to be driven by our execution efficiency and our ongoing transformation in the program. So how much is going to come from each, we obviously have a very clear on view I’m not going to go into the detail probably but I think both of them will be very good contributors.

David Anderson - JPMorgan Securities

In your outlook I was just curious the market has been on focused on some of the IOCs having some budget cuts out there I think (indiscernible). Some of the other IOCs their cuts have been feeding really market concerns about offshore and development spending, can you help us put this into perspective I think I heard you say about the infrastructure but can you talk about how that’s looking right there in terms of their pure upstream spending and maybe kind of collectively I mean would you just think that the offshore spending will be up at least mid-single digits? I mean it just seems like we’re hearing kind of different stories in different parts of the market.

Paal Kibsgaard

Yeah if you look at the comment I made on tool for E&P spend, this is expected to be around 6% and that’s really based on the third party survey. So at the average of that, they will come in around that level. Within the 6% as I said the international growth somewhat north of 6% and NAM growth somewhat below. But now while the industry focus is on the total E&P spend what is really driving our business is the well related E&P spend. So we actually have our own spend model which is entirely focused on well related E&P spend and this is a global model and it's based on well count, well price, well cost by cost I mean by countries [ph], whether either complete role as part of our planning process and this model suggests that the well related spend will grow faster than the 6% and that’s really what I’m basing my comments on. As within that outlook offshore and deep water continues to look solid. So and in this model the valuation and spend growth from the Super Mega’s to the IOCs to the independents and the NOCs is all part of it. So in these comments those valuations are captured.

Operator

Our next question is from Brad Handler with Jefferies. Please go ahead.

Brad Handler – Jefferies

If I could I guess follow-up on that if perhaps you can give us some perspective because part of what I think is raised concern among investment community is the lack of contracts recently for deep water rigs for example casting somewhat of a shadow on the what had been the fairly obvious trajectory for a deep water activity growth. Do you have any thoughts on the nature of that and then presumably there is a release of a lot of the contracts that you would envision happening soon?

Paal Kibsgaard

Yeah first of all we saw strong growth on deep water activity in 2013 and we expect to see also solid growth in 2014. But as you point out the drilling activity and the rig scheduled for deep water could be impacted by some of these ongoing commercial discussion. There is a number of rig contract coming up for renegotiation as you indicate and also some of the new arrivals who not yet have contract but in rig contractors that we talk whom seem confident that the new rigs will be contracted basically because of the higher operating efficiency that they have but the contract excursions [ph] could have an impact on the day rate for the other generation rigs, not now. We have factored these elements into again into our outlook so we’re not overly worried about what that mean from an operational perspective for us.

Brad Handler – Jefferies

Understand, okay. Maybe it's a related follow-up maybe it isn't but the conversation has shifted to sort of an overall level of spending from what had been a mixed conversation a little bit ago but I wouldn’t mind coming back to that the mix of exploration versus development. In your modeling as you see ’14 playing out, so a two part question first is there a discernible mix that you look for and then in a sense the second part of the question is does it matter as we look at some of your what I think are some of your higher margin businesses on the exploration side if there is to be a move away from that, how much can you mention seismic in or seismic was mentioned by your colleague earlier. How much of any of that matter? That mix shift if you see it coming for ’14?

Paal Kibsgaard

Basically we have a very broad and well-balanced portfolio. So these shifts they might have small impact but overall I’m not overly worried about that going into 2014. With respect to exploration we still see growth in exploration in 2014. It's going to be lower than the roughly 10% that growth that we saw in 2013 but still decent growth. Now in terms of the nature of the growth in exploration we expect this to be more well related again so we’re pretty clear that the flattening of the pricing spend is happening. There has been a lot of data acquired in recent years. So the growth in exploration is going to be more well related than exploration related and well that is that means that it's a more challenging environment for WesternGeco it still bodes well for our Wireline well testing and drilling product line. So of course they called in the balance.

