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Executives

Simon Ayat - Chief Financial Officer and Executive Vice President

Malcolm Theobald - Vice President of Investor Relations

Paal Kibsgaard - Chief Operating Officer and Director

Andrew Gould - Chairman and Chief Executive Officer

Analysts

William Herbert - Simmons

John Anderson - JP Morgan Chase & Co

Kurt Hallead - RBC Capital Markets, LLC

William Sanchez - Howard Weil Incorporated

Brad Handler - Crédit Suisse AG

Angeline Sedita - UBS Investment Bank

James West - Barclays Capital

Michael LaMotte - Guggenheim Securities, LLC

Michael Urban - Deutsche Bank AG

Ole Slorer - Morgan Stanley

Daniel Boyd - Goldman Sachs Group Inc.

Schlumberger Limited (SLB) Q1 2011 Earnings Call April 21, 2011 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Limited First Quarter 2011 Results Conference Call. [Operator Instructions] I'd now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Malcolm Theobald. Please go ahead.

Malcolm Theobald

Thank you, Stacy. Good morning, and welcome to the Schlumberger Limited First Quarter 2011 Results Conference Call. Joining me for today's call are Andrew Gould, Chairman and Chief Executive Officer; Paal Kibsgaard, Chief Operating Officer; and Simon Ayat, Chief Financial Officer. Today's call is being hosted from Rio de Janeiro where the Schlumberger Limited board meeting is being held in our Brazil Research and Geoengineering Center. Prior to Andrew's comments, Simon will first review the quarter’s financial results and then Paul will provide an overview of the operational results and technical highlights. 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 will welcome your questions after the prepared statements. And now I'll turn the call over to Simon.

Simon Ayat

Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. First quarter EPS, excluding charges, was $0.71 per share. This is a decrease of $0.14 sequentially and an increase of $0.09 compared to the same quarter of last year. During the quarter, we recorded $0.02 of charges relating to the continuing integration of Smith and Geoservices. As we previously announced, the quarter's results when compared to the fourth quarter of 2010 were adversely impacted by a number of events.

The events included severe weather in North America and Australia, political disturbances in the Middle East and North Africa, and the absence of the Q4 early payout of the IPM gain share project in North America, as well as the traditional surge in year-end multi-client software and other product sales. These items more than accounted for the sequential decreases in the EPS.

This is the first quarter that we are reporting under our new group structure. As a reminder, our primary reporting was based on our 3 groups: Reservoir Characterization, Drilling and Reservoir Production. These 3 groups comprise what we will now refer to as Oilfield Services. In addition, we will report our Distribution business as a separate and distinct segment. From now on, when we refer to the results of our geographic areas, it reflects the results of all 3 of the groups, including the legacy Smith oilfield and M-I SWACO businesses. Furthermore, the results of WesternGeco are also now included in both the group and geographic results and are no longer reported separately. This is a significant change from our prior quarters that I wanted to highlight. It is also worth pointing out that the Distribution business, which predominantly North-American centric, is not included in the geographic results. All prior period amounts that I will mention have been restated to conform to our new structure.

Pretax operating income for Oilfield Services were $1.5 billion. This represents $240 million decrease compared to the prior quarter. Oilfield Services pretax operating margin fell 206 basis points to 17.9%. International pretax operating margins were 16.5% for the quarter. Again, the previously mentioned events were the primary drivers underlying this performance.

From a group perspective, Reservoir Characterization margin fell 606 basis points to 21%. As the severe weather and political disturbances significantly hampered Wireline activity, while the absence of the year-end WesternGeco market line and the SIS software sales negatively impacted margins on a sequential basis. Margins for the Drilling group improved slightly to 14.6% on strong performances from IPM Well Construction activity and the number of the acquired Smith businesses in spite of the weather and geopolitical issues. Reservoir Production margin decreased 145 basis points to 19.4% due to the absence of the year-end product sales in Artificial Lift and Completion and the Q4 early payout of the IPM gain share project, as well as the impact of the weather in North America land. Distribution contributed pretax operating income of $22 million.

On a geographic perspective, North America had a very strong quarter, driven by Well Services activity and pricing. As a result, margin increased by 32 basis points despite the absence of the Q4 IPM gain share payout, which accounted for approximately 1.4 percentage points of margin last quarter and the lower multi-client sales. Latin America margin increased by 78 basis points to 15.7% as the revenue mix strengthened. Europe/CIS/Africa margin decreased by 6 percentage points to 12.5%. This decrease largely reflect the impact of the political disturbances in Libya and Tunisia, combined with a less favorable revenue mix in Russia and the seasonality effects in the North Sea. Middle East and Asia margins dipped slightly by 145 basis points to 21.9%. This decrease is almost entirely due to the political events in the area and the weather effects in Australia. The impact of the year-end product and software sales also contributed to the decline.

Now turning to Schlumberger as a whole. The effective tax rate, excluding charges, was 23.6% as compared to 23.1% in the fourth quarter. We still expect the ETR for the full year to be in the mid-20s, reflecting the planned mix of activity between North America and the rest of the world. We ended the quarter with $4.2 billion of cash and investment and short-term debt of $2.2 billion. Net debt was $4 billion at the end of the quarter as compared to $2.6 billion at the end of last quarter. Significant liquidity events during the quarter included $844 million of stock repurchases and $769 million of CapEx. During the quarter, we repurchased 9.68 million shares at an average price of $87.18 per share.

Additionally, we have now completed the refinancing of all of the long-term fixed-rate debt we assumed in the Smith transaction. In this regard, we repurchased $1.3 billion of notes during the quarter. This refinancing will serve to reduce our interest expense going forward. CapEx for all the Schlumberger is still expected to approach $4 billion in 2011.

