Schlumberger's (SLB) CEO Paal Kibsgaard on Q4 2015 Results - Earnings Call Transcript

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Schlumberger Limited (NYSE:SLB)

Q4 2015 Earnings Conference Call

January 22, 2016 09:00 AM ET

Executives

Simon Farrant - VP, Investor Relations

Paal Kibsgaard - Chairman and CEO

Simon Ayat - EVP and CFO

Analysts

Ole Slorer - Morgan Stanley

James West - Evercore ISI

Angie Sedita - UBS Securities

Kurt Hallead - RBC Capital Markets

Michael LaMotte - Guggenheim Securities

James Wicklund - Credit Suisse Securities

William Herbert - Simmons & Co.

David Anderson - Barclays Capital

William Sanchez - Scotia Howard Weil

Daniel Boyd - BMO Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Simon Farrant. Please go ahead.

Simon Farrant

Thank you. Good morning and welcome to the Schlumberger Limited fourth quarter and full-year 2015 results conference call. Today's call is being hosted from Houston following the Schlumberger Limited Board meeting yesterday. Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer and Simon Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paal. Simon will first review the financial results and then Paal will discuss the operational and technical highlights.

However, before we begin with the opening remarks, I’d like to remind the participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10-K filing and other SEC filings.

Our comments today may also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our fourth quarter press release which is on our Web site. We welcome your questions after the prepared statements.

I’ll now turn the call over to Simon.

Simon Ayat

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Fourth quarter earnings per share excluding charges and credits, was $0.65. This represent decreases of $0.13 sequentially and $0.85 when compared to the same quarter last year.

During the quarter we reported $2.1 billion of pre-tax charges. These charges are the direct result of the very challenging market conditions we’re operating in and they include severance, impairment, and restructuring charges.

The asset impairment charges largely relate to our North America business, which as you know has been the hardest hit during this downturn. All of these charges are described in detail in our earnings press release.

Our fourth quarter revenue of $7.7 billion decreased 9% sequentially. Approximately one-third of the revenue decline was attributable to pricing. Despite the very challenging environment, both in terms of pricing and activity, pre-tax operating margins only declined by 132 basis points sequentially to 16.6%. This was due to continued strong and proactive cost management across the entire organization.

Sequential highlights by product group whereas follows. Fourth quarter Reservoir Characterization revenue of $2.2 billion decreased 7% sequentially, while margins decreased 230 basis points to 24.2%. These declines were due to decreases in exploration spending that largely impacted wireline internationally. We also did not see the year-end surge in multiclient and software sales that we typically experience in Q4.

Drilling Group revenue of $3 billion decreased 8%, primarily due to pricing pressure and activity declines internationally that have mostly affected drilling and measurements and M-I SWACO. As a result of strong cost management, Drilling Group margins only declined 173 basis points to 16.7%.

Production Group revenue of $2.7 billion decreased 10% primarily due to the continued decline in land activity and further pricing pressure in North America. Production Group margins were essentially flat at 11.3% as SPM projects and higher earnings from our investments in OneSubsea compensated for the effects of the lower activity and pricing pressure.

Now turning to Schlumberger as a whole. The effective tax rate excluding charges and credits was 18.2% in the fourth quarter. This was lower than the previous quarter by about 2 percentage points. This decrease was largely due to the geographic mix of earnings between North America and the Rest of the World, as well as the favorable revolution of certain tax contingencies and an R&D credit during the quarter.

Excluding the impact of Cameron, we expect the ETR in 2016 to be around 20%. On a pro-forma basis, we expect the combined Company ETR to be in the low 20s, although this would remain sensitive to the geographic mix of earnings.

Our cash flow generation continues to be very strong. During all of 2015, we generated $8.8 billion of cash flow from operations. During the fourth quarter, we generated $2.2 billion of cash flow from operations. This is all despite making severance payments of approximately $800 million during 2015 and $200 million during the fourth quarter.

In light of our strong cash flow generation, yesterday our Board of Directors approved a new $10 billion share buyback program. This new program will be effective once the remaining $1.4 billion of authorization under the current program is exhausted.

During the quarter, our net debt deteriorated a $343 million to $5.5 billion as we continue to invest in future revenue streams. During the fourth quarter, we spend $627 million on CapEx and invested approximately $600 million in SPM projects and $150 million in multiclient projects.

Full-year 2016 CapEx excluding multiclient and SPM investments is expected to be around $2.4 billion. During the quarter, we spend $398 million to repurchase 5.4 million shares at an average price of $73.86. This is despite being prohibited under the securities laws from repurchasing our shares for about one month prior to the Cameron shareholder vote.

Let me take this opportunity to talk a little bit about the Cameron transaction. In order to ensure an efficient capital structure within the group, Schlumberger Holding Corporation, our principal U.S subsidiary that we will also refer as SHC, is the legal entity that will acquire Cameron.

SHC will acquire approximately 137 million shares of common stock from its parent and transfer these shares to Cameron shareholders. SHC will also pay cash of approximately $2.8 billion in connection with this transaction.

During the fourth quarter, SHC issued $6 billion of notes. These notes have the weighted average interest rate of approximately 3.15% and have maturities to ranging from 2017 to 2025. SHC will use the proceeds from this debt issuance to partially fund the purchase of the 137 million shares from the parent company. SHC will then use a combination of cash on hand and commercial paper borrowings to finance the difference between the proceeds received from the issuance of these notes and the cash required to complete the Cameron merger.

