Schlumberger NV (SLB) Paal Kibsgaard on Q1 2016 Results - Earnings Call Transcript

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Schlumberger NV (NYSE:SLB)

Q1 2016 Earnings Call

April 22, 2016 9:00 am ET

Executives

Simon Farrant - Vice President-Investor Relations

Simon Ayat - Chief Financial Officer & Executive Vice President

Paal Kibsgaard - Chairman & Chief Executive Officer

Analysts

Ole H. Slorer - Morgan Stanley & Co. LLC

J. David Anderson - Barclays Capital, Inc.

Angie M. Sedita - UBS Securities LLC

James West - Evercore ISI

James Wicklund - Credit Suisse Securities (NYSE:USA) LLC (Broker)

William Herbert - Simmons & Co. International

Waqar Syed - Goldman Sachs & Co.

Judson E. Bailey - Wells Fargo Securities LLC

Kurt Hallead - RBC Capital Markets LLC

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger earnings conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Simon Farrant. Please go ahead.

Simon Farrant - Vice President-Investor Relations

Thank you, good morning and welcome to the Schlumberger Limited first quarter 2016 results conference call. Today's call is being hosted from Houston following the Schlumberger Limited board meeting.

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 would 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 materially differ from those projected in these statements. I therefore refer you to our latest 10-K filings and other SEC filings.

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

I'll now turn the call over to Simon.

Simon Ayat - Chief Financial Officer & Executive Vice President

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call.

First quarter earnings per share was $0.40. Excluding charges recorded in the first and fourth quarters of last year, this represents decreases of $0.25 sequentially and $0.66 when compared to the same quarter last year. Our first quarter revenue of $6.5 billion decreased 16% sequentially, while pre-tax operating margin decreased 281 basis points to 14%. These decreases, which were driven by continued activity decline and pricing pressures, resulted in decremental margins of 32%.

Highlights by product group were as follows. First quarter Reservoir Characterization revenue of $1.7 billion decreased 20% sequentially while margin decreased 480 basis points to 19%, resulting in decremental margins of 43%. These decreases were largely due to seasonally lower software sales and a hold in higher-margin exploration activity.

Drilling Group revenue of $2.5 billion decreased 16% sequentially while margin declined 183 basis points. These decreases were primarily driven by activity declines across all areas. Despite these declines, decremental margins were limited to 27% on strong cost controls.

Production Group revenue of $2.3 billion decreased 11% sequentially and margins fell by 335 basis points, primarily on lower pressure pumping activity and further pricing erosion in North America land. These declines, offset in part by strong contributions from SPM [Schlumberger Production Management], resulted in decremental margins of 33%.

Now turning to Schlumberger as a whole, the effective tax rate [ETR] excluding charges and credits was 16% in the first quarter compared to 18% in the previous quarter. This decrease was largely driven by the significant sequential drop in pre-tax operating income we experienced in our North America business. With these reduced overall levels of pre-tax income that we are currently experiencing, relatively small changes in our tax expense line will have a disproportionate impact on our ETR. This can make our ETR more volatile as compared to prior years.

Looking forward, the acquisition of Cameron is not expected to have a material impact on our overall ETR. However, due to the sensitivity of the overall geographic earnings mix of the combined business, we do expect an increase in the ETR for the rest of the year as compared to the first quarter.

We generated $1.2 billion of cash flow from operations. This is despite the consumption of working capital that we typically experience during Q1, which is driven by the annual payments associated with employee compensation; as well, the payment of $260 million in severance during the quarter.

Our net debt increased $1.1 billion during the quarter to $6.7 billion. We ended the quarter was total cash and investments of $14.8 billion. Cameron had $2.2 billion of cash at closing, and we paid the Cameron shareholders $2.8 billion in connection with the transaction. Therefore, we effectively started off the quarter with $14.2 billion of total cash and investments.

During the quarter, we spent $475 million to repurchase 7.1 million shares at an average price of $67.43.

Other significant liquidity events during the quarter included: roughly $550 million on CapEx; $600 million of SPM investments; $170 million of multi-client; and $630 million of dividend payments. Excluding the impact of Cameron, full-year 2015 CapEx is now expected to be approximately $2 billion. This amount does not include investments in SPM or multi-client. Cameron's full-year 2016 CapEx is expected to be approximately $200 million, of which $37 million was spent during the first quarter.