And now I will turn the conference call over to Paal.

Paal Kibsgaard

Thank you, Simon. Schlumberger first quarter revenue of $8.12 billion decreased 4% sequentially, but increased 45% year-on-year. The impacts of the geopolitical events in North Africa and the Middle East, as well as severe weather in the U.S. and Australia impacted all 3 product groups and represented around half of the sequential decrease in total Oilfield Services revenue.

Looking at the product groups, Reservoir Characterization sequential revenue was severely impacted by the geopolitical events at WesternGeco Q-Land, Testing Services and our Wireline activity the most. In addition to this, WesternGeco revenue decreased following the fourth quarter surge and multi-client sales in the U.S. Gulf of Mexico even though revenue increased in Marine due to a more favorable activity mix. SIS revenues fell sharply in all areas from seasonally lower software sales.

Casting revenue also fell due to less product sales, lower activity in Latin America and East Asia and due to the winter slowdown in Russia. Wireline revenue was flat sequentially as strong winter activity in Canada offset the impact of the geopolitical and weather events. For the Drilling group, the sequential drop in revenue was primarily caused by the geopolitical events and excluding this impact, revenue actually increased for the group. IPM Well Construction revenue increased on strong activity growth in Iraq, Mexico and Russia. Drilling and Measurements revenue decreased from lower activity and pricing in Europe, CIS and Africa and the completion of offshore exploration project in Australia, Papua New Guinea, but this was partly offset by the return of some deep water work in the U.S. Gulf of Mexico and by an increase in activity in Latin America and Russia.

M-I SWACO show continued strong activity in North America, but overall, revenue decreased due to seasonally lower product sales, the weather in Australia and delayed projects in Europe, CIS and Africa. In Reservoir Production, revenue fell sequentially largely due to the impact of the geopolitical events in North Africa and the Middle East, and due to severe weather in the U.S. and in Australia. Excluding these impacts, the production group revenue increased as higher pricing and strong demand for Well Services technologies in North America more than offset the IPM gain share payout in North America from the prior quarter and the seasonally lower product sales in Artificial Lift and Completion Systems.

From a geographical perspective, the Europe/CIS/Africa revenues decreased sequentially as a result of the political unrest in North Africa, a less favorable revenue mix, lower software sales in the North Sea GeoMarkets and seasonally lower activity in Russia. Middle East and Asia revenue was lower as increasing IPM activity in Iraq and shale gas activity in India were insufficient to offset the impact of geopolitical events in the Middle East, seasonally lower software and product sales and weather-related slowdown in Australia.

In North America, excellent growth in pricing, utilization and activity in our Well Services product line resulted in double-digit sequential revenue growth, which fully offset lower WesternGeco multi-client sales, the non-recurrence of the IPM gain share payout and the impact of weather-related slowdown on land in the U.S. In Latin America, strong growth in WesternGeco and M-I SWACO activity in the Brazil GeoMarket balanced lower offshore activity and lower software sales in the Mexico and Central America GeoMarket.

Looking at some of the highlights of the quarter, I would like to start off with WesternGeco where a number of contract awards in Marine emphasize the success of new technology, both in acquisitions and in processing. Market take off of Coil Shooting acquisition with successful completion of the survey offshore Brazil and the award of a new Coil survey in Angola were particularly notable. The opening of the Brazil Research and Geoengineering Center in Brazil will be key to the processing of the Brazil data, while centers such as the WesternGeco GeoSolutions center in Jakarta will underline other contracts that have recently been awarded. For the growth in exploration activity to come, WesternGeco is well placed through technology and footprint to make further progress in the coming quarters.

In the Drilling group, we continued to make significant progress in terms of integration and synergies between Smith and Schlumberger products and services to the point that we now see the transaction being neutral on an earnings per share basis in Q2 2011, moving up from our previous estimate of H2 2011. In addition to revenue synergies related to our global footprint, as well as our IPM and D&M businesses, we are also starting to see the first examples of revenue synergies related to new product development. As a result, Smith Bits continues to perform very well, keeping its leadership position in the roller-cone market while at the same time dramatically improving the PBT market share, both in international and North American markets. This position is further strengthened by the introduction of the new Spear bits that's bringing superior performance to our customers operating any unconventional shale basins. We have also recently introduced another new bit, based on our unique single-copper technology developed by our nominal drill division in Utah, which has shown up to 80% improvement in drilling rates as well significant reductions in shock and vibration.

At our Investor Conference in February, we discussed the new HiWAY fracture stimulation technology, and this service continues to see very rapid growth. Total job count is now approaching 1,000 with 528 stages completed in the first quarter of 2011 compared to 102 in the fourth quarter of 2010. The first horizontal open hole well in the Bakken Shale with a total of 19 stages has been successfully completed using HiWAY and the first job has also been conducted in the Middle East. A significant number of opportunities for future jobs are now under evaluation for HiWAY. A new field for HiWAY technology deployment are under discussion in the U.S. and in Canada, Argentina, India, Oman, Saudi Arabia, Egypt, Algeria, Congo and Angola.

In the investor conference, we also told you about the leading position Schlumberger has established in well intervention and production enhancements to our market leading Wireline, slickline and coiled tubing offering. We are currently seeing particularly strong growth in our new coiled tubing service ACTive, which offers real time fiber optic enabled measurements and this new service has already been deployed to 20 GeoMarkets around the world.