As a result of this debt issuance, Schlumberger’s pre-tax interest expense will increase approximately $40 million in Q1 as compared to Q4. As we close the Cameron transaction, we will begin to incur merger and integration related costs. These will include transaction costs, the cost of the integration team, one-off purchase accounting adjustments, as well as one-off cost to achieve the synergies. These amounts will be most significant in the quarter the transaction closes and the quarters immediately following the merger. We will separately call out these charges for you as are incurred.

And now I will turn the conference over to Paal.

Paal Kibsgaard

Thank you Simon and good morning everyone. Negative market sentiments intensified in the fourth quarter with global oil production of oil continuing, extending the various trend in global oil inventories and causing a further fall in oil prices, which reach a 12-year low in December. The worsening market conditions added further pressure to the deep financial crisis throughout the oil and gas value chain and prompt the operators to make further cuts to the already low E&P investment levels.

For many of our customers, available cash and annual budgets were exhausted well before the half way point over the fourth quarter, leading to unscheduled and abrupt activity cancellations, creating an operating environment that is increasingly complex to navigate and where the traditional year-end product and multiclient seismic sales were largely muted.

As planned we implemented another significant adjustment to our cost and resource base during the fourth quarter, including the release of 10,000 employees as well as further streamlining of our overhead infrastructure and asset base.

In spite of these significant structural adjustments, our overall fourth quarter results were in some areas impacted by events that were either outside of our control or where we chose to maintain cost and resource levels, pending availability of additional customer budgets in the New Year.

However, as we exited the fourth quarter, I believe we’ve made the necessary adjustments to our cost and resource base and that we’re well positioned to continue to deliver solid financial results in both the first quarter and throughout 2016, which will clearly be another very challenging year for our industry.

Looking closer at our fourth quarter results, global revenue fell 9% sequentially, driven by a continuing decline in rig activity and persistent pricing pressure throughout our global operations together with a broad range of activity disruptions, project delays and cancellations.

In North America revenue was down 14% sequentially, which is inline with the reduction in the drilling rig counts and driven by exhausted customer budgets and cash flows together with the extended holiday period.

Our North American pre-tax operating margins remain very resilient at 7.1% driven by proactive cost and resource management, excellent performance from our supply chain and distribution organization, strong execution and new technology sales from our operations, all of which were further supported by our transformation program.

On land, in both U.S and Canada, the weakening activity resulted in additional commercial pressure for all product lines and in particular in pressure pumping where pricing levels drop further into unsustainable territory for both operating margins and cash flow.

We also saw continuous pricing pressure and activity reductions in the U.S., Gulf of Mexico, as the drilling rig count drops by another 2% sequentially and where year-end multiclient seismic sales were largely muted.

Turning to the international markets, revenue were 6% lower sequentially as customer budget cuts, the start of the seasonal winter slowdown, and the absence of the traditional year-end product and multiclient seismic sales all impacted results. Our fourth quarter international operating margins drop to 22%, driven by a further pricing pressure and unfavorable revenue mix and a significant impact of activity disruptions, particularly in the Middle East and Asia.

In Latin America revenue declined 1% sequentially with pre-tax operating margins improving by 229 basis points to 23%. In terms of revenue, solid activity in Mexico and Ecuador was offset by a further budget reductions in Colombia and Brazil, while the weakening of the peso had a negative impact in our fourth quarter revenue in Argentina.

Margins remain resilient across the area as the cost and resource base adjustments made during the previous quarter took full effect and as we continue to leverage our transformation program. This combination more than offset the persistent pricing pressure we saw throughout our customer base.

In Europe/CIS/Africa, revenue fell 9% sequentially, while pre-tax operating margins dropped 138 basis points to 20.8%. The drop in revenue was led by Russia and Central Asia, where a further weakening of the ruble, the start of the seasonal winter slowdown in Russia, and a noticeable reduction in activity throughout the Caspian region, all impacted the results.

In Europe, activity in Norway was resilient, but this was more than offset by a significant reduction in continental Europe and U.K., while in Africa solid in Nigeria and Algeria was not enough to offset the further weakening in the Central and West Africa.

In the Middle East and Asia, revenue declined by 5% sequentially, while pre-tax operating margins decreased by 448 basis points to 22.5%. The sequential drop in revenue was led by Asia where we saw a general weakening in activity throughout the region, which was most pronounced in Malaysia and Australia, where project ended and customer budgets were cut further.

Fourth quarter revenue was also down in the Middle East, where solid activity in Kuwait and Iraq was more than offset by reductions in the rest of the region. In terms of operating margins, pricing pressure across the area was only partly offset by adjustments to our cost and resource base and where project cancellations, delayed start off of new project, and activity disruptions due to 2015 budget limitations, all contributed to the sequential reduction in operating margins.

Our fourth quarter results cap a year where we’ve faced the most severe industry downturn in 30 years, but where we through proactive management and strong execution, have shown that we can navigate the challenging operating environment better than most and produce solid financial results while maintaining the bandwidth to pursue and capitalize on opportunities that strengthen the competitive position of the Company.

So as we prepare for another very challenging year, I’d like to summarize what we’ve delivered in 2015, as this sets a very good benchmark for our expectations and ambitions for the year to come.

Looking first at the top line, full-year revenue dropped by 27% in 2015, driven by a 39% drop in North America where we’ve further strengthen our market position in spite of our decision not to pursue work that falls outside of our financial return requirements. Our international revenue fell by 21% in 2015, which is comparable to the drop in E&P investments.