Let me take a few minutes to provide some additional financial details relating to the Cameron acquisition, which as you know closed on April 1. In connection with the closing of the transaction, we assumed gross debt with a carrying value of $2.8 billion. During April, we repurchased approximately $1.2 billion of this debt. This combined with the effect of the purchase accounting adjustment to fair value of the debt will result in Schlumberger's pre-tax net interest cost increasing by approximately $13 million per quarter starting in Q2.

We still expect pre-tax synergies to be approximately $300 million over the next 12 months and $600 million in the second year. These numbers consist primarily of costs as opposed to revenue synergies in the first couple of years. However, we remain most excited about the opportunities for revenue synergies, which are very significant and expected to grow considerably in the future year.

Although we are in the process of finalizing our purchase accounting, we estimate that the pre-tax amortization expense as a result of fair value adjustment to the acquired assets will add approximately $65 million on a quarterly basis to our corporate and other expense line. The transaction will be accretive on both an EPS and cash flow basis within the current year.

As a reminder, going forward we will be incurring merger and integration-related charges. These will include transaction costs, the cost of integration team, one-off purchase accounting adjustments, as well as costs to achieve synergies. These will be most significant in Q2, but they will continue for the rest of 2016 and into 2017. We will separately call out these charges for you as they are incurred.

One last item is how we will report Cameron going forward. Since the acquisition of Smith five years ago, our groups have served as the primary reporting for SEC purposes. Starting in Q2, Cameron will become the fourth group in the structure, along with our existing Reservoir Characterization, Drilling, and Production groups. Additionally, the revenue of these four groups will be combined and reported consistent with Schlumberger's current area structure. However, this will only be revenue reporting, as we will no longer report operating income by area. Paal will further elaborate on the rationale for this change.

Shortly after this call, we will be posting pro forma quarterly financial information in this format going back to Q1 2013, taking you through Q1 of 2016.

And now I will turn the conference over to Paal.

Paal Kibsgaard - Chairman & Chief Executive Officer

Think you, Simon, and good morning, everyone.

Activity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis. We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levels.

The start of a new year and a new budget cycle represented a further fall in customer E&P spend, and we expect continued weakening in the second quarter given the magnitude and erratic nature of the ongoing activity disruptions. This outlook is backed by the latest 2016 E&P spending surveys, which indicate sharper falls than earlier figures. Global spending reductions in 2016 are now approaching 25%, corresponding to a fall of 40% to 50% in North America and around 20% in the international markets.

Our first quarter revenue fell 16% sequentially, a figure that represents the second steepest quarterly decline we have seen in this downturn that has now persisted for six straight quarters. Rig activity fell in all parts of the world, as customers further reduced budgets and continued to exert pressure on product and service pricing, while operations also suffered from project delays and job cancellations.

In North America, revenue fell 25% sequentially, as the U.S. land rig count declined by 31%. By the end of the quarter, the U.S. land rig count had fallen to around 400, representing a drop of 80% from the peak of October 2014, and marking a third phase of a downturn that is the most severe the industry has seen in 30 years.

The latest fall in activity has been particularly steep, as seen by our North America land revenues, which is 29% lower sequentially on reduced activity and increased pricing pressure, together with the early onset of the Canadian spring breakup. In spite of this downward acceleration in activity, our new technology sales remain solid, and we also see growing customer recognition for the value of our integrated technology offering.

North America offshore revenue was down 18% sequentially, driven by lower rig activity and project delays and cancellations. In addition, multi-client seismic sales saw unprecedented low levels, resulting in a negative operating income of $36 million in the first quarter, due to the ongoing amortization of our multi-client library. This loss combined with the dramatic drop in activity and continued pricing pressure caused our overall operating margins in North America to fall into negative territory.

Throughout the quarter, we maintained our focus on tailoring costs and resources to activity levels while safeguarding our operational infrastructure and technical capabilities. Needless to say, this approach further reduced our profitability levels. However, our cash flow in North America still remained positive.

Turning to the international markets, revenue was 13% lower sequentially, as customer budget cuts, project cancellations, seasonal winter slowdowns, and foreign exchange weakness versus the U.S. dollar all impacted results. Fourth quarter international operating margins slipped to 21%, driven by the significant activity reductions and persistent pricing pressure. The Europe, CIS, and Africa [ECA] area was the worst affected, while the Latin America and the Middle East and Asia [MEA] areas were able to maintain flat margins compared to the fourth quarter. And in total, our international sequential decremental margins improved in the first quarter to 27%.