Operator

And next we will go to James West with Barclays. Please go ahead.

James West - Barclays Capital

So Paal I think we have gone beat up the E&P spend numbers globally and it's clear that you guys intend to grow faster than 6%. Maybe if I turn to one of the markets I guess it's been more troubling for the industry which is North America. We’re looking at least at some acceleration or some increase in spend in North America pricing obviously still weakish but do you think with this pickup in activity that’s envisioned, you hit a point where these product lines that had been at a balance can start to come back into balance and maybe pricing is no longer that much of a concern?

Paal Kibsgaard

Well we would like if that happen but if you referred to the fracturing if I go like fracturing there is still today significant industry overcapacity of horsepower. So at this stage we do not expect the market to reach equilibrium in 2014. Now in terms of activity for North America you expect solid growth in activity on land in 2014 and a lot of this is still going to be driven by further improvements in drilling and fracking efficiency. And as I mentioned in my prepared remarks we do not see any significant combat in in dry gas (indiscernible). So if you look at the trends that you saw in 2013 I think they are continuing into 2014 and North America last is going to be I think more of a same.

James West - Barclays Capital

And then maybe a perhaps on related follow-up but talking about your technology pipeline it sounds like there is acceleration in new technology introductions. Are these more focused on the U.S. land market as you kind of highlighted some of the stuffs that you’re testing right now or is this global and you just choose to highlight the North America technology?

Paal Kibsgaard

It's more than up against, I choose to focusing on North America because this is where I think technology will have a significant impact in terms of how the market is going to be shaped going forward. We talked about that on previous calls. We obviously have a broad I would say portfolio of new technologies coming out also addressing the international markets with the range of businesses we all present but I choose to highlight North America land and attracting on the coal.

Operator

Our next question is from (indiscernible). Please go ahead.

Unidentified Analyst

Paal I appreciate the comment especially on the near term outlook for 1Q and the seasonality, I was curious so if we think about adding back the negative impact you saw on fourth quarter for Iraq. We thought about first quarter Middle-East Asia margins let’s say should we assume that add back of revenue and the attaining profitability at least offsets whatever multi-client excuse me you’re in product sales that you lose traditionally in the first quarter so perhaps maybe revenue flattish margins flattish is opposed to down in Middle-East Asia for 1Q?

Paal Kibsgaard

Well the question is to if you want to welcome to give you a specific number or go much more in detail. I would say the change the sequential change both in revenues and margins in both environment I think is going to be more and less in line in what you see at an average over the past couple of years. So there are a lot of moving parts in our business and the way we see we do want to at this stage that is going to be more or less at normal seasonal growth that we see.

Unidentified Analyst

Okay my follow-up Simon will be for you. I guess with the dividend raise now by looking consensus numbers for ’14 the dividend is coming by a 28% of net income, is there a target range that you guys have as a management team or as a Board that we should be thinking about longer term here in terms of where that dividend potentially can go as a percentage of net income.

Simon Ayat

You know if you look back on several years now, we look at our dividend every year in January and we decide based on the level of activity, the cash flow where we’re going to be as far as the dividend is concerned. The 28% this is on the higher side and reflect the new level of cash flows that we are at and we will continue to be but there is no target number for the dividend. We will look at it every year and we will reflect basically on the condition of the business and the growth in the cash flow but there is target number.

Unidentified Analyst

And Simon do we just, should we view the assumption of debt during the quarter specifically just to fund the share repurchase program and is that something that we should expect to continue and what is still a little interest rate environment?

Simon Ayat

Frankly we don’t need to borrow to fund the repurchase, we did the borrowing to take advantage of the lower interest rate which as you know kind of climbed the business during the quarter so we did it at the right time and we have some maturing that’s coming in the first half of 2014 which we will use this excess cash to bring it down.

Operator

Our next question is from Bill Herbert with Simmons. Please go ahead.

