Schlumberger Limited Q1 2010 Earnings Call Transcript

Apr.23.10 | About: Schlumberger Limited (SLB)

Schlumberger Limited (NYSE:SLB)

Q1 2010 Earnings Call

April 23, 2010 9:00 am ET

Executives

Malcolm Theobald – VP IR

Simon Ayat – EVP & CFO

Andrew Gould - CEO

Analysts

Dan Pickering - Tudor, Pickering, Holt

Mike Urban – Deutsche Bank

Kurt Hallead - RBC Capital Markets

Ole Slorer - Morgan Stanley

Bill Herbert - Simmons & Company

David Anderson – JPMorgan

Angie Sedita – UBS

Alan Laws - BMO Capital Markets

Geoff Kieburtz - Weeden & Co.

Robin Shoemaker – Citi

William Sanchez – Howard Weil

Pierre Conner - Capital One Southcoast

Daniel Boyd - Goldman Sachs

Brad Handler - Credit Suisse

Wagar Syed – Macquarie Capital

Kevin Simpson – Miller Tabak

Operator

Welcome to the Schlumberger Limited earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Malcolm Theobald; please go ahead, sir.

Malcolm Theobald

Good morning and welcome to the Schlumberger Limited first quarter 2010 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 results and his comments on the outlook, Simon will first review the quarter's financial results. After the prepared statements we will welcome your questions. 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. Excluding charges first quarter income was $0.62 per share. This is down $0.05 sequentially and down $0.16 compared to the same quarter of last year.

During the quarter we recorded $75 million or $0.06 of charges, $40 million related to the reduction of future tax deductions relating to our retiree medical plan as a result of the passage during the quarter of the Patient Protection and Affordable Care Act in the US.

We also recorded $35 million of merger related transaction costs pertaining to the Smith and Geoservices transactions. We anticipate that we will continue to incur merger and integration related costs. These amounts will be most significant in the quarter when the Smith transaction closes, and the quarters immediately following the merger.

We will continue to separately identify these charges for you. Turning to the business segments, oilfield services first quarter revenue decreased 1% sequentially while WesternGeco revenue decreased 14%. The sequential decline in both revenue and earnings per share can be primarily attributed to severe winter weather that hampered activity particularly in Russia, combined with the absence of the surge in multi client SIS software and other product sales that we experienced in Q4.

These declines were partially offset by an improved performance in North America. Oilfield services pre-tax operating income of $969 million decreased 4% compared to the prior quarter. Oilfield services margins slipped by 46 basis points sequentially to 19% as improvement in North America were offset by a decline in Europe/CIS/Africa. Although all international margins in OFS were 22.3%.

By area oilfield services sequential pre-tax operating margin highlights were as follows. North America improved by 594 basis points to 8% primarily due to an increase in activity across the area supplemented by some pricing improvements for well stimulation services. Latin America increased by 174 basis points to 17.5% mostly as a result of the more favorable revenue mix in Mexico/Central America and the effect of the currency devaluation in Venezuela.

Europe/CIS/Africa margin was 18.1%, 353 basis points lower principally due to lower activity in Russia and the North Sea and lower testing services, equipment and SIS software sales. Finally, Middle East/Asia margin declined slightly by 156 basis points to 31% primarily due to less favorable revenue mix in the Arabian, Gulf, Qatar and Indonesia GeoMarkets and the absence of the year end artificial lift product and SIS software sales in Q4.

At WesternGeco pre-tax was $67 million reflected the decrease in pre-tax margin of 659 basis points to 14.3%. This decrease was largely attributable to the absence of the strong year-end multi client sales that we experienced last quarter. Now turning to Schlumberger as a whole the effective tax rate excluding charges was 18.9%.

This was higher than last quarter primarily due to less favorable geographic earning mix in oilfield services. As you are aware the ETR is very sensitive to the geographic earnings mix and as such we do experience some volatility on a quarterly basis.

Net debt was $75 million at the end of the quarter as compared to $126 million at the end of Q4. We ended the quarter with $4.9 billion of cash and investment on hand and short-term debt of only $934 million.

Significant liquidity events during the quarter included $337 million of stock repurchases and $444 million of CapEx. During the quarter we repurchased 5.3 million shares at an average price of $63.72. Subsequent to the announcement of the merger with Smith in February we repurchased the maximum number of shares we could under the SEC’s Safe Harbor provisions. During the second quarter we are projecting a significant increase in our net debt as a result of the closing of the Geoservices transaction combined with the ramp up in CapEx.

These increases would be offset in part by the expected conversion to equity of our $299 million of convertible debentures during Q2. Oilfield services CapEx is now expected to reach approximately $2.8 billion in 2010 while WesternGeco CapEx is still expected to approach $300 million.

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

Andrew Gould

Thank you Simon and good morning everybody. Schlumberger first quarter revenues of $5.1 billion registered a marginal sequential decline with a strong performance in North America and continued strength in the Middle East/Asia offset an overall decline in product and software sales in the high levels of the fourth quarter and a sharp drop in the North Sea and Russia resulting from lower drilling efficiency and adverse weather conditions.