Finally, I would like to highlight IPM's outstanding drilling performance on the well construction project in Iraq. All the projects have been mobilized and started on schedule in a very challenging environment, and we are now drilling both for BP and ExxonMobil. On the BP project, we have already managed to half the drilling time from the first well we drilled through the use of both technology and process optimization, and our ability to consistently redefine the benchmark for this performance is being recognized by our customers.

With that, I will pass the call over to Andrew.

Andrew Gould

Thank you, Paal. Good morning, ladies and gentlemen. Despite the difficult working environment, I'm very pleased to the performance with both our North American and international operations during the quarter where a number of underlying trends were positive.

Wireline growth was encouraging, particularly for high technology services. Despite the seasonal drop in Russia with M-I SWACO, the Drilling group revenue increased to excellent performance at IPM Well Construction, particularly in Iraq. In addition, growth in revenue synergies with Smith and Geoservices products is very strong. Reservoir production continued to make gains in North America in both activity and pricing, which in our total North American results more than compensated for the absence of a gain share project that was recognized in the fourth quarter and a 42% drop in seismic revenues between the fourth and first quarters. These positive effects limited the decrease in margins to 206 basis points, led by strong performance in a number of GeoMarkets, including Iraq, where we achieved double-digit margins that we expect to improve continuously through the end of the year.

Looking ahead, the recent completion or announcement of various licensing rounds around the world will ensure sustained marine seismic activity. The anticipated increases in exploration budget and the advent of additional development activity, particularly in the Middle East and North America, will rapidly improve business conditions for Wireline and Testing Services. The continued success of new Petrel releases, particularly for exploration, will ensure further strong performance from SIS.

For Drilling and Measurements however, despite strong increases in demand, service pricing remains extremely competitive internationally but excellent service quality and advanced technology allows this effect to be offset to some degree. In addition, call-out services are non-contracted rates have boosted this effect and further activity increases later in the year should lead to considerable tightening of capacity with a consequent effects on price impact.

The absence of oil production from Libya, combined with continued recovery in demand, has reduced the world's spare capacity of oil production significantly. The call on both fuel oil and natural gas will increase as Japan recovers. The exploration and production industry has begun to respond and absent a further leg to the recession, will have to substantially increase investment to maintain a comfortable supply cushion in an era of political uncertainty. We anticipate that high oil prices will continue to support additional drilling in the liquid-rich plays in North America. The upturn in deepwater activity more generally is becoming increasingly visible, and the rate of permitting in the U.S. Gulf of Mexico is accelerating. Middle East activity is increasing substantially, led by Saudi Arabia and Iraq.

These activities will progressively mobilize over the next 6 months and the projected increases will reach levels where some resources will become constrained. Schlumberger is ready for this scenario with new technology, equipment and people. Our excellence in execution initiatives, which were introduced in 2007, is already paying dividends and will continue to do so.

Thank you very much. I will now hand the call to Stacy for the question-and-answer session. Stacy?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will go to the line of Dan Boyd with Goldman Sachs.

Daniel Boyd - Goldman Sachs Group Inc.

Andrew, I'd like to just follow up with you on what's going on in North America and you alluded to this somewhat in your comments with the seismic being down, IPM gaining up being there this quarter. But what are you seeing, especially on land, as underlying sort of revenue and margin trends? Just as we look at what 1 of your competitors put up so far, the numbers look like they maybe growing a little bit faster. So maybe can you talk about what you're seeing there and just update us on your strategy of closing the gap in terms of, I think, size and margin within North America.

Andrew Gould

Okay, Dan. So can we make an extraction of the gain for the IPM project that was sold in Q4 and an extraction for a sequential drop of 43% in seismic revenue. And then I'm going to ask Paal to talk about the rest of our strategy in North America. Is that okay?

Daniel Boyd - Goldman Sachs Group Inc.

That would be great.

Andrew Gould

Okay. Paal?

Paal Kibsgaard

Okay, so if you look at what we set out to do about some months ago, we set up the goal to basically close the margin gap in North America because at that stage we were severely underperforming in our eyes. So if you look at where we stand at this stage, we have more or less closed the gap, so I'm very pleased with the margin momentum that we have managed to create. And I'm also quite confident and positive in my outlook of our future margin momentum. If you look at land, we are at this stage seeing a very strong pricing momentum in both Drilling and Wireline, and I think this will continue in the coming quarters. I also think that our HiWAY introduction drilling technology is going to help extend our pressure pumping margin momentum. We're actually seeing some customers switching to our pressure pumping services at this stage at the back of HiWAY. We also continue to drive utilization in all segments as part of the restructuring that we have initiated and we have record utilization again in pressure pumping in March. And also see some impacts that still come from the restructuring in terms of supply chain services, as well as general support. Now in addition to that, we are also relatively optimistic on the onset of the Gulf of Mexico coming back and we have a very strong position in the high-end services, so Wireline and Drilling and Measurements in these new rigs and permits that have been granted. And this, of course, is going to be highly accretive to our non-performance going forward. So that's on the margin side. On the growth, we are very much committed to invest in capacity as we go forward. The quarter-to-quarter growth for Well Services as I indicated in my comments were in double-digits, but they were offset by the significant reduction in multi-client sales, as well as the non-recurring gain share we had then in IPM. So we are very much, I would say, positive on the outlook of North America at this stage. We have secured manufacturing capacity on pressure pumping in a multi-year bid program that we started last year and we have a lot of flexibility in our program to continue to take significant capacity addition, which is what we are going to do.

Daniel Boyd - Goldman Sachs Group Inc.