Included in this revenue drop is both the impact of our higher leverage towards the exploration, deepwater, and seismic markets, where E&P investment saw significantly higher reductions and also included the impact of the strong dollar against a number of foreign currencies.

These revenue mix headwinds are fully absorbed in our results at this stage, which makes our international business a highly compressed coiled spring, which we will capitalize on when E&P investments and customer activity starts recovering. In addition to this, we’ve in the past year significantly increased our tender win rate, which further strengthens our very solid contracts portfolio and puts us in a great position to increase market share going forward.

Looking at 2015 profitability, full-year global operating margins fell by only 342 basis points to 18.4%, as we maintained our wide margin lead in the international markets and as we now are also approaching a similar margin gap in North America. We’ve managed to protect our margins due to a very proactive approach to cost and resource management and by further accelerating our corporate transformation program. Together these actions have delivered detrimental margins of 31% in 2015, which is about half the level seen in previous downturns.

Turning next to cash, our free cash flow in 2015 was about $5 billion, which represents net income conversion rate of 114%. This includes CapEx of $2.4 billion, which is now down to 59% of DNA, in addition to investments of $1.4 billion in future revenue streams in the areas of SPM and multiclient seismic.

Our ability to generate free cash in this part of the cycle is unmatched in the oil field services industry and gives us a unique ability to capitalize on the significant business opportunities that the current market conditions present. From our free cash flow we’ve returned $4.6 billion of cash to our shareholders through $2.4 billion in dividend payments and $2.2 billion worth of stock buyback.

In addition to this, we’ve spent about $500 million on M&A, where we continue to target smaller disruptive technology companies that we can integrate into our existing and future workflows and deploy through our expensive global organization. The strength of our free cash flow can also be seen from our net debt level which has only increased by $160 million on a full-year basis, driven by the financial performance I’ve just described.

With respect to the pending Cameron transaction, the integration plans are now largely completed and we are fully ready for day one. We still expect to close the transaction during the first quarter of 2016, and we’ve already received antitrust approvals from the U.S., Canada, Russia, and Brazil.

The fact that we structured the deal to include 78% of stock provides us with a necessary installation from the ongoing market turmoil and during the fourth quarter we also secured the required financing for our U.S entity that will make the acquisition.

Turning next to people, we’ve in the past year unfortunately have to reduce more than 34,000 employees, which represents an unprecedented number for the Company and where we all have been impacted as we’ve gone through the disheartening process of letting colleagues and friends go in all parts of the Company.

I’m at this stage optimistic thing we’ve completed the workforce reductions required in this downturn and I look forward to be able to shift focus throughout our organization from the negative sentiments of the past year towards a brighter future as we work through the remaining challenges of this downturn.

In terms of R&D, we did reduce investment levels in 2015, but we were still able to protect our capabilities and ensure the progress of all our key projects. In the past year we made solid advances on several new technology fronts through a combination of organic and inorganic efforts and we look forward to update you further on this in our external communications in the coming year.

And lastly in 2015, we significantly accelerated our corporate transformation program, stepping up both investment levels and the detailed engagement of our global organization. As part of this, we prepared a comprehensive and granular three-year transformation plan covering each of our 600 business units with specific deliverables and business impact goals set at all levels in our organization.

In parallel with this, we’ve delivered noticeable cost savings and efficiency gains that can be seen in our 2015 financial results, together with a 23% reduction in our customer NPT rate, which is the largest annual improvement we’ve ever achieved.

In summary, while 2015 has been extremely challenging year for the industry and for Schlumberger, we’ve clearly demonstrated our ability to navigate a complex landscape and capitalize on the opportunities the current business environment presents and we’re fully prepared to repeat these efforts and achievements in 2016. So while we all look forward to a recovery in the oil price, and the market conditions in our industry, it is evident that the longer the current market environment continues, the stronger we will emerge as a Company relative to our competitors when the upturn ultimately comes.

Turning next to the market outlook, we still believe that the underlying balance of supply and demand continues to tighten, driven by both solid growth in demand and by weakening supply as the dramatic cuts in E&P investments are starting to take effect. In North America, our shale oil production is declining more or less as we expected and was in December below the levels from one year ago.

The apparent resilience in production outside of OPEC and North America is in many cases driven by producers opening the taps wide open to maximize cash flow, which also means that we will likely see higher decline rates after these short-term actions are exhausted.

So while the global oil market is still being weighed down by fares to reduce growth in Chinese demand, the magnitude of additional uranium exports and the continued various trends in global oil inventories, we still expect a positive movement in oil prices during 2016 with specific timing being the function of the shape of the non-OPEC decline rates. This means that the market outlook for oil field services in the coming quarters will remain challenging at the pressure on activity and service pricing is set to continue.

It also means that 2016 E&P investment levels will fall for a second successive year and that any significant recovery in our activity levels will be a 2017 event. Still at Schlumberger we remain confident in our ability to weather this downturn much better than our surroundings and to our global reach the strength of our technology offering and our corporate transformation program, we’re currently creating a considerable leverage that will enable us to increase revenue market share, deliver superior earnings and margins and continue to generate unmatched levels of free cash flow. Thank you very much.

We will now open up for questions.

Question-and-Answer Session

Operator

Okay. [Operator Instructions] Your first question comes from the line of Ole Slorer from Morgan Stanley. Please go ahead.