Looking at the international areas in more detail, revenue in Latin America declined 9% sequentially while pre-tax operating margins remained steady at 23%, driven by proactive cost management initiated in the previous quarter and the startup of a new integrated project. In Argentina, activity softened further in the first quarter, and revenue was also negatively impacted by the weakening of the peso. Activity in Brazil and Colombia continues to be in freefall and was in the first quarter down 50% and 75% respectively compared to the first quarter of last year. In Ecuador, we are executing well on our SPM projects, with production in Shushufindi exceeding 90,000 barrels per day during the first quarter. And we continue to invest actively in our integration project in the country.

Revenue in Venezuela was down sequentially, but we did see higher activity in the Faja joint ventures compared to the fourth quarter. In Venezuela, the rate of cash collections has been insufficient in recent quarters. And in spite of concerted efforts together with our main customer, we have been unable to establish new mechanisms that address this issue. Therefore, as we have already announced, we have decided that we will not increase our accounts receivable balance beyond the level reached at the end of the first quarter.

This means that activity levels in Venezuela going forward will be aligned with the rate of cash collections from our customers in the country. In doing this, we are working in close coordination with all customers in Venezuela to continue to serve the ones with available cash flow and to ensure a safe and orderly wind-down of operations for the others. We have been working in Venezuela since 1929. And in spite of this temporary reduction in activity, we remain committed to the oil and gas industry in the country going forward.

In Europe, CIS, and Africa, revenues fell 18% sequentially, while pre-tax operating margins dropped by 194 basis points to 19%. The drop in revenue was led by Russia and Central Asia, where a further weakening of the ruble and the seasonal winter slowdown both on land and offshore impacted results. In the North Sea, revenue was also lower due to customer budget cuts, seasonal reductions in activity, and also severe weather conditions, while widespread project delays and job cancellations in sub-Saharan Africa contributed to another significant sequential reduction in revenue in this region.

In the Middle East and Asia, revenue declined by 11% sequentially while pre-tax operating margins remained flat at 22%. The sequential drop in revenue was led by Asia, with lower activity in China from the seasonal winter slowdown and also by weaker activity in Australia and the Asia-Pacific region as a result of continued customer budget cuts.

First quarter revenue was also down in the Middle East region, where solid activity in Kuwait, the United Arab Emirates, and Egypt was more than offset by reductions in the rest of the region. In terms of operating margins, the lower activity and pricing pressure seen throughout the area was offset by adjustments to our cost and resource base as well as by further implementation of our transformation program.

Turning now to our technology offering, the Cameron transaction closed on April 1, 2016. And on this date, Cameron became the fourth Schlumberger product group, joining our Reservoir Characterization, Drilling, and Production groups. We are very excited and pleased to welcome the Cameron employees under the leadership of Scott Rowe to Schlumberger. And we are already in full implementation mode of the detailed integration plans we have jointly prepared over the past seven months.

In terms of financial reporting, Simon has already explained that we will report Cameron financial results as a fourth global group, and also that Cameron's revenue will be consolidated with the rest of the company on a geographical basis under the four reporting areas we currently disclose, while we at the same time will discontinue the geographical reporting of pre-tax operating income.

So let me explain the reasoning behind this change. First, the Cameron Group is a centrally run manufacturing business built around large plants that address global markets, and their customer billings around the world are largely separated from where the costs are incurred. Combining the Cameron Group revenue with the rest of the company will therefore give a good representation of customer activity for the entire company. However, Cameron has historically not allocated out a large central cost base because managing these allocations are associated with significant extra workloads.

At the same time the traditional Schlumberger business, although different in nature from Cameron, is also evolving towards a more regional and central setup as part of our ongoing corporate transformation. Our geographical presence from both a customer interaction and well site execution standpoint will never change and will always remain central to how we run the company. However, the overhead structure that is employed to support our day-to-day customer operations represents a significant part of our cost base, which can be dramatically streamlined and reduced through the centralization drive of the transformation program. Schlumberger is therefore also on a path where there is a growing distance between where we bill our customers and where we incur a large part of our costs.