That's very helpful. There's a lot I could probably follow up on with that, but let me just go back to the HiWAY and it's something you talked about at your Analyst Day. But how quickly can you build that up and is that something where we could expect you to start pulling through a lot more services and using that to lead with a differentiator? But in terms of scale and how many pressure pumping jobs or how many fleets you could roll it out to, how should we think about the progress that has been made and how quickly that could continue to ramp up?

Paal Kibsgaard

I think we are ramping this up very quickly as you see. There's somewhat the quotations that's needed to be done on the pressure pumping equipment that we have on the wildcard, but this is not significant. So the main thing is just to have the product available to pump and we have, obviously, a significant supply line set up to do this, right? So just in terms of the ramp, we did about 100 stages as I said in Q4 and we did over 500 in Q1. And this is now multiplying almost by the day, right? So we have not only in North America, but we are now engaged in looking at candidates and projects pretty much all over the globe. So this is a significant amount, I would say, growth vehicle for us on pressure pumping. And as I said, even in North America, we've had cases where customers have switched to our pressure pumping services in the background of HiWAY.

Daniel Boyd - Goldman Sachs Group Inc.

Okay. And if I could just have 1 more follow up on just the Gulf of Mexico coming back because that's something that Andrew highlighted at the Analyst Day of something we could -- the 1 upside surprise to really tighten even international market, it sounds like you're optimistic there, but is that something that you think contributes to a much higher incremental margins in the back half of the year, just broadly in the business?

Paal Kibsgaard

No, I would say so. If you look at our margins in North America historically, the Gulf of Mexico has always been highly accretive to our business. Over the past year, it has been highly dilutive so I think it's going to have a significant relative impact to our margin as we go forward.

Daniel Boyd - Goldman Sachs Group Inc.

Thanks a lot.

Operator

And we'll go to the line of Angie Sedita from UBS.

Angeline Sedita - UBS Investment Bank

Andrew, in your comments you mentioned that you believe some resources will be constrained as activity increases. Which product lines would you expect would be constrained first? And I would assume it would likely be in some international markets over others, could you give us a little color?

Andrew Gould

I think that if the Gulf of Mexico plays out, Saudi plays out. The new [indiscernible] seem to be coming on a pretty much as we planned them, then the first place that equipment control that will show up will be Drilling and Measurements. In fact, in some places, they're showing up already which makes complete nonsense of the industry's pricing policy at this point in time.

Angeline Sedita - UBS Investment Bank

And on international margins, for the third quarter of 2007, we were at 18.7%. Obviously, increased in Q4 to 19.3% on seasonality and as expected declined here in Q1 to 16.5% for international margins. When you think about the second quarter, could we go back to the third quarter level for international margins at 18.7% or do you see that as a second half of 2011 event?

Andrew Gould

No, I will be disappointed if we don't do that in the second quarter.

Angeline Sedita - UBS Investment Bank

Okay. And then finally, there's been some commentary about performance-based contracts for Schlumberger and it's been an area that you're focusing on globally. Could you give us a little color what percentage it is of total revenues today? What could it rise to? What customers you're working for? And is there any risk that this could change the dynamics for peak international margins for the cycle?

Andrew Gould

I'm going to let Paal answer the question on the strategy with performance contracting.

Paal Kibsgaard

Okay, so we have actually been moving our contract base, in particular, within Drilling and Measurements towards performance contract over the past couple of years. And at this stage, we have around 1/3 of our contracts for Drilling and Measurements based on performance in various forms. And this is obviously something that we will continue to push going forward. Exactly how high it will come, I can't give you an exact number on, but again, we are setting quite aggressive goals in terms moving our contracts towards this type of cycle. And the key for that is, that obviously, when you take on a performance-based contract, you need to have confidence in your ability to perform. And at this stage, we are very confident in our ability. And the reason for that is the excellent in execution program that we embarked on 4 years ago where we have basically invested heavily both on the product development side to get better performing products, but also on the operational processes and all of these elements are now paying off very, very nicely.

Andrew Gould

Yes, and if I can provide a little color to that Angie. In Q1, the first quarter of 2011, we replaced our competition in Drilling and Measurements on 40 jobs. They replaced us on 7. Almost all 40 we replaced them on were for service quality review. We were replaced 1 for service quality and 6 times because we didn't have the right tool available. So I was just -- a very nice point that in this international market, as drilling ramps up, quality is really going to count.

Angeline Sedita - UBS Investment Bank

So is there a specific customer that you're working, is this more NOCs in international oil companies or give us little color there?

Andrew Gould

I think it's across the board at the moment.

Angeline Sedita - UBS Investment Bank

Okay, great. Well, thanks, guys.

Operator

I'm going to the line of Ole Slorer with Morgan Stanley.

Ole Slorer - Morgan Stanley

A question to Paal or for Simon Ayat there, you didn't highlight any of sort of magnitude of the negative headwinds in the first quarter. That's where it's somewhat unusual, Australia, North Africa, I mean we all know, this was a very unusual quarter. Could you give us not enough, with respect to North America, but with respect to international, could you help us with some kind of magnitude of the negative effect versus kind of a normalized type of core environment? I mean, we all know that there's no such thing as normalized but nevertheless, could you help us a little bit?

Simon Ayat

So Ole, as we announced before, this impact of geopolitical and weather, overall impacted us between $0.08 to $0.10, will probably be more on the lower end of that. And this is what happened in the first quarter, some of it is North America, it's only the weather impact of it is North America, but the rest is international. So we are in that range that we announced, partly, it's North America, but the large part of this is international because of the geopolitical and the Australia weather, the severe weather we experienced in Q1. Does this answer your question?