Ole Slorer

Thank you. Thank you very much and congrats with another great -- relatively great year with free cash flow and solid performance.

Simon Ayat

Thank you, Ole.

Paal Kibsgaard

Thanks.

Ole Slorer

When it comes to the macro outlook that you just painted, how should we think about the overall oilfield macro cycle? And relative to the internal momentum that you’re creating within Schlumberger with respect to the ongoing transformation process, I presume that a lot of the lowest hanging fruit has been picked in the transformation process. So if you could just bring us up to speed about how we should think about earnings projections over the next couple of quarters, several quarters with respect to those two kind of factors?

Paal Kibsgaard

Well, if you look at our earnings trajectory in the coming quarters, it is obviously largely going to be driven by what continues to happen in the market around us in terms of the spend from our customers. But if you look at our ability to, I would say, counter the significant pricing pressure as well as the activity reductions, the transformation is indeed playing a significant role. I think it’s fair to say, like you say that a lot of the low hanging fruits we’ve already picked, but we’re now getting into the deeper part of the transformation where we’re making significant structural changes to how we go about doing our work and conducting our business. And this is basically laid out in the three-year plan that we worked on in 2015, which is going to take us from 2016 all the way out to 2019. And here we’ve broken down all the initiatives into specific actions and plans and targets for all the various business units we’ve around the world and I think with this, I would say, formalized way of driving performance I think we should look to put even more impact into our results in the coming three years and what you seen in the previous years.

Ole Slorer

Okay. I’ll take that. With respect to the free cash flow that you generated and clearly having a strong balance sheet, today is, I’d imagine, whereas an awful lot when it comes to the bargaining power that you’ve around the world. So how should we think about the opportunity around generating that or putting that to work as internal CapEx versus SPM, which I saw you just picked up a bit now again in the fourth quarter, and versus acquisitions?

Paal Kibsgaard

Well, first of all, we continue to have a very strong focus on generating the cash. And I think 2015 was another solid year. It was not perfect. There were several things that I think we could have done better, but $5 billion of free cash flow in this environment is not bad. Now how we go about spending the cash, there is really no change to the philosophy that we’ve in any part of this cycle. The first thing we look to is to reinvest into the business and that is CapEx for the service and product segments that we have. In 2016, we’re going to keep CapEx flat with 2015 and that you may ask why? If you look at the base business, it is indeed coming down, but we’ve certain new activities that we’re looking to invest into in particular the land drilling market for the rig of the future and there is a few other strategic investments that we’re looking to make when it comes to our internal CapEx. In addition to this, we continue to invest in future revenue streams, both multiclient seismic where we’ve a significant program going on in Mexico. And at this stage of the cycle, there are also significant SPM opportunities and we’ve really stepped up our efforts in screening and evaluating these opportunities and we will capitalize on them when they meet our internal requirements. Beyond this, we review dividends annually. We are not increasing dividends this year. And then beyond that for the coming year, it’s going to be a balancing of the opportunities we’ve on M&A and the opportunities we have to buyback our stock. That is how we’re planning to spend the cash. Simon, you want to add something?

Simon Ayat

No, I think you’ve summarized it very well. I guess, 2016 is going to be marked by the big event of integrating Cameron and there is a lot of transaction as I described. We bought up $6 billion and we will be paying for the acquisition. We are also issuing shares, but we’ve the $10 billion in new program that w e will commence as soon as we exhaust the previous one.

Ole Slorer

Thank you very much.

Operator

Your next question comes from the line of James West from Evercore. Please go ahead.

James West

Hey, good morning, Paal.

Paal Kibsgaard

Good morning.

James West

And congratulations also on -- just excellent execution really all year for you and your management team and all your employees and especially in the fourth quarter.

Paal Kibsgaard

Thank you very much.

James West

I wanted to follow-up a little bit on what you were talking about there in the second part of Ole’s question about really the SPM business. It seems -- I did notice the pickup in the fourth quarter, that’s probably project timing, but are you -- at this point are you chasing more projects? Are you getting more inbounds? And you talked a little bit about or you mentioned that your screening process had been updated or upgraded. Could you talk a little bit more about that and how you see this playing out over the next couple of quarters, couple of years?

Paal Kibsgaard

Yes, we’re seeing significantly more SPM opportunities at this stage, of the cycle, given our ability to generate cash and given the status of our balance sheet. So we’ve -- we haven’t changed our screening process, but we’ve put more resources into it, so we can process more of these opportunities. And we’re prepared to step up our investments in SPM. As you noted, there was a step up in Q4 and it might not be at that level every quarter going forward, but I’d say that going into 2016 SPM is an area that we’re interested in investing further in. It provides us with solid long-term contract. It provides us with the ability to deploy our entire capability set and generate good returns and good cash for the Company. So it is a very interesting opportunity set for us that we’re actively pursuing.

James West

Okay. And then maybe another follow-up, the press release was littered with technology success stories and it seems like the technology adoption rate has picked up significantly during the downturn. I know you have given out numbers before on sales, percentage of sales on new technologies. Could you give us an update there on what you’re seeing on the adoption rates and if that percentages has improved?