Bill Herbert – Simmons

With regards to 2014 I’m not sure if you made mention of this or not yet but with regard to your international margins in ’13 incremental were kind of 40% to 45% in that range for last year. Should we expect much the same in 2014 with regard to international incremental margins?

Paal Kibsgaard

Well we want to try I can’t promise but we have a lot of drivers that we’re working on to which is kind of you know puts us to try to refuse that. But now it's going to come down to a number of things but the new technology introduction and a further improvement in efficiency and quality are one of the key drivers. So, I can’t promise but we’re certainly going to try.

Bill Herbert – Simmons

Okay and secondly back to the first quarter relative to the fourth quarter, if I look at that what you guys have done over the past 5-6 years on average earnings per share is down a low double digit percentage, quarter-on-quarter is that what we should be expecting or modeling for the first quarter?

Paal Kibsgaard

Well what number did you say?

Bill Herbert – Simmons

A low double digit percentage quarter-on-quarter.

Paal Kibsgaard

Yeah I would say plus minus 10% is the rough, is the average of the past 3-4 years, yeah

Bill Herbert – Simmons

Okay so that a buck 20 an buck 21 I know you’re not endorsing a specific number but that’s not necessarily an implausible place to start for at Q1.

Paal Kibsgaard

It is implausible but I will stick to the number that I gave you more well which is look at the previous years and do not (indiscernible).

Operator

And next go to Angie Sedita with UBS. Please go ahead.

Angie Sedita - UBS Securities

Paal could you give us a little further color on the North American price weakness, obviously we had seasonality in Q4 and what are you seeing in Q1? Is it too earlier to tell or do you think those stay continued price weakness into 2014?

Paal Kibsgaard

So season for us we would have appropriate impact in pricing in Q1 that’s mainly down to the renegotiation and rollover of all the certain contract that we have. So we believe that a few of them during Q4 with some impact in Q4 we get a full impact of those in Q1 and the other contract as well that will probably impact in Q1 to a certain extent. So that’s dated for the kind of pricing comments that I already made.

Angie Sedita - UBS Securities

All right and then on the overcapacity kind of in reference to James question certainly going to be able to, the capacity in 2014, is your thoughts that we will certainly see that in 2015 as well based on the market condition as we see it today?

Paal Kibsgaard

Well I think I will focus my comments on ’14 for now and things can move fast in North America land but we’re pretty confident that we will not reach equilibrium in 2014.

Angie Sedita - UBS Securities

And then as I’m really a follow-up on Mexico, congratulations currently on the market share gains. Some color there on when you expect to mobilize equipment or actually start activity in Mexico and then comments on Mexico longer term. Obviously expectations for the region are fairly high, is it still too early to tell how meaningful Mexico will be or are you becoming more confident on Mexico?

Paal Kibsgaard

As I’ve said in my prepared remarks the early indication for these (indiscernible) we will have a pretty solid market share gain. Now these contracts are not finalized yet, they will be finalized during the first quarter. We expect to mobilize the additional resources that we need to take on the additional work during Q2 and that we will get into kind of full operation on these contracts in the second half of the year. So we still see H1 [ph] activity to be somewhat challenging partly due to the (indiscernible) slowdown but I think H2 [ph] will be better for us given the market share gains. Now with respect to the and as you recall obviously the net profits for the industry in Mexico but the earlier impact on our activity will be 2015.

Operator

Our next question is from Jim Crandell with Cowen. Please go ahead.

Jim Crandell - Cowen Securities

Well the Chinese companies CNOOC, PetroChina seem to be estimating a lot lower growth in E&P CapEx in 2014. Do you expect that as well and can you characterize which is just being in terms of the awards and business coming out of the Chinese companies?

Paal Kibsgaard

Well we continue to see strong growth and activity for us throughout in China on land and this is driven by both conventional price gaps and there are certain expense (indiscernible) right, so partially this is through the market penetration for us. There is lot better demand now for our new technology, for our fracking expertise and also for our further management capability. So I still the overall I still think China as one of the fastest growing geo-market for us in 2014 as it was in 2013. I have a pretty positive outlook on China for the coming year.