WesternGeco registered an expected sequential decline in multi client revenue while marine activity improved slightly with higher vessel utilization. Looking at the areas in more detail, in North America all GeoMarkets saw revenue growth sequentially. US land grew on increased drilling activity coupled with some pricing improvements that benefited well services technology.

Canada experienced significant growth as a result of the strong winter drilling season particularly for the oil basins in the West. This led to higher demand for well services, wireline and drilling and measurement services. The US Gulf of Mexico revenue was higher sequentially on increased shelf and deepwater activity that resulted in strong demand for drilling and measurements, testing services and wireline technologies.

Alaska revenue grew from seasonally high exploration activity. In Latin America/Mexico/Central America GeoMarket revenue decreased sequentially primarily due to weather related slowdowns that effected offshore activity and to delays in the finalization of contracts for SIS and data consulting services activities.

In Venezuela/Trinidad/Tobago revenue fell from the impact of the devaluation of the Venezuela currency and from the absence of deferred revenue recognized in the prior quarter. But these effects were partially offset by increased demand for SIS software. Revenue in the Brazil and the Peru/Columbia/Ecuador GeoMarkets decreased sequentially mostly due to lower completions and SIS sales partially offset by an increase in IPM activity.

Argentina/Bolivia/Chili GeoMarket revenue decreased primarily due to lower SIS software sales. Revenue in the Europe/CIS/Africa area fell sequentially as a result of a combination of lower sales of testing services, equipment, and SIS software with the effect of lower pricing and the weakening of local currencies against the US dollar.

Among the GeoMarkets revenue in the North Sea decreased resulting from a combination of lower drilling activity that impacted drilling and measurements, delays in project start-ups that effected testing services, and lower well services stimulation activities.

Russia revenue was lower mainly due to the severe winter weather while revenue in the Libya GeoMarket fell on early completion of offshore exploration campaigns. In the Middle East/Asia revenue was essentially flat with the previous quarter as growth in the Australia/Papua New Guinea and East Mediterranean GeoMarkets was offset by lower sales of artificial lift products and SIS software following the surge in the fourth quarter and by lower activity in the Arabian, Gulf, Qatar, and Indonesia GeoMarkets.

We gained a number of significant contract wins during the quarter, in Iraq BP awarded us together with our joint venture drilling partner the Iraq Drilling Company, a number of wells on an integrated services basis. In Angola we were awarded a series of six-year contracts for wireline logging, tubing-conveyed perforating, well testing, well completions, coiled-tubing services, and well stimulation vessels.

And in marine seismic, WesternGeco was awarded a number of acquisition service on the Norwegian Continental shelf as well as a contract in Brazil for the region’s first multi azimuth survey. We also announced two significant events during the quarter, the proposed merger with Smith International, and the planned acquisition of Geoservices which closed in about an hour after the time our press release went over the wire this morning.

In the proposed merger with Smith our complimentary products and services will lead to the development of an engineered drilling system that optimizes all the components of the drill string to allow customers to drill more economically in demanding conditions. What we consider to be a step change in drilling performance and well productivity will come from combining measurement and steering capabilities with the engineering and design of complete bottom-hole assemblies and their various components, including the drilling fluid and the drill bits.

The addition of Geoservices mud-logging technology to the Schlumberger portfolio will also be an important step in the development of higher-performance drilling systems. The combination of Schlumberger’s real time downhole measurements with Geoservices’ drilling mud analysis will help customers better identify and react to drilling hazards while the combination of mud-logging with Schlumberger formation evaluation measurement will bring a more complete understanding of rock lithology and fluid content.

In addition to Geoservices mud-logging technology and expertise, Geoservices’ footprint, expertise and technology in slickline well intervention and field production surveillance will complement existing Schlumberger activities. I look forward to welcoming both the employees of Smith and Geoservices to Schlumberger.

Our outlook for the remainder of 2010 confirms the optimism we expressed at the beginning of the year. At WesternGeco while the second quarter will see increased vessel transits, strong tendering activity in marine is leading to much improved visibility on the remainder of 2010 and utilization will be higher than originally planned.

However new capacity entering the market is likely to limit pricing gains until later in the year. In North America commitment drilling to hold leases as well interest in domestic oil plays should sustain current activity levels in the United States through the second quarter while Canada will experience the normal spring break-up. Beyond that, the picture is less clear as natural gas prices and the fundamentals of the natural gas remain uncertain.

Higher oil prices are leading to tangible evidence that operators are contemplating higher levels of activity than originally planned in international markets. We reiterate our comment from the last quarter that we see improvements in some offshore markets notably the UK sector of the North Sea, Latin America, and West Africa as well as on land in Russia.

In order to prepare for this increase in the latter half of 2010 and in 2011 we have increased our CapEx guidance by $400 million, the bulk of which will be aimed at drilling and measurements and high-end wireline technologies.

Finally, I am on record as saying that I felt international margins would bottom at the end of the Q2 2010. I am pleased to report I was mistaken. International margins appear to have bottomed and are now likely to resume a positive trend from now on, absent any exceptional circumstances.