Based on this, we have therefore decided to discontinue the reporting of pre-tax operating income by the geographical areas. Beyond this, we will continue to report orders and backlog for the Cameron long-cycle businesses, of OneSubsea and Drilling, and for the WesternGeco seismic business.

Next, let's move on from financial reporting to new technology. The technical driver behind the Cameron transaction is our belief that the Cameron technologies will be critical enablers in the development of a new generation of incubated surface and subsurface systems that have the potential to make a step change in both drilling and production performance. One example of this is our land drilling system of the future that brings together purpose-built surface and downhole hardware, which is ready to be integrated into a complete drilling system, overseen and managed by a common optimization software that will deliver a step change in operational efficiency.

Cameron brings expertise and technology in the areas of top drives, pipe handling systems, and blowout preventers, while the new system will also draw on the rig design acquisition and rig manufacturing JV we made last year. Five engineering prototypes of the new system will be ready for field testing in 2016 in Ecuador and the U.S., with full commercial introduction on track for 2017.

Another example is our new hydraulic fracturing system, which will be produced in 2017, where we will bring together new hardware technologies and significant process reengineering as well as a common operating and optimization software. This system will span the complete range of surface components, such as Cameron's CAMSHALE pressure control and wellhead systems together with our own perforating, fracturing, cleanup, and flowback services, as well as our latest downhole completion technology and fracturing fluids.

Both of these systems will initially be deployed within our current CapEx budget of $2 billion for 2016, which itself has been reduced by $400 million from our initial guidance. Our ability to invest through this unprecedented industry downturn on the back of our strong cash flow and balance sheet enables us to capitalize on the current market conditions to gain significant relative strength compared to our surroundings.

In addition to our traditional CapEx investments, we also continue to invest in new production management projects, leveraging our broad subsurface and integration capabilities. An example of this is the Auca project we started off in Ecuador during the first quarter, where we are building further on the highly successful Shushufindi project, which is now in its fifth year of operation.

Multi-client seismic surveys is another line of business opportunities we continue to invest in, where our current focus is on the exciting Campeche Basin in Mexico and the largely unexplored areas offshore Mozambique and South Africa. As we enter the second quarter, we have a total of eight 3D vessels active, and with three of these using our unique IsoMetrix technology.

We also continue to make M&A investments in niche technologies that fill gaps in our portfolio or in our ability to develop specific new services. We mentioned two of these in today's release, with one being a novel downhole metal-to-metal sealing technology for use in our completions product line, while the other brings expert consulting abilities in support of the expansion of our integrated project portfolio.

And finally, we continue to focus on returning cash to our shareholders through dividends and stock buybacks, which combined amounted to $1.1 billion in the first quarter.

Turning now to the short-term outlook, we expect market conditions to worsen further in the second quarter, as customers continue to reduce activity. Excluding the additional revenue from Cameron, this market outlook together with our decision to reduce activity in Venezuela could lead to a sequential percentage fall in revenue for the second quarter, similar to what we saw in Q1. Cameron revenue, on the other hand, is expected to be flat sequentially.

In this environment, we will continue to tailor service capacity and overhead costs to activity levels while preserving long-term operational and technical capabilities, which could represent a further burden on our operating margins going forward, in particular in North America.

Our overall view of the oil markets, however, remains unchanged, where a steady tightening of the supply and demand balance is taking place. The latest reports confirm that 2016 demand growth remains solid, while OPEC production levels have been largely flat since the mid of 2015. Production in North America continues to fall as decline rates are becoming more pronounced, while the mature non-OPEC production is now falling in a number of regions.

As we navigate these landscapes, a number of positive factors make me optimistic and confident with respect to Schlumberger's future. First, the magnitude of the E&P investment cuts are now so severe that it can only accelerate production decline and the consequent upward movement in oil price. Second, our financial strength enables us to continue to invest in a range of opportunities across a number of our businesses. Third, the massive capacity reductions in the service industry will help restore a good part of the international pricing concessions we have made once oil prices and activity levels start to normalize. And last, while we have reduced capacity significantly, we are safeguarding the core expertise and capabilities of the company beyond our immediate operational requirements.

We therefore remain confident in our ability to weather this downturn much better than our surroundings. Through our global reach, the strength of our technology offering, the strategic moves we have made, and our corporate transformation program, we are creating the leverage that will enable us to increase revenue market share and continue to produce superior earnings and margins.