Ole Slorer - Morgan Stanley

Yes. So if you look at the margin impact from there, say your international, so would this be -- so in percentage terms, on the international margins, what would that translate into?

Andrew Gould

We're not going to give you a percentage, Ole, but the decremental was very high, because whether you can't cut costs and when you're evacuating a place like Libya, you have very high decremental costs. So you can assume it was a very high percentage.

Ole Slorer - Morgan Stanley

Yes. Just trying to get a feel for sort of as things normalized without pricing and the way margins would be, but I think can back into it from what you've said. Second question, Andrew, I mean talking about this nonsense pricing that the industry is engaged on, I mean how much of your capacity is tied up on nonsense pricing a the moment and when do you think it will roll off?

Andrew Gould

Well, not a great deal. As yet, there are probably 1 or 2 fairly large contracts where to retain them we've gone through nonsense pricing. But along as those contracts are long term, we know very well within the year's time, we won't selling the technology we bid on, so there's a possibly to recover margin in this. It's very much there. It's not -- what I'm worried about is, what I'm concerned about is that we're going into a market where the demand for this service is picking up very, very rapidly, and we still see a lot of nonsense pricing out there.

Ole Slorer - Morgan Stanley

Would you think that - - you've been through a few cycles, so when do you think there'll be an environment where people will realize that it's better than nothing?

Andrew Gould

Yes, they will realize it when it has happened in 1 or 2 cases already, when they win contracts but they can't serve it because then the customers will become upset. And once the customers become upset, if you want to provide a decent service, you have to pay for it, right? So the emphasis will shift.

Ole Slorer - Morgan Stanley

Do you see a scenario where international margins could catch up with North American margins? And if so, when would that be?

Andrew Gould

Well, that's going to depend an awful lot on 2 things in North America. The first is the speed with which the Gulf comes back after its initial flush of permits, right? So what is the total recon in the Gulf going to look like in 2012. And the second is, even if activity doesn't rollover, pricing rollover on land in North America because of the surge in capacity. So those 2 effects will come North America margins, they're a little bit unknown at the moment. But I think that absent the second leg to the recession or a severe drop in demand due to higher oil prices that the trend in international margins will, in the back half of this year, should accelerate. I mean as I said in my comments, more and more confident that the activity is there.

Ole Slorer - Morgan Stanley

Okay, Andrew. Finally, this 1, could you quantify what you mean when you say spare capacity in the global oil markets have heightened up significantly as a result of this? Could you just share a little bit more of your thoughts on that?

Andrew Gould

Well, you've lost them -- well, I mean very rough numbers you've lost 800,000 to 1 million barrels a day out of Libya, which is having to be made up by other people, which means that from the global spare capacity which you could calculate is really being around 4.5 million, 5 million barrels a day, you've lost 1 million. And I actually think that political uncertainty will add to the need to add spare capacity or to have more spare capacity available in the world. And I think oil prices are reflecting that at this point in time.

Ole Slorer - Morgan Stanley

Do you see that the scenario with the shale oil could become as big a surprise as what the shale gas goes to all of us?

Andrew Gould

You're going to have to define what you mean by shale oil, Ole.

Ole Slorer - Morgan Stanley

Okay.

Andrew Gould

Are you talking about the Colorado...

Ole Slorer - Morgan Stanley

On the global unconventional oil, what is the scope for that to surprise the way North America unconventional gas did over the past couple of years?

Andrew Gould

I don't know. I honestly don't know. I mean, we are looking at it, but I don't have a decent result. You want to say anything, Paal?

Paal Kibsgaard

No, I'm thinking -- well, I think at this stage, it is really is what is driving the sustained activity in North America, all right? But I mean we have -- some of these wells are produced for 1 or 2 years maximum, I'd say. It's still early to say how sustainable it is. But at this stage, it is looking quite promising.

Ole Slorer - Morgan Stanley

Thank you very much.

Andrew Gould

It's a light shale gas, Ole. It depends a lot on infrastructure.

Ole Slorer - Morgan Stanley

[indiscernible] completely wrong. So I'm just wondering what is the scope here that we can grow oil production significantly more than what anybody's kind of thinking about at the moment if [indiscernible].

Andrew Gould

Well, I don't think that you can take these reservoirs as being some form of way of replacing the Middle East or something.

Operator

And we'll go to the line of Brad Handler with Credit Suisse.

Brad Handler - Crédit Suisse AG

Could we spend a little time on your seismic outlook, please? Very nicely optimistic. I guess what I -- maybe 1 way of asking the question is, how much of your optimism is based on the broad demand for seismic services, for Marine contract services, specifically versus kind of nice illustrations of coil shooting technology and uptick there or continued uptick. But how much of it is sort of technology driven and specifically, Schlumberger technology, just trying to parse between those 2?

Paal Kibsgaard

So I think the main basis for optimism at this stage is the fact that we have a very, very strong technology position both on the acquisition side and on the processing side, right? So the examples we showed on Coil Shooting is obviously at the absolute high end of it, but there's also a lot of other technologies within the offering which is unique to us, right? So we are quite, I would say, upbeat and optimistic on the basis of this strong technology position. I think what's going to be the key element that's going to determine the uptick on marine pricing is going to be what's happening -- what is going to happen in the Gulf. So I'd say whether the same round is going to go forward at the end of this year or early 2012. If that is the case, then I think there will be a significantly more multi-client acquisition activity in the Gulf, which again is going to tie up investments that are currently on third-party, and this, again will then hopefully create the pricing traction that we are looking for. I thought the counter to that is whether some of the players more and more specifically mine leading trend they keep adding vessels to the global's pick up. But overall the technology position is, at this stage, what makes us products optimistic and upbeat on seismic.