Jim Crandell - Cowen Securities

Okay and then my follow-up is if you could comment on Brazil you had some cautionary comments about Brazil. I assume you’re forecasting a lower level of business out of Brazil. If that’s true what kind of drop do you see in business there for either drop in the market or drop in business for Schlumberger in 2014?

Paal Kibsgaard

I would say overall rig activity we expect to be flat in 2014 which is going to be another challenging year. Exactly what’s going to happen (indiscernible) I’m not going to going reach out there but it will be a challenging year you know coping with the frac activity which is obviously lower than what we were expecting going back 12 to 18 months.

Operator

And we will go to Jeff Tillery with Tudor, Pickering, Holt. Please go ahead.

Jeff Tillery - Tudor, Pickering, Holt

In the release you mentioned a couple of operational startup delays in the drilling group. Could you give us just some color on which geo-markets that may have been impacted as well as the timing of those startups when you see some this impact projects?

Paal Kibsgaard

I don’t have the detail for those available (indiscernible). So I can’t comment on them and follow-up maybe Jeff.

Jeff Tillery - Tudor, Pickering, Holt

Okay and then how should we think about from a top down standpoint measuring the progress Schlumberger makes on some of the cost and efficiency initiatives in ’14? Do we just watch that through the margin line or through incremental or what’s an external measuring sticks we can use to judge you by?

Paal Kibsgaard

Well I think both the margin probably is going to be a good measure of it, it think also it will have some impact on our ability to generate the free cash flow. So I think both of those are good yardsticks to look at.

Operator

We will go to Scott Gruber with Bernstein. Please go ahead.

Scott Gruber – Bernstein

Just one quick one from me, Simon can you provide some color on the CapEx trends in North America versus rest of the world and where you’re spending it down equally or is it weighted toward one region?

Simon Ayat

It's really in-line with the rest of the world. I mean you know last year it was lower because obviously the pressure pumping is consuming less as we have consumed some of the excess equipment. Exact figure I don’t know ready with me but I will follow-up with you on this.

Scott Gruber - Bernstein

But there is you know I was thinking of the international side there is no bigger drop on the international side versus domestic at this point?

Paal Kibsgaard

If you look at 2013 we obviously stayed back significantly in North America due to basically hardly any CapEx required for pressure pumping. So I think what you see going into 2014 is an more even increased North America versus international and obviously we included in North America to growth of Mexico where we see had price significant growth and these services are also quite capital intensive.

Operator

And we will go to Jud Bailey with ISI Group. Please go ahead.

Jud Bailey - ISI Group

I wanted to follow-up on Latin America that was difficult market for Schlumberger and for the rest of the industry in 2013 although you still have to grow margins. With the Mexico work ramping up, with Argentina growing how much of a pickup in growth can we see in 2014? If you grew low single digits in this year or last year rather is that a market that can grow high single digits with Mexico coming back and Argentina growing or is that a stretch?

Paal Kibsgaard

Jud we typically don’t comment on details kind of growth outlook for either but I would say that we’re aiming to grow in Latin American in 2014. What level I can’t really comment on.

Jud Bailey - ISI Group

And just another question, you were able to like as I mentioned grow margins pretty nicely despite a difficult market in Latin American last year. You mentioned cutting cost in Brazil given your cost structure down. Can you comment maybe on how to think about margins in Latin America for 2014? Does it stay kind of soft until activity in Mexico starts to pick back up?

Paal Kibsgaard

I think in the third couple of quarters given the challenging activity levels, both in Brazil and Mexico, across the [ph] mobilization as we probably say in Q2 in Mexico there will be challenges now we’re going to work very hard on keeping the margins where they are but there are some headwinds we’re dealing with. Now on the flip side of that we have very strong businesses in terms of growth perspectives in Argentina, Ecuador and Venezuela. So while we have headwinds continue in Mexico and Brazil, we obviously are going to do what we have to kind of offset those with the strong performances in those three countries.