Thank you very much. We will now open up for questions.

Question-and-Answer Session

Operator

Thank you. And we'll go to the line of Ole Slorer with Morgan Stanley. Your line is open.

Ole H. Slorer - Morgan Stanley & Co. LLC

Thank you very much and thanks for a good rundown there, Paal. Our CapEx numbers agree very closely with those you outlined. But despite that, at least here within Morgan Stanley, we have a pretty big debate about the exact timing and the expected impact of these cuts on production. I think U.S. and the Middle East is getting extremely well understood, but I'd be very grateful if you could share your insights on some of those areas, so the role that have headline rig counts that have gone down 80% – 90% in many cases, but very little data available. So what's your take on what's going on across some of the key Latin American markets or West Africa or let's say China? If you can, give us a high-level – without mentioning any specific country or customer of course, some insights into what gives you confidence that the markets are rebalancing.

Paal Kibsgaard - Chairman & Chief Executive Officer

What I would say, you look at non-OPEC production outside of North America, it is very clear that it's now in full decline. If you look at non-OPEC production overall, it drops by 930,000 barrels over the course of Q1. About 50% of this was North America, and the other half was international non-OPEC. The leading driver outside of the U.S. in terms of this production drop is seen in Mexico, Colombia, Brazil, the UK, and in China. So 930,000 barrels of drop over the course of Q1 is quite significant, and non-OPEC production is now already 400,000 barrels a day down year over year.

So based on this, we believe that the current oversupply is expected to shrink to almost zero by the end of 2016. And in Q4 this year, non-OPEC production is now forecasted to be down 1 million barrels per day year over year. So that basically increases the call on OPEC from today's level to Q4 by 1.8 million barrels a day, which is quite a significant increase. So yes, we believe and I think we agree with you that the oil market is in the process of balancing.

Ole H. Slorer - Morgan Stanley & Co. LLC

That does sound like some big numbers. What would it take in your view – eventually the industry is going to have to go back to work again because once we undershoot on the supply side, prices will take care of that. But what will it take in order to stabilize and grow production again globally given the contraction we've seen, as you highlighted, in service capacity and the lag between investments and – or lack of investments for that matter and production?

Paal Kibsgaard - Chairman & Chief Executive Officer

I think we will need significant increases in E&P investment. There's no way you can get around that. But if you look at the current state of the industry today and you look forward to 2017, there are limited sources of short-term supply that can be brought to the market. What can be done next year is to draw down further on global stocks. There is OPEC spare capacity that can be put into the market. We have the North America land ducts. And if you look at new investments that are relatively short cycle, there are two sources of that. It is going to be the conventional land international, and it's going to be the unconventional land in North America. Both of these resource types are relatively short-cycle businesses, and production coming out of them is just going to be a function of the investment appetite.

So I think the sources of additional production for 2017 is limited to these items that I just mentioned. And beyond that, I think we need a widespread significant increase in E&P investments to get supply back to where it can meet growing demand.

Ole H. Slorer - Morgan Stanley & Co. LLC

Okay, thank you very much.

Simon Farrant - Vice President-Investor Relations

Thank you, Ole.

Operator

We'll go to the line of David Anderson with Barclays. Your line is open.

J. David Anderson - Barclays Capital, Inc.

Good morning, Paal. In the past you've talked about the massive overcapacity in land service markets and talked about the pricing recovery in the short to medium term looks really difficult. Some of the smaller peers have been talking about stacked capacity permanently impaired in North America, so maybe the market is a little tighter than it looks. So in your mind and as we think about the lag effects that you've talked about here, how does that look for you, the outlook on pricing and how that utilization and the capacity can all work together?

Paal Kibsgaard - Chairman & Chief Executive Officer

For North America?

J. David Anderson - Barclays Capital, Inc.

Yes, in North America. I'm just curious if you think that some of that stacked capacity doesn't come back and how that portends to margins.

Paal Kibsgaard - Chairman & Chief Executive Officer

I think it would be great if it didn't come back, but I still think most of it is going to come back. I think some of it today probably isn't operational because it needs maintenance. But I think when activity starts to increase, most of this equipment through some maintenance investment can be brought back in. And that's why I still believe there's a large capacity overhang in North America land. And with the current depressed service pricing, we need significant pricing increases to get back in to generate profits in North America land. And that's why I don't think that pricing traction is going to be significant in the short term, and that's why also I think the earnings contributions from North America land is going to be a bit out in time.