Paal Kibsgaard

Yes, during this downturn the level of new technology sales which is basically technologies that we have commercialized in the past five years is at a significantly higher level than what we’ve seen in previous downturns. The new technology sales as a percentage of total revenues in 2015, is 24% which is markedly higher than what we saw in the previous downturn in 2008, 2009. This is partially down to the broad range of technologies that we have, and in fact that a number of them are focused on driving, I would say cost and efficiency for our customers. And these type of technology are as valid in terms of being bought and being operated during the downturn as they are in the upturn. So strong sales, and we continue to commercialize new technologies during 2015. So this obviously has had a very good impact on our financial performance in the past year, and I expect it to continue to do that in the year to come.

James West

Perfect. Thanks, Paal.

Paal Kibsgaard

Thank you.

Operator

Your next question comes from the line of Angie Sedita from UBS. Please go ahead.

Angie Sedita

Thanks. Good morning, guys.

Paal Kibsgaard

Good morning.

Angie Sedita

I echo the sentiment, very solid quarter for the quarter and for the year given good business conditions, so well done. Maybe, Paal, we can go a little bit more granular on thoughts and obviously 2016 is a question mark, but thoughts into Q1 on a geo-market basis and walk us through where you’re thinking on a revenue and margin sign, if you will?

Paal Kibsgaard

Well, I’m not going to review the details by air Angie, what I think we’re going to do. If you’re looking for an indication of how we -- what we plan for and how we see Q1 shaping up, its going to be another very challenging quarter both from an activity and a pricing standpoint. The reasons new lows in oil prices is going to be reflected in lower REIT content and more activity disruptions we believe. This is going to be continued budget pressure throughout the first half from all customer groups where they now have to operate within cash flow. In addition we’re going to see the winter slowdown in the Northern hemisphere in Q1 which is going to be another activity headwind. So I would say that, rather than going into margins and revenues, if we focus in on EPS, I would say that the current Q1, EPS consensus is probably a best case scenario from what we can see today in terms of Q1 earnings.

Angie Sedita

Okay. That’s helpful. And then on Cameron, I know there is only so much you can say at this point. But if you have any further color, you can talk about on the opportunity set within Cameron as you move forward. But also talk us through or walk us through the integration of Cameron within Schlumberger, both operationally and how it will show up in the financial?

Paal Kibsgaard

Right. So, on the start up of the integration we are largely ready with our integration plans. We’ve had a sizable team made up of both Cameron and Schlumberger please working diligently on preparing these plans since we announced the transaction back in August. We reviewed all the plans in December and they have been approved, and we are basically ready for day one at this stage. Closing is now basically pending a few more countries in terms of antitrust approvals, and we do expect that we will close during the first quarter. In terms of synergies, the detailed work that we’ve done has really confirmed the numbers that we put up at the announcement. Lots of opportunities which initially are going to be cost focus, but this transaction is largely a revenue transaction and we are very excited about what we can do by joining the R&D forces of the two companies and creating the integrated drilling and production systems that we have laid out earlier. In terms of integrating Cameron as an organization, it would actually be a fairly simply task. Because Cameron as it is today will become the fourth product group of Schlumberger together with characterization, drilling and production. And Scott Rowe, the CEO of Cameron is going to join us and continue to head of Cameron in its present form. So the main thing we were focusing are in terms of integration initially. It’s going to be to coordinate the customer interface and to streamline the back office and also then morph or merge over time the R&D organization. So it is relatively a simple integration, because Cameron would slide in, in its present form into Schlumberger as the fourth group.

Angie Sedita

All right. Fair enough. Thanks. I’ll turn it over.

Operator

Your next question comes from the line of Kurt Hallead from RBC Capital Markets. Please go ahead.

Kurt Hallead

Hi. Good morning.

Paal Kibsgaard

Good morning.

Kurt Hallead

Good morning. I just had a -- I had a couple of quick follow-up questions and some discussions within investors around the SPM dynamic. And in that context, Paal, just given the decline in oil prices year-to-date and the write down on the project in Colombia, there’s some questions out there just relating to potential incremental risk around existing SPM projects, and maybe you could put that into the context of maybe how you access risk on varying projects and maybe how you look at it from a portfolio approach?

Paal Kibsgaard

Right. So if you want to -- let’s start off with the write down we did in Colombia which is really an isolated event. This is a project that’s being going on between 10 and 15 years. We’re in the later years of the project. And it’s really the only project at this stage in our portfolio that has our compensation directly linked to the oil price. So with only a few years left and the oil price being at the very low level, this is what caused the impairment of the -- or the remaining balance we have. If you look at the rest of the portfolio and the new contract that we’ve entered into in recent years, these are all fee per barrel type of contract where obviously the project economics are linked to the oil price, but where our compensation is basically an isolated fee per barrel set up. So as with any of these projects they do carry a higher risk than what our base business does. But we are -- I would say very comfortable with being able to -- I would say identify and manage these risks. And with the screening process we had with the internal approval process that we have, I’m very comfortable with the step that we have in terms of the projects that we take on and that these all will generate very good returns for the company. And I would also say that the project in Colombia overall provided also very good returns and good cash flow throughout the life of the project.

Kurt Hallead

All right. That was great color. Then maybe if I could follow-up just on the margin front. If I understand correctly, you guys are trying to manage your business such that you can maintain a 20% margin maybe internationally here at the trough and maybe 5% in the North American market. I know a lot of that is being driven by your transformation process. And given the drop that we’ve had recently in oil price and the impact that we’ll have on E&P spend drop in 2016, how much harder do you think its going to be to maybe maintain those targets?