Operator

Our next question is from Robin Shoemaker with Citi. Please go ahead.

Robin Shoemaker – Citi

Paal you mentioned that you’ve seen price weakness across most product lines in North America. I wonder among all your product service lines and drill bits and fluids and LWD, MWD et cetera where are you seeing relative pricing stability in contrast to areas that are weakening?

Paal Kibsgaard

In North America.

Robin Shoemaker - Citi

In North America, yes.

Paal Kibsgaard

Yeah I think for both of the product lines we’re seeing continuous pricing challenges. I would say the only one that has kind of stood out as a positive and that’s very much driven I would say new technology introduction is actually a good thing. So but the other ones given the market conditions are all facing pricing challenges.

Robin Shoemaker - Citi

Okay and you highlighted artificial lift as an area of focus in the shale play. Now obviously a lot of the and the lot of the shale plays that have lower productivity wells, ESP Technology is not generally employed. So what is Schlumberger solutions that you’re working for lower productivity wells?

Paal Kibsgaard

Well what we have done over the past couple of quarters which I had in my prepared remarks is basically that we are both in number of smaller Broadcom [ph] companies for the key liquids shale basins both in the U.S. and Canada. So our plan is to combine the offering from the biggest Broadcom [ph] companies with our existing artificial lift business and then the objective is then to provide a life of well lift solution to the customer base. So we will do that by looking at what is the idea of lift or ESPs and lot of technologies to optimize production and we’re going to obviously leverage our production adhering expertise and our ability to monitor and integrate the production based on from these wells.

Operator

Our next question is from Edward Muztafago with Societe Generale. Please go ahead.

Edward Muztafago - Societe Generale

I did have one follow-up question on sort of the incoming rigs and specifically as it relates to the Gulf of Mexico. There has been a little bit of chatter recently that while there is a fairly large influx of rigs coming in and we may see a little bit exodus out of the Gulf as well and I guess what I’m wondering is on a net basis does the exodus you know sort of the lower specification, shallower water rigs have material effect on Schlumberger or you know do you think that because you’re little bit more deep water focus does that say on that’s less of a concern?

Paal Kibsgaard

Well when I comment on the Gulf of Mexico my comments are generally focused on deep water which is obviously a large part of one operation and so while there might be some offshore rigs we’re still quite optimistic in terms of the rig projections and the results for the Gulf of Mexico or deep water in particular for 2014 and that’s what I’m basing the outlook on.

Edward Muztafago - Societe Generale

And then this is kind of a follow-up to the revenue per rig discussions in North America, you know obviously one of the things that we have seen as the well count go up fairly dramatically in relation to rigs and so I haven't run the numbers I’m hoping maybe you will have but if we were to actually look at sort of revenue per well, is it probably a better metric. Do we see the same sort of trend between Schlumberger revenue as you would with rigs but maybe to a lesser degree that is the technology upscale has driven some atypical improvement in that metric.

Paal Kibsgaard

So for the revenue per well in North America land I don’t have that data available at this stage. I would still say that that’s probably you know not up as much as the 5% in terms of global revenue, international revenue that I was referring to. So there is continuous negative pricing pressure in North America. So I would say revenue per well is probably more challenged than revenue per rig over a quarter.

Malcolm Theobald

Okay that’s all the time we have for questions today. So now on behalf of the Schlumberger management team I would like to thank you for participating in today’s call. I would like to also personally thank you for your support. John will now provide the closing comments.

Operator

Thank you. And ladies and gentlemen this conference is available through replay. It starts today at 10:00 AM Central Time, will last for one month until February 17th at Midnight. You may access the replay at any time by dialing 800-475-6701, international parties please dial 320-365-3844. The access code 306544. Those numbers again 1800-475-6701 or 320-365-3844 and access code 306544.

That does conclude your conference for today. Thank you for your participation. You may now disconnect.

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