Thank you very much and I will now hand the call back over for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Dan Pickering - Tudor, Pickering, Holt

Dan Pickering - Tudor, Pickering, Holt

You earlier in the year you did express optimism but then you sort of dialed the numbers back a little bit for 2010 indicating that maybe the street had got a little bit too optimistic, do we interpret sort of your uptick in outlook to mean that 2010 numbers may now have some upside room and can you talk a little bit about exactly what you’re seeing that gives you the increased confidence over the past month or two.

Andrew Gould

Well firstly I feel pretty comfortable with the sort of overall consensus where it is now. And secondly we are seeing clear signs of increases in activity in the North Sea. You can count them. And similarly we’re seeing the results of some of the exploration campaigns in Latin America which are leading to very high quality revenue for us, particularly in wireline and testing.

And similarly I’ve always thought that some of the title rigs lots in West Africa would get picked up if the oil price was higher than people were planning and that’s exactly what seems to be happening. So its just, its confirmation that’s come through in the last three months at what I was alluding to in January.

Dan Pickering - Tudor, Pickering, Holt

So you’re seeing some concrete examples it sounds like.

Andrew Gould

Yes.

Dan Pickering - Tudor, Pickering, Holt

I know that you’re transitioning your role a little bit at Schlumberger and the company has done I guess about $10 [billion] in acquisitions here in the first quarter, one closed one yet to close, do you think the acquisition side slows down a little bit or does the focus change in terms of the things you look at, can you maybe walk us through what you’re going to be working on in the next year or two.

Andrew Gould

So firstly apart from niche technologies or opportunities we can’t say no to, yes we have shut down or if you like severely restrained the acquisition pipeline and Paal Kibsgaard will be running the day to day operations as COO and I will be taking care of the integration of Geoservices and Smith as well as obviously helping Paal when he needs help.

So that’s basically how we’re splitting the roles for the next couple of years.

Operator

Your next question comes from the line of Mike Urban – Deutsche Bank

Mike Urban – Deutsche Bank

Wanted to talk about Russia a little bit obviously some weather issues there, but it seems to me there’s been a bit of a disconnect in the market, a lot of the stuff especially in the mature basins spending down a lot there hasn’t recovered much but yet we’re still seeing a lot of the forecasts out there for production growth, I was wondering if you could reconcile those two things and what you see in terms of activity levels and is there a need to ramp up there significantly going forward.

Andrew Gould

Well I think that last year they were able to sustain and increase their production largely because they got a lot of help from [Vancor] and one other field I can’t remember the name of, but this year if they want to maintain their production at current levels they’re going to have to go back to work in Western Siberia and tendering activity would indicate to us that they do have the intention to do that.

And as well for us we will have an even stronger year in Sacalin then we did last year but the big shift from last year is that we think that there’ll be a lot more drilling in Western Siberia in order to sustain their production.

Mike Urban – Deutsche Bank

And then shifting to Iraq, as you noted some nice contract awards there and there’s again some conflicting trends there, there’s a need to ramp up quickly in a number of cases but also still some uncertainty there surrounding the status of the government and so just wanted your thoughts on what the trajectory looks like there, do you expect additional awards or are we just going to be executing on what’s already out there.

Andrew Gould

Do you mean for the oil companies.

Mike Urban – Deutsche Bank

For the oil companies and then what that means from a service standpoint.

Andrew Gould

I think that its highly unlikely that there is any more licensing rounds or contract rounds for the oil companies. I think that the future is more likely now to be with the Iraqi national oil companies. I don’t think that the oil companies will hesitate to spend on the first phase of the activity in Iraq just because at this point in time there is no stable government.

I do think that two or three years down the road if they don’t have a satisfactory judicial physical and political atmosphere, they will hesitate before they go into the very large spending that will be required for the new development. But actually they’re spending for the rehabilitation of the existing fields in terms of a budgets of the size of companies we’re looking at is not huge.

So I think that activity will as sort of, as has been advertised will go ahead.

Mike Urban – Deutsche Bank

So any delta from here would be from the NOC there.

Andrew Gould

Yes.

Operator

Your next question comes from the line of Kurt Hallead - RBC Capital Markets

Kurt Hallead - RBC Capital Markets

Wanted to just come back to the macro team again here and maybe flesh it out maybe a little bit more and obviously your reference in Dan’s question some tangible evidence that you’re now seeing that gives you the confidence now, you increased your CapEx which I think pretty much underscores your conviction that the market cycle is starting to turn, and probably turn in Schlumberger’s favor, I was wondering if you might give us some insights as to how you see the cycle evolving and how it will in your view accelerate in the international markets and if you can give us some benchmarks and comparisons to prior cycle periods. Is it going to be a faster acceleration in line maybe a little bit slower, if you could give us any color that would be great.