Paal Kibsgaard

But obviously fighting the margin pressure with both dramatic reductions in activity and significant pricing pressure, it’s tough. We have the added tool in our tool kit which is the transformation on top of our very, very solid management team that is excellent at executing, but it is tough to maintain margins at the levels that we currently see. I’m very pleased with how the North America team has managed and navigated in the past year, and 7.1% in Q4, I think is excellent. It’s going to be tough to continue to keep it at these levels. But with the energy and the focus our team on the ground in North America has, I’m optimistic that we will continue to significantly outperform the rest of the field there. Now if you look at the international margins, they are actually holding up recently well. We’re now six quarters into the downturn internationally, and we’re all at 253 basis points down which is basically half what we saw in 2009 in the last downturn. But it’s a very dynamic environment, and there’s always going to be quarterly variations driven by unplanned events. And if you look at LAM for an example, we had a big drop in Q3; yes we managed to close that back in Q4. Some of the actions that we put in place in the third quarter took full effect. Now in Q4 we did see a significant impact on our MEA margins and part of this is pricing and part of it is permanent activity reduction. But there is also a significant part which is temporary which is down to delays and stoppages. And if you look at the team we have on the ground, they have a long list of actions in place to address what they can in order to offset some of these margin headwinds. So I can't promise you that we’re going to get all the margins back in MEA, but I would say that the MEA team is clearly unhappy having being surpassed by the LAM team at the most profitable area. So I really look forward to the internal competition between these two.

Kurt Hallead

That’s great color. Thanks a lot, Paal.

Paal Kibsgaard

Okay.

Operator

Your next question comes from the line of Michael LaMotte from Guggenheim. Please go ahead. Michael, your line is open. Check your mute button.

Michael LaMotte

Great. Thank you. Good morning, guys.

Paal Kibsgaard

Good morning.

Simon Ayat

Good morning.

Michael LaMotte

Paal, you mentioned a couple of times the three year transformation plan, and I imagine you’ll go into more detail in April. But can you just broad stroke the key categories that were identified as new areas of opportunity in the three year plan?

Paal Kibsgaard

Yes. There is no new areas that we have identified. What we’re doing with the three year plan is that, in the past couple of years there’s been a lot of work done in the central team formulate the detailed concepts and principals of how we want to change, how we operate our business. And these initiatives and these concepts are all now fully mature and they come together with a change management process that we have also put a lot of effort into designing. And what we’re doing with the three year plan is basically formalizing how each of these initiatives will now be translated into actions and results throughout the global organization. So in the past couple of years we have been pursuing the low hanging fruit. We are now going into the -- to the structural changes of our business that would also provide an additional step of savings and improvements in the years to come. But the focus is around asset and inventory management, its maintenance and repairs, transportation, distribution, supply chain, back office, quality assurance. It’s all the things that we’ve talked about in previous years, but its now being formalized and itemized down to the business unit levels. We have around 600 business units down to the country level and they all now have specific actions and targets on each of these line items to implement the changes that we have been preparing centrally for the past few years.

Michael LaMotte

Okay. And as we think about the financial impact, is order of magnitude similar to the low hanging fruit, it’s just the timing in terms of the flow through, the impact may take a little longer? How do we think about the implications on the financials?

Paal Kibsgaard

Well, I’d say the impact of the transformation going forward will at least be as big as it’s been in previous year and probably even higher in the years to come as we really start changing fundamental parts of how we conduct business. So this is not decreasing I would say, it’s stable to increasing in terms of impact going forward.

Michael LaMotte

Okay. So low hanging fruit doesn’t mean expect less going forward?

Paal Kibsgaard

No, absolutely not.

Michael LaMotte

Great. All right. Thanks. I’ll turn it back.

Paal Kibsgaard

Thank you.

Operator

Your next question comes from the line of James Wicklund from Credit Suisse. Please go ahead.

James Wicklund

Good morning, guys.

Paal Kibsgaard

Good morning, Jim.

James Wicklund

Obviously the Cameron, Schlumberger OneSubsea JV has been a big success, it led to marriage. And now you’re doing an MoU with Golar, and looking on gas monetization solutions. Can you talk about how far the breadth -- how far this takes you, the Schlumberger Octopus grabs another segment of business? Can you talk a little bit about where this should go and why you did it?

Paal Kibsgaard

Well this is an MoU where we’ve had -- we had good discussions about the concepts of how we can combine some of our capabilities and efforts with the capabilities that Golar has and this is something that we will continue to work with them going forward. It is an interesting I would say combination. And I don’t have a lot of comments beyond this at this stage other than that it is the partnership that we’re looking to establish and to grow going forward.

James Wicklund

Okay. And just again, breadth. You’ve got now subsea, you’ve got equipment, you’re doing gas monetization. Kurt and James asked about the SPM business. You had said before in previous conference calls that you'd embrace a number of different business models. Is this the fruition of those kind of statements?

Paal Kibsgaard

I would say it is. But we don’t know this, it doesn’t change the fact that the main part of our business is, I would say oil free services and products and equipments. So we will continue to focus on leading each individual market that we continue, that we participate in for individual products and services. But with the integration capabilities and with the ability we have to pursue different type of business models, we are also looking to combine all of these things like you indicate Jim, to create more business opportunities for the company. So we are not pursuing only these. We have a huge focus on making sure that we standout and we continue to drive performance in the base business. But when you combine all of these things, there is a broad range of opportunities for us that we’re also pursuing.