Brad Handler - Crédit Suisse AG

Understand. Just a couple of -- maybe some quick follow-ups on that. So I understand the Gulf position, but I guess you have new horizons in Brazil that you're securing some work to shoot as well, I'm sure there's more to come. Obviously, you have a number of emerging basins, can that -- I guess the suggestion is that can all soak up with capacity is today and is it a tighter sort of tighter outlook on that basis than perhaps you've even suggesting the last 6 months or is it more -- is it pretty similar?

Paal Kibsgaard

I think overseas, it is pretty similar, right? Yes, we've had these surveys planned and they were going ahead and that's good, and some of them are actually going more high-tech than what they initially thought. But I think the main doubt there is how many vessels are going to be attracted into the Gulf of Mexico as we get ready for this lease turnaround.

Andrew Gould

I would just add, if I may, Paal, that the awards of blocks in the Kwanza basin in Angola were all the people who've been awarded have a time-limited in which they have to shoot 2,500 square kilometers of seismic is a fairly significant event in demand over the next 18 months.

Brad Handler - Crédit Suisse AG

That's very helpful. 1 last 1 quickly. Your backlog of $900 million in WesternGeco, how does that compare with a quarter ago?

Simon Ayat

We've slightly improved.

Andrew Gould

It's a slight improvement, I might say, Brad.

Brad Handler - Crédit Suisse AG

Okay, very good. Thanks, guys.

Operator

And we'll go to the line of Michael LaMotte with Guggenheim.

Michael LaMotte - Guggenheim Securities, LLC

I've got a couple of quick follow-ups. First, on North America, if I think about just the changing complexion of the market with liquids and foreign capital, IOC is coming back. Does the liquids and just, call it the toolkit required to get to that resource and the operator mix shift at all? Did Schlumberger benefit disproportionately from those 2 factors, you think in terms of your opportunities for market share?

Andrew Gould

I would say not at this stage. I still think as you know, I said on many occasions that for both these liquid-rich plays, as well as the gas plays that longer term, the current technology is extremely wasteful and longer term that's going to shift and it's going to shift to a point where the completed zones will be pinpointed rather than being almost statistically frac-ed, but the technology is still 2 or 3 years away from that probably.

Michael LaMotte - Guggenheim Securities, LLC

Okay. So the resource that we're after doesn't really change that underlying trend that you've been talking about for a while then?

Andrew Gould

No, not really. Not really. The tool set is not there yet.

Michael LaMotte - Guggenheim Securities, LLC

Okay. Thank you, Andrew. On quickly follow up on the seismic side, Paal, your comment that sort of the technology uptake early on, if I could sort of think about exploration cycles from leasing rounds to seismic acquisition, I think the uptake rate historically was pretty slow in the sense that you had lease and then some maybe 2D and as you got more comfortable, you went to 3D, but the technology penetration seems to be occurring a lot faster in the cycle. So is it correct to say that there's in effect a double lever this time around and that exploration activity is growing very rapidly? And that you're seeing that technology penetration much sooner in the cycle?

Andrew Gould

Mike, I'm just going to answer that because it's a subject I really enjoy. The advent of our technology is almost redefining the way in which people will do their initial delineation after 3D. So for example, a lot of the work we're doing in Brazil, is they've made the discovery, they've identified the reservoir, but before they go into development, they want to have a really, really high resolution map of the actual reservoir from seismic. So the technology is redefining to a certain extent the way that they're applying it, applying seismic as a tool.

Paal Kibsgaard

And if can add, I think also in the past, you may have had options of whether you went to 2D or conventional 3D and you could still get a reasonable view of the reservoir. And with some of the reservoirs that we are chasing now below salt, there is only 1 option in some cases and that is called shooting. So in fact, the need to move to high-end technology even to get some cycle answer is a lot more significant at this stage and that's why I think the technology uptake again is going to be quicker and higher.

Michael LaMotte - Guggenheim Securities, LLC

That's great. Thanks, guys.

Operator

And we'll go to line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC

The question I have is when you look at the numbers, you had really impressive international margin performance from around 900 basis points better than your closest competitor. So with that, what dynamics are in place that could provide Schlumberger with the opportunity to increase this spread? And do these dynamics provide a unique opportunity for Schlumberger relative to your competitors?

Paal Kibsgaard

So if you look at the margins overseas, again, similar to North America, we also are mostly very confident in our ability to basically continue to widen the margin gap that we have versus the competition. Some of the reasons for that is that we still see a significant margin upside from the Smith integration as we continue to get both the revenue synergies and the cost synergy and as we switch into the exploration phase, the value mix of our services is, I would say still significantly higher or more favorable than that of our competitor. And also given our size at this stage and the focus that we have put over the past year on internal efficiencies, there is significant cost in margin potentials from our side. So I would say that generally, the margin momentum we have overseas is significant and we will continue to pursue it and maintain a very meaningful margin gap towards our competition.

Andrew Gould

Kurt, we explained in Boston and I'll repeat it, that as prices go up and as projects become more and more difficult, service quality and technology become more and more important and the operator's desire to take chances diminish, and I think that's what you see happening.

Kurt Hallead - RBC Capital Markets, LLC

Okay, great. That's all for me. Thank you so much.

Operator

And we'll go to the line of James West with Barclays Capital.

James West - Barclays Capital

Good morning, guys. Andrew, I had a question about the Middle East specifically. We obviously see the ramp up that's occurring in Iraq and we have improving trends in Saudi here. For your other customers in the region, are they starting to consider or starting to accelerate programs in response to this perhaps to secure service capacity?