Andrew Gould

I think there is a bit of a difference between this cycle and the 2004 and 2008 cycle, in 2004 2008 we had a huge amount of natural gas projects going on overseas that were not going to be going on this time around. So we had the whole Qatar LNG ramp up, we had Yemen, we had other stuff in Africa and while there will be some of that this time around, I don’t think its going to be anything like the volume of what we had between 2004 and 2008.

So this cycle is going to be far more in my opinion related to oil outside the United States, even inside the United States. And there I think that if you look at the latest demand figures for the non-OECD world, you look at the flattening of the demand drop in the OECD world and you look at the potential call on OPEC I don’t see any reason for the price of oil to decline very far from where it is today in which case gradually confidence is going to grow to bring in a lot more of these particularly offshore projects that we all know that our customers have lined up.

And on land its going to increase all the activity and production enhancements so I think absent a double-dip in the developing world or a huge double-dip in the OECD that the oil cycle is probably going to, I hate to say this again, but its going to be stronger for longer. But the gas cycle is going to be very much effected by the amount of LNG that’s just been put on stream and of course by the advent of shale gas, so unconventional gas in the United States.

Now in terms of our CapEx what is very satisfactory is these deepwater rigs are starting up on time. We had more, the start ups we anticipated in Q1 have gone on time and pretty flawlessly which means that we’re getting more deepwater activity earlier than we thought and if that carries through that means we had to accelerate the CapEx.

Kurt Hallead - RBC Capital Markets

Now in connection with that and how the cycle may be evolving and Schlumberger’s position there seems to a line of thought in the marketplace that Schlumberger is losing share in certain geographic markets and some product lines and I understand this Angola project that you referenced in your press release today I think there’s some element of significance that may be worth mentioning, so I was wondering if you could just talk about your view of Schlumberger’s market share position both from a geographic market and from the technology standpoint and would you generally agree with the view out there that Schlumberger is at risk from the competition.

Andrew Gould

So let me deal with Angola first, the whole Angola thing that’s been announced by us and others is a renewal. It is not new work. It is a major, major renewal. And in that renewal we have renewed segments we already had working there and we have added segments that were not working there before.

In terms, I don’t, its very difficult to believe your own people and market share data, but we constantly look for where we’ve lost market share and we constantly fail to find it. I can only think of one major piece of market share we’ve lost in the last two years. And then I go to the [Spears] data and the Spears data if you look at if Q409 over Q408 says we’ve increased our market share more than our principal competitors so I’m sorry I don’t see it.

Kurt Hallead - RBC Capital Markets

And just basic question now, one area that you think you lost share where would that be.

Andrew Gould

It was one big contract and I’m not going to rub my poor people’s nose in it. It was one big contract we lost.

Operator

Your next question comes from the line of Ole Slorer - Morgan Stanley

Ole Slorer - Morgan Stanley

Welcome back into the camp of more bullish people again, its good to have you back.

Andrew Gould

Well its nice to be back, but prudent has always been my watch word in these things.

Ole Slorer - Morgan Stanley

Absolutely and I hope you of course stick with that, on the jack up side we’re seeing big tender activity in the North Sea and West Africa Middle East of the broad base, of course that the [inaudible] you’re talking to, but we’re not really seeing much in the deepwater market in terms of a kick off of increased tender and contract, so can you give us a little bit of a view on how you see the exploration side turn more into a development drilling kind of kick off both in West Africa and then selected deepwater markets in Asia. Can you give us a little color on what you’re seeing now compared to—

Andrew Gould

Well I think, so firstly the deepwater programs that have been announced and rigs have been contracted for happening as I mentioned earlier they seem to be happening on time which is unusual. Secondly I think that the operators generally will make sure that deepwater rig rates come down a bit and once they’ve done that they will do some exploration.

They hate paying top dollar for exploration rigs so in fact I think an adjustment down similar to what we’ve seen recently in the big deepwater rigs or even the sort of the second or third generation rigs that can do an exploration well in deepwater is very positive for us.

Ole Slorer - Morgan Stanley

Are you saying that this is not coming over the past couple of, has there been any kind of rate or change in your customer inquiry levels as of late.

Andrew Gould

Only really in West Africa whereas I said earlier there were some semis that had idle slots and those idle slots are getting filled with an exploration well here or there.

Ole Slorer - Morgan Stanley

On exploration again on the seismic market you mentioned that you saw firmer [inaudible] into the back end of the year, could you elaborate a little bit, is this you realizing higher prices, is it leading edge, are you expecting to bid a higher, firmer prices.

Andrew Gould

I think the answer is that we, our utilization for 2010 is pretty much wrapped up and therefore we’re expecting to bid higher. Whether we’ll be successful or not is another question.

Ole Slorer - Morgan Stanley

On the pricing on renewals if you could repice your international work, let’s say for example you highlighted this Angola contract, this rolling over and renewing, could you give us a little bit of a feel for how a rollover pricing has changed compared to let’s say three months ago, are we back into positive territory again or –

Andrew Gould

No I don’t think so, I don’t think there’s been any change in large tenders, in large tenders in international pricing in the last three months. I’m not exactly sure when this is bid but with the evaluation process and the award process, it was probably bid early last year.