James Wicklund

That’s very helpful. And my follow-up, if I could. Are we willing to take the chance and say that 2016 could be the bottom of the cycle or do you guys think today that 2017 will be worse than 2016?

Paal Kibsgaard

Well, I think it’s too early to say Jim, but I’m -- I don’t currently think that 2017 is going to be worse. I think -- but with that said, I’m still not ready to say that we are troughing in 2016. I’ll be focusing in on executing basically quarter-by-quarter. I’m still optimistic, and I would hope that 2016 is the trough, but I’m not ready to rule on it yet.

James Wicklund

We'll keep our fingers crossed as well. Thanks sir, very much.

Paal Kibsgaard

Thank you.

Operator

Your next question comes from the line of Bill Herbert from Simmons & Co. Please go ahead.

William Herbert

Thank you. Good morning. Back to SPM, I’m curious with regard to the projects that you’re seeing. Is there any change with regard to the kind of projects that you’re seeing now on a leading edge basis, more offshore versus onshore? And then moreover, with regard to as you evaluate these projects, recognizing that there’re are fee per barrel on the one hand, there must be an embedded oil price assumed as you’re looking at these projects in terms of a threshold oil price is required for the NSC to make capital if it is an NSC partner on these. So can you talk about the mix of projects, how it has changed and embedded oil prices associated with the capital allocation?

Paal Kibsgaard

Right. So, on the projects there is no shift in what the projects are. I mean, we’re looking at a certain set of projects. These are relatively small compared to what our customers would be interest in. And they are generally late life fields where we can come in and try to change the decline curve and add reserves and production to the field in late life. We are generally focused on LAM, and the only thing I would say is that the opportunity set has increased. There are more customers that are coming to us now that has these types of fields and they’re interested in doing these types of business models with us. So there’s not a dramatic shift in the type of assets that we’re looking at, but generally there’s more of them. And for the fields that we enter into a contract zone, obviously we will have to look at the total economics of the field for the lifetime of the contract which is generally I would say at least 15 years. So in that it’s obviously important that the total project is economical, and then the way we set up our contract is today generally on the fee per barrel where we are I would say insulated against variations in oil price. That being said, if it goes down, we don’t get hit at all. But again we are leavening the upside to our customers if oil prices are higher than what is in the assumption. So we have a very, I would say solid process on evaluating this. And like I said earlier in the call we’re actively pursuing these type of contracts where we can get the terms that we want contractually, and where we are satisfied that the reservoir holds the upside both in production and reserves.

William Herbert

Okay. And another one from me, sort of an extension of Jim's question in terms of testing the boundaries as to how broad, how plausibly broad your business model extends to; and that is; are you contemplating or evaluating anything on the clean technology front?

Paal Kibsgaard

No, not at this stage. I mean, we continue to -- I mean, if you look at minimizing the environmental impact with what we do at the company and our carbon footprint absolutely, we have several programs in place both in terms of, of how we conduct business as well as how we develop new technologies on this. But in terms of venturing outside of our current space which oil conservatives, there is no plans of doing that at this stage.

William Herbert

Okay. Thank you.

Paal Kibsgaard

Thank you.

Operator

Your next question comes from the line of David Anderson from Barclays. Please go ahead.

David Anderson

Great, thank you. A question on kind of your Middle East Asia Pac business; obviously margins came down a good bit this quarter and a lot going on behind the scenes. I was wondering if you could help me kind of sort out some of the dynamics behind there. You talked about some activity disruptions in the Middle East. There's pricing going on. Asia Pac is probably also down -- probably also going to get hit pretty hard as well. Can you help us kind of understand some of those and how much of that’s kind of one time you think on the quarter?

Paal Kibsgaard

Now I tried hard -- I tried to answer that earlier David in the call and I would just say that, yes MEA margins dropped a fair bit in Q4, but there are variations in terms of all operations of activity that you will basically get some variations and in margins going forward. I gave LaMotte the example. Now there is significant pricing pressure. There is lower activity in parts of MEA, but are also some temporary aspects of what happened in the quarter where there were delays of big projects in terms of the startup where we had significant resources standing by and there were also some customers that stopped activity during the quarter because they were running out of annual budgets. And these budgets are going to be replenished now in January in which case we decided to carry the cost under resources. So I cannot promise you that we will regain all the loses in Q4 in terms of margins, but lots of actions in place to try to repeat what we’ve done in LAM over the course of 2015.

David Anderson

Those operational disruptions, do you think a lot of those are going to come back in the first quarter?

Paal Kibsgaard

Some of them will. And some of the -- for the ones that -- well we know which one they are and those are the ones to be carried the resources for. And for the ones that aren’t, you also know what they are in which case we have been cutting the resources.

David Anderson

And then on the pricing concessions, Paal you’ve been talking about and you talked about it last quarter as well. Is this on kind of new work that's being tendered or is this kind of pricing concessions on existing contracts?

Paal Kibsgaard

It’s a combination. When you tender for new work you will need to access what the growing rate in the market is, and in some cases you’ll get the opportunity to hang on to the existing contracts or even extend them provided there are some concessions given. So this is a combination.

David Anderson

Okay. And would the transformation -- does the transformation you think offset pricing over time largely?

Paal Kibsgaard

Well if you look at internationally in 2015, we have managed to offset internationally quite a lot of it. Can we do all of it? That’s probably going to be tough. But it is a significant counter to the pricing pressure that we’re seeing, yes.