J. David Anderson - Barclays Capital, Inc.

And as we talk about decrementals and how those look for you, your decrementals have held up remarkably well here. But you also talk about preserving your core capabilities. Are we getting to the end of cost-cutting here, and would you expect decrementals to get maybe a little bit worse here before it starts turning the corner?

Paal Kibsgaard - Chairman & Chief Executive Officer

You're right, it is increasingly difficult to maintain decrementals around the 30% mark. We did 32% even with the massive surprise we had in the first quarter. But yes, we are getting to the point where some of our technical capabilities, which take a long time to develop, we are going to revamp those and not cut them to be in line with current activity levels.

But with that said, on the field capacity, we continue to tailor that to ongoing activity levels. This can be rebuilt within, I would say, plus or minus 12 months. What we are currently undergoing now is a detailed review of our overhead structure to see whether there is an opportunity to bring that further down, but that wouldn't be done to serve the next couple of quarters, it would be basically finding a way that we can lighten that burden more permanently. But to do that, it requires significant review, and that's the process we're currently going through at this stage.

J. David Anderson - Barclays Capital, Inc.

Thank you.

Operator

Thank you. Our next question comes from the line of Angie Sedita with UBS. Your line is open.

Angie M. Sedita - UBS Securities LLC

Thanks. Good morning, guys. Good morning, Paal.

Paal Kibsgaard - Chairman & Chief Executive Officer

Good morning.

Simon Ayat - Chief Financial Officer & Executive Vice President

Good morning

Angie M. Sedita - UBS Securities LLC

So there has been a lot of discussion out in the marketplace about people and the challenges with people. And if you could, give us a little bit of color on what steps you've taken to retain your top talent, both internationally but also more importantly in the U.S., and then your thoughts on your ability to bring these new people back in or bring back your old people back in when things do slowly start to turn around in 2017.

Paal Kibsgaard - Chairman & Chief Executive Officer

Okay. Maybe I can just start by one thing first. So if you look at our reported head count numbers, we reported at the end of Q4 95,000 people, and we reported 93,000 people at this stage, which indicates that we let go another 2,000 people during Q1. We actually released another 8,000 people during the first quarter. So we have now reduced our workforce by around 42,000 people from the peak in 2014. So the delta here is that we are now counting around 5,500 contractors which were previously not considered part of our permanent head count, so a drop of 8,000 in Q1.

Now to your question around how we are managing this, we are obviously right-sizing field capacity continuously. This capacity, we can build back relatively quickly, probably within 12 months. But even in the field capacity, we have introduced a program called intent of leave of absence. And here for our senior field engineers and for key operational people, we are giving them basically half an annual salary, paid 20% up front when they take this leave of absence, and 30% of the salary is paid when they return back after 12 months. And we have several batches of this incentivized leave of absence where we can call people back in the coming 12 to 18 months. So that's a key part of how we preserve some of our core operational expertise.

And then on the overhead and support structure, we continue to look at right-sizing that. But in this, our technical support organization, which takes a long time to develop, we are also ring fencing that to take sure that we have these people available as we get back into growth mode.

Angie M. Sedita - UBS Securities LLC

Okay. Okay, that was very helpful. And then you mentioned and you gave a little bit of color on your preservation of your core capabilities, but also a greater willingness to balance market share with profitability. Maybe a little bit more color there, particularly on the U.S. but internationally as well, and you referenced obviously still some pressure on revenues and margins going into Q2. And can you talk a little bit more how that plays out for the next quarter or two on the margin side?

Paal Kibsgaard - Chairman & Chief Executive Officer

Q2 is going to be another very tough quarter. So the significant drop in activity that we saw during the first quarter is obviously now spilling over into Q2. In addition to that, we're going to have the impact on Venezuela to deal with. So again, we are expecting a significant percentage drop in revenue going into Q2, which again will make it difficult or challenging to maintain decremental margins around 30%, although we are going to continue to try.