Andrew Gould

I don't think we've seen that yet, but I don't think it's very far away, Jim.

James West - Barclays Capital

Okay.

Andrew Gould

I don't think -- I can't honestly say we've seen it yet, but I don't see it far away, James.

James West - Barclays Capital

But it certainly hasn't gone unrecognized what those two countries are doing, I would assume?

Andrew Gould

Absolutely not, no. And also the Gulf, they're reissuing permits in the Gulf. The operators all notice these things.

James West - Barclays Capital

Understood. And then one question actually on the Gulf of Mexico, it has been a negative drag on earnings. If we assume your cost structure as it is today and your current market share -- historical market share there, how many rigs do you need running in deepwater to turn breakeven or positive from an earnings perspective in the Gulf?

Andrew Gould

We've never been negative in the Gulf. So we've kept most of the infrastructure in place. We do not export a bunch of equipment, so there's not a huge amount of investment and we will bring people, the skill -- the very skilled people who we’ve been using overseas from the Gulf, back into the Gulf, so the actual cost structure is not going to be significantly different from what it was before. So we will -- the margin, as Paal pointed out a few minutes ago, are going to accelerate pretty rapidly.

James West - Barclays Capital

Okay, that's helpful. Thank you.

Operator

And we'll go to the line of John David Anderson with JPMorgan.

John Anderson - JP Morgan Chase & Co

Good morning. Andrew, you probably have a good insight and mentality that anyone has seen out there, just kind of a related question of what James is asking but specifically about Manifa. Would Manifa have happened at this time it wasn't for Libya? In other words, was Manifa planning to go at this stage all along or have we seen a change in kind of the way Aramco is operating and kind of accelerating things and I guess you're saying you think it's out there, has anything kind of shift in terms of your views of the international cycle as it kind of all fits in together?

Andrew Gould

I'm absolutely not going to make any comments on those specific policies of Saudi Aramco. They always had the option of accelerating Manifa in the various times. In the last two years, they've slowed it down and they've accelerated it. They're now, at this point in time, it's not for me to speculate. But yes, I think that the absence of good production worries the oil producers generally because while they like a high-level price, you don't like a higher oil price because of they potential they have to destroy demand. So where we see a greater activity from other NOCs, I think we probably will. And also, don't forget that this activity that's being added, we do not see that coming at the expense of the expansion of gas activity which is already taking place in the Middle East.

John Anderson - JP Morgan Chase & Co

So is it fair to say you're incrementally more positive on terms of the timing of the international spend than you were 90 days ago?

Andrew Gould

I have a great deal more of comfort that is -- well, firstly, I'm more confident it's happening because we can see what's being built, what's being mobilized and the rest of it. And given the geopolitical circumstances, the condition of Libya and Japan and everything else, yes, I think that I'm much more confident that the international spend are going to come much faster.

John Anderson - JP Morgan Chase & Co

And also, Andrew, in your release you talked about exploration spending ticking up and we're starting to see it pretty well distributed globally. I was wondering if you could just kind of provide some context as you should see how exploration versus development spending evolves over the next couple of years compared to last cycle? In other words, if you look out the next kind of 12 months, how does that kind of spending makes up exploration? Where does that compare? Are we looking kind of like '05, '06 and how that ramped up, how are you thinking about that as you look out?

Andrew Gould

I think the biggest -- there are two significant changes in the way the exploration might occur in this cycle. The first is obviously the availability of deepwater rigs and the relative increase in our knowledge of how to prospect in deepwater compared to 5 or 6 years ago, that's 1. And the second is, the national oil companies themselves coming back to exploration which is not something that they did on any scale in the previous cycles. So generally and if you look at a basket of oil companies, private ones, the reserves in production ratios are not great. Where they have acreage is going to be perspective with these oil prices, I think they will substantially increase their exploration spend and you're seeing one or two of them out there.

Operator

And we'll go to the line of Bill Herbert with Simmons & Company.

William Herbert - Simmons

Sticking with the Middle East, Asia-Pacific region here quickly. Andrew, back in '05, '06, '07, we had sort of annualized revenue growth of 20% to 30%, almost hard to believe that now. I mean, clearly, you were coming from the smaller base, you were in the midst of Saudi tripling its rig count. But based upon the broad and building swell that you're seeing right now in the Middle East, do we get back to those kind of annualized revenue growth rates, do you think?

Andrew Gould

Well, first, you have to remember the biggest change between now and then is we have Smith. And we have the opportunity to expand both Smith and M-I SWACO in those regions that we did not have in the previous cycle. Activity wise, I don't think -- I still don't think it's going to ramp as fast as it did in '05, '06 because the tripling of the rig count in Saudi was sort of once in 100 year event almost overseas because overseas never normally go that far. But over time, can we double some of them in the Asia again? Yes, I think we can.

William Herbert - Simmons

Okay. Secondly, with regard to Drilling and Measurement, sort of performance-based contracts, I'm curious as to how your appetite for performance-based contracts, Paal, will shift in the event we get the supply-demand framework for D&M tightening and pricing improving demonstrably relative to the supercompetitive environment today. Does that lessen your appetite for performance-based pricing and improving overall pricing environment or is it still sort of a strategy of your irrespective of pricing where you want more performance-based contracts?

Paal Kibsgaard

Yes. I don't think the pricing of capacity necessarily is going to change our strategy on that. I think the benefit of this model is that we have the ability to set ourselves apart from the competition due to the stronger performance that we have and obviously, if there's a tightening of capacity and the base prices continue to go up. They will have to be a higher value for the performance that we put up. But the contractual framework very much holds water in a tighter capacity situation as well. We will continue to push that and make sure that we get our fair share of the value that we create with our customers.