Ole Slorer - Morgan Stanley

Would you expect at this point to be bidding higher prices and prices rolling off or are you still in negative territory if you’re looking forward from here.

Andrew Gould

If we look forward from here I think for specific high end technology we will be looking to push price.

Operator

Your next question comes from the line of Bill Herbert - Simmons & Company

Bill Herbert - Simmons & Company

Along those lines here I was curious as to whether you could provide us with a road map if you will for international margins, do you, you said that they’ve troughed in Q1 but really what I’m looking for is how you see them evolving second half of 2010 and next year and really talking about the interplay between volume, mix and price, and what I’m trying to reference here is back in 2006 and 2007 we were generating 40% incremental margins and how long do you think before we get back to that and what will it take to get back to that.

Andrew Gould

Well firstly I think that for the balance of this year there are two elements of price that will dominate and they are firstly volume and mix. Volume is better utilization of equipment and mix is the big shift towards deepwater and offshore that’s taking place at the moment. I think that the other thing that will happen in this year, but this depends very much on us, is the $80.00 oil.

Our customers will loosen their purse strings on using the high end technology that in the downturn the engineers were told they were not allowed to buy or they should go easy on because it was expensive in the worst of it. So we, if you like, it’s the difference between a cheap bottle of wine and feeling you can afford a good bottle of wine.

So we think we’ll see a little bit of that, not a lot. I don’t think we will get real pricing traction until we start to have volume issues, in other words that people start to move into equipment shortages and I don’t think there’s any way that that could happen this year. I think next year in certain segments particularly drilling and measurements, if the level of drilling stays where it is you will start to see operators wanting to tie up equipment and therefore that gives you some demand pull pricing power.

But I don’t think its this year, I think its next year.

Bill Herbert - Simmons & Company

Do you think its unreasonable to expect us getting back to those really flush incremental margins sometime next year.

Andrew Gould

There has to be demand there, so it really, really does depend on the level of activity and I can’t see that yet. Because we really, really get pricing power when our customers are desperate to have the equipment. So in fact in the 2005 cycle one of the things that provoked that was the huge sucking of equipment into Saudi Arabia, that frightened operators elsewhere so if Iraq went very, very fast, which personally I don’t believe, that also could suck in fairly large amounts of equipment.

Bill Herbert - Simmons & Company

So you don’t see it yet for 2010 yet you’re not necessarily ruling it out for next year.

Andrew Gould

I’m not ruling it out but I’m not going to call it.

Operator

Your next question comes from the line of David Anderson – JPMorgan

David Anderson – JPMorgan

Question on WesternGeco I don’t think a choppy recovery will surprise anyone and taking into account your remarks on pricing, I was wondering if you could compare for me how this business is positioned now to where it was in 2002, 2003. It seems to me that with multi client de-emphasized it should be a much quicker uptick in margins, and with your limited capital requirements going forward that maybe you should be hitting mid cycle returns at a much earlier stage then the past cycle. Am I right on that.

Andrew Gould

The only reason I’m, so firstly I think on multi client you’re right, in other words that the, our library is extremely healthy and that to the extent that activity remains robust particularly in the Gulf of Mexico and West Africa then library sales will probably go faster then they did in the last cycle and a lot of that will be to do with technology.

Because we have made major strides, the industry and us, have made major strides in the quality of multi client over the last four or five years. But in marine there is going to be, there is something like 14 or 15 treaty boats that are either new or can come back into the market fairly shortly so that’s what’s going to, if you like, slow pricing uptick in marine seismic, whereas last time around the boats were not in a build cycle and therefore the excess capacity got sucked up faster.

You’re quite right to point out that the Eastern [Ecco] deal means that we will not be in the market for building or huge CapEx commitments for our marine fleet in the next few years.

David Anderson – JPMorgan

On just a different subject, on your last call it sounded like you were focusing a little bit more on the emerging shales in North America but more recently EMP has been taking up a lot of headlines a lot of talk about a shift into unconventional oil, just wondering if this changes your thinking at all in this market, should we be looking for Schlumberger to perhaps be more aggressive going after this business and kind of what’s your sense of service intensity of the oil versus the gas plays.

Andrew Gould

I think my competitors have commented that they’re very similar and I think they’re right. I do think and I’m not, please don’t ask me why because I’m not going to say, we do have certain technologies that in these unconsolidated oil plays are quite advantageous. And obviously we will be introducing those probably later this year.

Its adaptation of other technology that we have but its, and its not hydraulic fracturing. But we think that we probably have some tools that can make a difference.

Operator

Your next question comes from the line of Angie Sedita – UBS

Angie Sedita – UBS

To dig another cut at the international margins you pieced in 2007, 2008 about 28 to 30% margins, today at 22%, you think that we will return to those peak margins, or potentially go beyond and is that a 2013 event or could it actually be earlier and finally do you think that the increase in IPM risk, there’s margins and returning to those levels.