What we see in certain markets and certain basins in North America and also certain markets international, that activity is coming down to basically critical mass type of levels. And at that stage, it is not only about focusing in on cost reductions and managing margins. We are also considering what the startup costs again would be in the event we have to shut everything down. So in certain cases, we are carrying, I would say, contracts and operations losses for certain regions where we believe that's a better investment than actually shutting down and then having the lag in time and significant costs to start things back up again. But this is a review we do for every country or every basin on a continuous basis, what's the benefit of taking the losses versus shutting down and then making the investments later on to start back up again.

Angie M. Sedita - UBS Securities LLC

Great, that was actually very helpful. Thank you, Paal.

Simon Farrant - Vice President-Investor Relations

Thank you, Angie.

Operator

Thank you. Our next question comes from the line of James West with Evercore ISI. Your line is open.

James West - Evercore ISI

Thanks. Good morning, Paal.

Paal Kibsgaard - Chairman & Chief Executive Officer

Good morning.

James West - Evercore ISI

So I don't think we have much of a debate here at Evercore ISI on the structure of oil prices, but I'd love to get your thoughts on prices given that you've said recently in public documents you're looking at medium-for-longer. I guess what do you see as medium-for-longer? And then my follow-up would be what does that mean for activity improving for your businesses?

Paal Kibsgaard - Chairman & Chief Executive Officer

Our view on the medium-for-longer or the background for that statement is that I think that is the pricing level that the industry has and has to live with, and it's probably the pricing level that some of the core parts of OPEC is also believing is a reasonable target, although they have not told us, so that is our assumption. So in that environment, there is still a big jump for the industry to make sure that we can bring cost per barrel down to make projects viable in these pricing ranges as well as having enough projects to generate supply to meet future demand.

So it is an opportunity for a company like ourselves to work closely with our customers in collaborative ways, where we look at jointly with them driving costs out of the system and production up from the assets that they have. And I think by having this focus, there is an opportunity for the industry to be quite successful in the medium-for-longer scenario. But we cannot continue to operate in the same way that we have done in the past. So we see significant opportunity for Schlumberger in that type of scenario, but it requires the industry to change both in the level of collaboration between customers and the service industry, as well as new investments in more efficient processes, better quality, and very importantly, total system innovation to drive performance.

James West - Evercore ISI

Paal, are you seeing that collaboration come through during this down cycle? Are you seeing more evidence from your customers to actually collaborate more with you?

Paal Kibsgaard - Chairman & Chief Executive Officer

There are some signs of it, James, but I wouldn't say it's prevalent or significant at this stage. We are obviously very interested in starting it. We have some small projects going on with some key customers. In fairness to our customers as well, they are in a very, I would say, significant cash crunch at this stage, in which case the priority for them would have to be to navigate that through before they start changing their business model. But I think there is an openness and willingness when things settle here to move in towards more collaborative relationships, and we are certainly ready to lead that.

James West - Evercore ISI

Got it. Thanks, Paal.

Operator

Thank you. Our next question comes from the line of Jim Wicklund with Credit Suisse. Your line is open.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Good morning, guys.

Paal Kibsgaard - Chairman & Chief Executive Officer

Good morning.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

A little bit of a shift, I figure that about 25% to 30% of your operating income these days are coming from offshore and primarily deepwater work. And I'm in Washington at the NOIA [National Ocean Industries Association] meeting. And the consensus here seems to be that deepwater is going to decline or at least not begin to recover for at least the next couple years. You all have given us a great deal of view and guidance on the onshore outlook. Can you talk a little bit about the offshore outlook?

Paal Kibsgaard - Chairman & Chief Executive Officer

I think it's fair to say that in terms of significant new projects being sanctioned offshore, I think that is not going to be the first area that our customers are going to start putting money into. So I think it's fair to say that the land part of the global operations will see higher investments before the offshore, and in particular the deepwater part.

Now as to the percentage of our revenue and earnings, we haven't disclosed what deepwater and offshore is. But I would say that the current operating income we're getting from this part of our business is I would say significantly or massively reduced from what it was in more of a stable operating environment in 2014. So a lot of these hits I believe we have already taken. It still means that we have upside potential when these investments start. But we also have a very good presence, both in North America land and even more so in the international land conventional market.

So in any situation where the investments are coming, and they would have to come, we are very well positioned to capture our share of them and generate earnings growth from the onset of the increase. And then the offshore and deepwater comes later on and exploration coming after that. We have several new phases that can spur our growth in the coming two, three, four years.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Okay, Paal, I appreciate that. And my follow-up if I could, when we talk about international conventional and domestic unconventional, it would appear just from customer spending patterns that onshore U.S. and the independents will probably come back first. Will there be much of a delay, and if so, how much between the recovery in North America and the recovery on international conventional land?