William Herbert - Simmons

Now I'm sure it varies by contract and by customer, but remind us basically the framework of how performance-based pricing works. What's the base pricing, if you will? Is it at a discount to what you would otherwise charge in a standard contract? And clearly, you're going to get something above and beyond what you would get on a standardized basis in the event that you deliver on the performance, but remind us the framework, if you will, as to how the performance-based pricing works.

Paal Kibsgaard

What you said is pretty much the case. These things vary significantly and in terms of how you formulate it in the various contracts and the various customers. But the principle is, that there is a basic fee that we get for being there and doing the work and that could typically be lower than what normal pricing would be. But then there is a similar upside for us to harvest in the event that we outperform what is currently perceived to be the benchmark and the benchmark would be the average performance of I would say us and the various competitors. So exactly how you're formulating contracts varies somewhat, but that's the basic principle. And by having that basic principle is just a matter of how much you put on the basic fee and how much you put on the performance upside. And at the end of the day, for us to deploy equipment into these types of contracts for customers in a tightening market, it would have to be attractive.

Operator

And we'll go to the line of Mike Urban with Deutsche Bank.

Michael Urban - Deutsche Bank AG

Andrew or Paal, you talked about the tightening you see in pricing, I guess, initially in the Drilling and Measurements. Is that -- given the increase visibility that you've seen, was that something you felt was going to be happening anyway as we progressed here or is that been more a function of Saudi coming back into the market in terms of your view?

Andrew Gould

One more time, I always thought I may have been wrong but D&M will be the segment that tightens first partly because they lose a lot of equipment. And so if you have an increase in activity and the normal rate of equipment lasted, things tend to tighten very fast unless industry is completely overbuilt. Now the Gulf of Mexico and Saudi Arabia are both very heavy users of D&M equipment. So those events have probably given us confidence that pricing is going to come back soon.

Paal Kibsgaard

I agree. You said year-end early on and I think it will definitely by year-end, if not, the second half of the year.

Michael Urban - Deutsche Bank AG

Okay. And then after D&M, where would we progress in terms of the tightening cycle in pricing?

Paal Kibsgaard

Well, I think the next segment that we would see that in will be in more slightly open-hole Wireline. That's the next in line for that. So probably similar tougher times, maybe slightly off in Drilling and Measurements but very quickly Wireline as well.

Michael Urban - Deutsche Bank AG

And then where do you have -- conversely, where do you have the most excess capacity in the industry? What would be last to tighten?

Andrew Gould

Sorry, again?

Michael Urban - Deutsche Bank AG

What would be the last? Where should we see -- expect to see the pricing lagging?

Andrew Gould

I don't -- it's very difficult to say. That will depend an awful lot on how capacity evolves in North America, whether we overbuild or we don't overbuild.

Michael Urban - Deutsche Bank AG

Okay, got you. That's all for me. Thank you.

Operator

And we have time for one last question. And we'll go to the line of Bill Sanchez with Howard Weil.

William Sanchez - Howard Weil Incorporated

Andrew, you've mentioned a couple of times now that either you've replaced one of your competitors on several contracts or that as you anticipate perhaps doing it in the future given their inability to deliver on contracts. I'm just curious when you're replacing some on these contracts, are you doing it -- so not only getting the volume pickup, but are you doing it typically at a higher price in what the competitor was doing that work for?

Andrew Gould

We are not an insurance policy for our competitors. In other words, if we replace them, we do not agree to the contractual terms that they accepted to get the job. If we accept to replace them at their contract value, we're just an insurance policy.

William Sanchez - Howard Weil Incorporated

Okay, sure. So there is some an embedded pricing improvement, I guess, in that. And then just one follow-up...

Andrew Gould

Paal wants to say something.

Paal Kibsgaard

No, as we decide to take on someone else's contract whether that's for 1 well or 2 wells or whatever it is, we'd obviously look at the value of that contract and whether it's something that we do want to take on. So it would have to be attractive again for us to do it and increasingly so when our competition keeps bidding low and our customers want us to come in that amount [ph].

William Sanchez - Howard Weil Incorporated

Sure. Just as we look for the quarter 2 here, can you give some just sense in terms of -- you had almost a 10% drop in your revenues in first quarter from fourth quarter. Just I know we had seasonal issues clearly that were addressed, but can we just talk a little bit about top line recovery here as we kind of look out the next couple of quarters and maybe how you think -- you guys think about as a whole year-over-year growth perhaps 2011 versus 2010 given what's going on in North Africa?

Andrew Gould

So the bulk of the revenue drop outside North America was either seasonal or geopolitical. So obviously, Libya is not coming back, right? The rest of it probably will. And the mobilization of projects towards the end of the quarter offshore was quite high. So second quarter, can we recover what we lost compared to Q4, for example? I don't think we're going to be very far away.

William Sanchez - Howard Weil Incorporated

Okay. Thanks Andrew and Paal for your time.

Malcolm Theobald

In closing, I would like to thank Robert Bergeron for his support during his time as Manager for Investor Relation and wish him luck in his next assignment. And now on behalf of the Schlumberger Management Team, I would like to thank you for participating in today's call. And Stacy will now provide the closing comments.

Operator

Thank you, ladies and gentlemen. This conference will be available for replay after 9:30 a.m. today running through May 21 until midnight. You may access the AT&T replay system at any time by dialing 1 (800) 475-6701 or 1 (320) 365-3844, and when prompted, enter the access code of 190450. That does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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