Andrew Gould

So firstly I think that the comment I would make which is if you like an indication of the relative mildness of the cycle overseas is that for our margins to only go from 28 to 22 instead of in the teens, probably in the mid teens, is a pretty remarkable situation. But how fast it can go back really, really does depend on how fast activity accelerates and that’s still a judgment I’m afraid on the general economy.

There is no doubt that oil drilling is going to be very solid but how fast its going to go is going to depend very much on the general economy. So can we get back there one day, yes I’m actually convinced we can, but please don’t ask me to say its 2013 or 2014, I don’t know.

Angie Sedita – UBS

I guess to follow along that as far as talking specifically about Iraq do you think that, how much time do you think it will pass before you get to margins that you’re happy with there and do you need a scale as far as the number of rigs operating in the region to reach those margins and do you have any concerns so far on how your competition is bidding in the region.

Andrew Gould

I don’t think the first phase in Iraq, in other words the rehabilitation of the existing fields and the just the drilling of wells in non locations is necessarily going to produce for anybody the sort of margins that they like. And also we’re all going to have set up costs, we’re all going to have, it will be pass through but it nonetheless will effect the margins you see, security costs for example.

And have I seen any irrational bidding behavior, so far no I haven’t actually. Not of the, we don’t really obviously know what other people bid but given the pricing we’ve been using, I don’t think we’ve seen totally irrational behavior so far.

Angie Sedita – UBS

Do you think its scale or time that pushes you—

Andrew Gould

Scale in Iraq is a difficult thing, I think its going to go project by project. For example you do not want to build out infrastructure in advance of work because every time you build a new piece of infrastructure it adds to your security risk and your security costs. Every time you have a new base, you have to have more security and it costs you more. So I think people will build out, certainly we will build out project by project.

Angie Sedita – UBS

And then finally going along with the scale side, do you want to give us your thoughts on Mexico, the labs, the incentive contracts and do you think that over time we could go back to the recent highs as far as activity levels that we saw in 2009 or will that take some time or just lack of clarity so far.

Andrew Gould

Everyone, our lab is started like everybody else’s, we in fact have had a group in Mexico City studying this problem for the last two years so we’re not, we have some ideas and actually I think that it will be quite a long time, at least a couple of years, before Pamex is in a position to judge whether or not the production potential justifies the scale of drilling program that they previously had.

So I think it will be a couple of years before we know that and in the meantime yes they will drill but I don’t think they will drill on anything like the scale they were drilling before.

Operator

Your next question comes from the line of Alan Laws - BMO Capital Markets

Alan Laws - BMO Capital Markets

First question is we haven’t really talked too much about North America, you’re more bullish on international and that seems very logical, less visibility in North America because of the gas situation but could you talk maybe to the profitability levels in this market, the rig count say flattens, can North America reach a reasonable profitability level for Schlumberger.

Andrew Gould

Well yes, I think at this level of rigs, when we’ve completed the various initiatives we have on the way to improve our utilization and improve our decision making, I think that we can reach a level of profitability that will satisfy us, yes. But we’re already a little way into that process so far therefore the improvement we got in Q1 was a good job on the part of the people who were involved.

Alan Laws - BMO Capital Markets

Is part of the GeoMarket reassessment in cost initiative that you’ve talked about last time that is getting you there.

Andrew Gould

Its not really a cost initiative its more a question of management control over the levers which we had to decentralize and which we’re busy centralizing in different basins.

Alan Laws - BMO Capital Markets

On international you noted Saudi as a sort of driver or catalyst in the last cycle, two parts here, is Saudi market going to be less important in this coming cycle and maybe is there another market like Saudi that’s going to be that kind of I guess driver of profitability or the one that really makes everything move this cycle.

Andrew Gould

I don’t think that anyone else in the world is going to build on a scale, build out on a scale that Saudi builds out between 2005 and 2009. Saudi will remain a very, very important market not just for oil but also because they have very ambitious plans in gas and very ambitious plans in exploration.

I don’t see another market that is capable of ramping up as fast as Saudi did.

Operator

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

Geoff Kieburtz - Weeden & Co.

Just a couple of clean up questions, on the international margins you said that the first quarter is the bottom would that statement apply individually to the three regions.

Andrew Gould

No I think I’m going to say it applies globally, because you can always have a mix effect that will uptick or down tick a particular region in a particular quarter.

Geoff Kieburtz - Weeden & Co.

With that in mind, do you think that those down ticks could drive the margins in any one of the regions below what they were in the first quarter.

Andrew Gould

It doesn’t look that way. We’re not talking about North America right.

Geoff Kieburtz - Weeden & Co.

No international. And on North America in regards to these management initiatives where would you say you are in the implementation, it sounds like your review is finished and you’re in the implementation stage, is that correct.

Andrew Gould

I would say that we’re more than a third but less than half way into the implementation.

Geoff Kieburtz - Weeden & Co.

And I don’t know if you can answer this but in a steady state activity environment what kind of margin improvement are you targeting with these initiatives.

Andrew Gould

I don’t think I’m going to discuss that.

Geoff Kieburtz - Weeden & Co.

And in regards to your earlier comments about Mexico not getting back to the level of drilling activity, that was specific to Chicontepec.