David Anderson

Thank you.

Paal Kibsgaard

Thank you.

Operator

Your next question comes from the line of Bill Sanchez from Howard Weil. Please go ahead.

William Sanchez

Thanks. Good morning. Paal, I was hoping before we ended the call that perhaps you could just speak generally about customer expectations internationally in terms of CapEx for ‘16. I mean, do you guys have a bottoms-up view yet at this point in terms of the size of the decline we could see as we try to think about calibrating overall top-line international revenue declines potentially for ‘16?

Paal Kibsgaard

Well I mean, if you look at 2015, national spend was down about 20%. And then there is a range of surveys out now from third parties and the kind of average or consensus from these surveys is about, I would say more than a 10% reduction in international spend. So, if you go by these then yes it will be another challenging year. But also I think while we look at full year numbers, I think its also important to keep in mind the five or six quarters slide we have seen now in international E&P spend where we have had a significant drop in our revenue from Q4 of 2014 versus -- down to Q4 of this year and into Q1 of ’16. So while the year-over-year numbers for full year matters, I think it’s also important to look at the quarter levels we have now which is obviously significantly down. And actually if you do the Q1 revenue consensus for us, based on what your guys, analysts have done, four times that is already 17% down overall in revenue for us. So in that sense, the current level of activity and spend is already way down on a full year basis going forward.

William Sanchez

Okay. Thanks for that. I guess Simon, one for you. Given the pending Cameron acquisition here in the first quarter, is there any blackout period on Schlumberger being able to buyback stock as we approach that close?

Simon Ayat

No, none. Actually we are -- we will, after the blackout because of the earnings which is just in couple of days, we will be free to go back to the market. No, none, Bill.

William Sanchez

Okay. I’ll turn it back. Thanks for the time.

Paal Kibsgaard

Thank you.

Operator

And your final question today comes from the line of Dan Boyd from BMO Capital Markets. Please go ahead.

Daniel Boyd

Hi. Thanks, guys. I have a question for Simon, and more on the currency side continuing there. It looks like you’ve done a really good job so far this year of managing the currency risk. So, I would just like to understand how do you manage the currency risk in SPM projects, especially as you ramp those? And then if you could just help us, you quantified the revenue impact from currency this year. Can you help us with the international margin impact from how well you manage the currency?

Simon Ayat

Okay. Well, thanks. The last question. Let me just take overall the currency situation. As far as our international operation overall we have a natural hedge which, what it means is basically we match the revenue that we get the local currency. It is inline with our local cost and local currencies, it varies between jurisdictions. So in some areas we loose a bit on the currency but then gains in other places compensate for it. In 2015, you’ve seen the numbers; we have lost a lot of revenue because of currency. And almost 20% of the reduction of revenue between 2014 to 2015 was currency but actually did not impact the margin significantly. So it is all international. Yes, there is a bit of Canada, but the rest is outside NAM and we manage it as I said, it is natural hedge. We prevent ourselves from taking more local currency than we consume locally for local cost. As far as SPM is concerned, normally most of our SPM projects actually are dollar based, revenue wise, and those that have local currency they will basically reflect the same policy that I just mentioned to you, that we don’t take more than what we locally require for our cost and the third part that it is also bigger in SPM project. So naturally -- we are naturally hedged.

Daniel Boyd

Okay. So that -- are you saying that your margins didn't benefit from the currency? If your EBIT held up this year, you could have a few hundred basis point benefit in your margin. Is that accurate?

Simon Ayat

No, the currency -- big impact of the currency this last year was, one because of Venezuela, because we changed the currency rate. But otherwise did not impact us on the margins.

Daniel Boyd

Okay. Thank you.

Simon Farrant

Turn it over to Paal, Matt

Paal Kibsgaard

Thank you, Simon. So before we close this morning, I’d just like to summarize the three most important points that we have discussed. First the business environment in the oil industry we can further into fourth quarter leaving traditional reductions in both activity and pricing levels and making 2015 the worse industry downturn since 1986. In spite of this we delivered strong full year performance compared to previous downturns generating $5 billion in free cash flow and returning $4.6 billion in cash to our shareholders through dividends and buybacks. In addition we spent $500 million on technology acquisitions that further broadened our portfolio and yet we increased our net debt by only $160 million.

Second, 2016 will be another challenging year during which we will aim to continue to deliver superior financial results empowered with proceeding and capitalizing on the broad opportunity set the current market environment presents. We remain constructive in our view on the market outlook for the medium term, and continue to believe that the underlying balance of supply and demand is tightening driven by growth in demand, weakening supply as the massive cuts in the E&P investments take further effect and by the size of the annual supply replacement challenge.

Lastly we look forward to closing our merger with Cameron International during the first quarter where the integration planning is largely complete for day one, and with anti-trust approvals all progressing on track. We are excited about what the combination of our two companies will bring. I look forward to joining forces with more than 20,000 Cameron employees.

Overall we remain confident in our ability to continue to weather this downturn embedded in our surroundings through our global reach, the strength of our technology offering and the extent of our corporate transformation program.

That concludes the call. Thank you very much for attending.

Operator

Ladies and gentlemen, this conference will be available for replay after 10 AM Central Time today through February 22. You may access the AT&T teleconference replay system at any time by dialing 1800-475-6701 and entering the access code 373076. International participants dial 320-365-3844. Those numbers once again are 1800-475-6701 or 320-365-3844 with the access code of 373076. 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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