Andrew Gould

Yes.

Operator

Your next question comes from the line of Robin Shoemaker – Citi

Robin Shoemaker – Citi

Just to finish that question we can look back and see that over the last years that Schlumberger’s margins in North America have been almost exactly comparable to its peers, and for the fourth quarter and the first quarter clearly was below so it sounds like you believe that with the initiatives you’re taking you will be back very much in line with the other multi service companies in North America.

Andrew Gould

So I would be very disappointed if our people in North America didn’t have at least that ambition. The only thing I would say is that with one of our competitors we have a comparable mix, with the other one we don’t yet but they will shortly. So the mix effect can effect what the overall margin is for each company. And when we finished, closed the Smith transaction and when Baker closed the BJ transaction we have to relook at the whole margin landscape.

Robin Shoemaker – Citi

Then just on the deepwater market where you had I guess a favorable comment about the timing of the deepwater rig start ups, so if we think about all of the rigs that are under construction today and the timing that we can see that they’re scheduled for delivery certainly looks like 2012 would be the first really full year and what is the order of magnitude of that increase in deepwater drilling 2010 versus 2011, the bulk of the rigs really seem to be mostly coming in 2011.

Andrew Gould

It means that, I don’t have the numbers in front of me but certainly 2010 is much bigger than 2009 and then again 2011 is much bigger than 2010. And actually 2012 I haven’t even looked at. Because you know when a rig comes into the market if you take the number of rigs that people announce are coming into the market in any one year you basically have to divide it in two because the average would arrive half way through the year.

So this year we get the full effect of the rigs that came into the market in 2009 and half the effect of 2010 and next year we get the cumulative 2009 and 2010 and half of 2011. So you’re probably quite right that 2012 will be the high point of deepwater activity.

Operator

Your next question comes from the line of William Sanchez – Howard Weil

William Sanchez – Howard Weil

I was curious as it relates again to Latin America and the margin performance being surprisingly good, unlike your peers you didn’t identify specifically the Venezuela devaluation as a non-recurring item, just curious as to what kind of impact that had negatively to the quarter and what kind of add back could we have expected there and the results in Latin America.

Andrew Gould

I’m going to let Simon discuss the Venezuela valuation and if you want more granularity on the rest of it I’ll talk about it afterwards.

Simon Ayat

Let me take this in two parts, first why we didn’t see any impact on the devaluation, we obviously have an impact on the devaluation, the reason it was not apparent because in Venezuela we do take a very prudent approach within the rules of accounting, we anticipated this kind of devaluation and we have deferred certain gains from exchange that we experienced during 2009 to be ready for this eventuality.

And it did take place and we covered it from within the balance sheet. Now as far as the impact on the business obviously the revenue drops because we have a Bolívar portion of our revenue but on the cost side it has a positive impact because the cost reduced given the new rates and as a result was slightly positive impact on the margin overall in Venezuela.

So this is basically the story.

Andrew Gould

And I would say the other element that helped us is that a lot of the adjustment of our cost based in Mexico took place in 2009 as well.

William Sanchez – Howard Weil

And that’s been a big difference for you, you don’t feel like you’re carrying additional cost that some may be doing as they await what happens in Mexico in terms of spending.

Andrew Gould

We don’t own rigs very many of them anyway.

William Sanchez – Howard Weil

My follow-up would be you mentioned limits on the first quarter share repurchases here or Safe Harbor I’m just wondering if there’s any limits that we should think about share repurchases either in the second quarter or until the Smith acquisition is closed.

Simon Ayat

There are certain rules that we have to follow, we continue to buy now under the Safe Harbor rule and as soon as the proxies are mailed to the shareholders of Smith there is a blackout period that we have to respect until the shareholders vote on the transaction, then we’ll be free to buy without limits except the normal limit for buybacks.

So there is a period of time, we hope it will not be too long between the mailing of the proxy to the shareholders and the voting on the transaction.

William Sanchez – Howard Weil

And we should probably still expect that you’re buying back enough stock to offset any dilution as a whole for the company is that fair.

Andrew Gould

Dilution from the employee programs, yes. The Smith transaction it won’t really be, we can’t really look at that until as Simon says, the Smith shareholders have voted.

Simon Ayat

But the rate we are buying at its bigger than the dilution from the stock based compensation program.

Operator

Your next question comes from the line of Pierre Conner - Capital One Southcoast

Pierre Conner - Capital One Southcoast

I note as Bill did the performance in Latin America is very good on the margin side in particular and so with that my question is actually around Europe/Africa margins which might have been a little bit lower although we were, you alerted us to the weather impacts, what’s the progression from here with the recovery of some of those transitory issues on weather in the North Sea, weather in Russia, and you’ve mentioned some specific contract awards in Russia but when do we get back to sort of 2Q, 3Q 2009 margins in that region.

Andrew Gould

Q3 2009, how much as that Simon, do you have that in front of you Pierre.

Pierre Conner - Capital One Southcoast

In the low to mid 20’s.

Andrew Gould

I think we’ll get back to the low 20’s fairly quickly because the trouble with Russian weather is that not only do you have your equipment doing nothing but you also have to pay to heat it. So the cost effect of minus 35 temperature days is huge. So aside the activity just the equipment working normally makes a huge difference to the margin.

Pierre Conner - Capital One Southcoast

So there’s a big piece and then the North Sea as well some recovery there—

Andrew Gould

The North Sea efficiency will improve in the second quarter and in fact our stimulation boat was dry docked for 18 days as well in Q1.

Operator

Your next question comes from the line of Daniel Boyd - Goldman Sachs

Daniel Boyd - Goldman Sachs

I wanted to follow-up on North America and sort of the reshuffling process that you have going on there, you’ve actually grown in line with peers sequentially but your incremental margins are in line with peers as well but I’m assuming you’re carrying some extra costs associated with this and I know you don’t like to break that out, but are we talking about incremental or additional costs in the $20 to $30 million range that at some point through the year will fade.

Andrew Gould

No I don’t think you should think of it as incremental cost, I think there is still cost we have in North America that we need to eliminate. So its idle facilities, things like that and you know that all takes place over the balance of the year so there is incremental costs associated with the reorganization or the restructuring or whatever you want to call it, but it really is fairly marginal. It’s a group of people.

So I wouldn’t take it as something that’s just going to disappear but that group of people is working at getting the whole cost base down.

Daniel Boyd - Goldman Sachs

So we should measure the success of this risk shuffling as higher incremental margins to allow you to catch up to peers over the course of the next four quarters.

Andrew Gould

Yes.

Operator

Your next question comes from the line of Brad Handler - Credit Suisse

Brad Handler - Credit Suisse

A couple of unrelated questions, just a follow-up on the North American market in the assessment you’ve made to date are there changes to your capital commitment that you expect in North America.

Andrew Gould

One of the effects of what we’re doing should be much higher equipment utilization. And therefore the revenue dollar per hydraulic horsepower or whatever you want to use as a measure should increase and therefore ultimately the amount of CapEx that we’ll need to cover what we do compared to Schlumberger did in the past will probably go down.

Brad Handler - Credit Suisse

So the additional $400 million it does not sound like is being directed—

Andrew Gould

No I was very clear, the additional $400 million is drilling and measurement and high end wireline, its not pressure pumping.

Brad Handler - Credit Suisse

And then can you tell us how much of your percentage of revenues is coming from deepwater today and maybe how you expect that to evolve over the next couple of years then given all we’ve talked about with deepwater.

Andrew Gould

We haven’t disclosed that. I don’t think we want to at this point in time but it’s a substantial portion and it obviously has a very high growth factor.

Brad Handler - Credit Suisse

That’s why I figured I’d probe, how about if I ask it a little more generally just in terms of offshore, as a percentage, offshore revenues as a percentage of total.

Andrew Gould

Its not 50% but it’s a, I would say its somewhere between 30 and 40.

Operator

Your next question comes from the line of Wagar Syed – Macquarie Capital

Wagar Syed – Macquarie Capital

I just wanted to get a sense from you about the outlook for Venezuela and what does the payment schedule look like now.

Andrew Gould

I would describe the payment schedule as thoroughly under control and a very good understanding between ourselves and [inaudible] service for what is necessary. And the activity actually I think will pick up slightly this year particularly for us given the amount of success they’ve had with gas. So I think Venezuela will finally have a slightly better year this year then they did last year.

Wagar Syed – Macquarie Capital

Do you see any recurring expenses from this healthcare bill.

Simon Ayat

No this is, basically there was a write off of some deferred tax assets so we’re not going to see this as ongoing no, it was one-time.

Operator

Your final question comes from the line of Kevin Simpson – Miller Tabak

Kevin Simpson – Miller Tabak

I just wanted to get a clarification on those deepwater comments you made earlier I guess in response to Robin’s question, you said peek in 2012 but I’m assuming you meant based off of the equipment we know is already been ordered and is being built now rather than an actual peek in the market.

Andrew Gould

A peek on what we know is going to come to the market, yes. Not anything that gets launched now. And it assumes that, there’s a very high utilization rate for deepwater rigs as well.

Kevin Simpson – Miller Tabak

And one other unrelated, in Russia you’re talking about a little bit more of a swing to Western from Eastern Siberia, would that imply that margins will while they recover nicely will, may not be as high on the individual work since its less, more fields and so a little more competitive and higher—

Andrew Gould

No I think that the, while you’re quite correct to point out that Western Siberia margins are not as high as Eastern Siberia or Sacalin, the sheer volume will compensate for that.

Kevin Simpson – Miller Tabak

And you don’t think there’s, some of these expansions of your competitors trying to be like you will limit upside pricing power or limit pricing power.

Andrew Gould

No.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Malcolm Theobald

Prior to closing the call I would like to mention that the Schlumberger second quarter 2010 earnings conference call will be held on Friday, July 23, at 9 am US Eastern time. Now I would like to thank you for participating in today’s call.

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