Paal Kibsgaard - Chairman & Chief Executive Officer

I think it's a good question, Jim. I think if you go on historical ways of responding, I think it's right to say that in previous small and large downturns, the North American players have been quicker and had more investment appetite to grow fast. I think the situation at this stage is somewhat different. There is a potential significant supply challenge over the next couple of years, and part of this will have to be addressed through international increased supply.

So I think a number of the players within the Middle East, I think Russia land and Russian Siberia all have the capacity I think to invest more and have a short-cycle impact on production. Now whether they will do that or not I think is still to be seen. But I think given the potential challenges of supply, I don't think North America by itself is going to be able to handle it. It would have to come from other sources as well, in which case I think this time around you would probably see a faster response, in my view, from the international conventional land businesses as well.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Okay, thank you very much.

Simon Farrant - Vice President-Investor Relations

Thank you.

Operator

Thank you. Our next question comes from the line of Bill Herbert with Simmons. Your line is open.

William Herbert - Simmons & Co. International

Thank you, good morning.

Paal Kibsgaard - Chairman & Chief Executive Officer

Good morning.

William Herbert - Simmons & Co. International

Paal, I was curious as to your views with regard to the threshold oil price required to drive 2017 international E&P capital spending growth.

Paal Kibsgaard - Chairman & Chief Executive Officer

I think it's going to be gradual. I don't think there's going to be one magical number.

William Herbert - Simmons & Co. International

Yes.

Paal Kibsgaard - Chairman & Chief Executive Officer

I think oil prices now for Brent being already in the mid-$40s is a positive sign. Still, we maintain our view that there's going to be a lag between oil price and increases and significant increases in E&P spend. And I think our customers will take a cautious view on how much they're going to spend as well, given the balance sheet state of many of them and also the significant volatility that you might also see going forward.

So I think you will see a gradual comeback of investments as oil prices increase, we believe, over the course of the second half of this year. And then it's going to be I think a function maybe of how severe the supply situation is going to be. I think that might be a good guide in addition to the movement of the oil price because if supply is clearly weakening, I think it's going to be much safer to increase investments going forward as well, in which case the appetite might come up together with the oil price. So I think our customers will take a balanced but conservative view initially. And I think the appetite might increase as we see how severe the impact on supply is going to be as the rest of this year evolves.

William Herbert - Simmons & Co. International

I guess the question is that in the event that we continue to get an improvement in oil prices, although the rate of improvement slows over the back half of the year, that it begins to crystallize that we're on a sustainable path to recovery. Do we need considerably higher oil prices from this point to drive decent E&P capital spending growth internationally in 2017, or is it sufficient that we're on a recovery path and resource holders continue to believe that the direction is higher and not lower?

Paal Kibsgaard - Chairman & Chief Executive Officer

It's difficult to generalize, but I think your statement around the path I think is going to be critical as well, the path of supply and the path of movement of oil price. Like I said, it's difficult to come up with one specific number. I think the various customer groups and the customers within these groups will have different views on when they are getting comfortable to invest. But I would think both aspects, the oil price movement and the supply trends, is probably what they're going to look at when they make decisions. But overall, as I said earlier on the call, E&P investments will have to come up in order to address the supply challenges we'll see in 2017 and onwards.

William Herbert - Simmons & Co. International

Okay, thank you.

Paal Kibsgaard - Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Waqar Syed with Goldman Sachs. Your line is open

Waqar Syed - Goldman Sachs & Co.

Thank you. Paal, you had mentioned that international pricing concessions that you've given would start to go away as oil prices rise. I guess that's what you said. Would we start to see that at $60 per barrel Brent, or do we need higher prices to see those pricing concessions go away?

Paal Kibsgaard - Chairman & Chief Executive Officer

I wouldn't tie it to a specific oil price. I would more tie it to activity levels. I think that's what's going to drive our pricing. And that's again, we see a lag between the move in oil price and E&P investments and our activity. But I think if there is a start of a third or at least a noticeable uptick in international activity, I think some of these pricing concessions that have been made, we should be able to get part of them back. And in fact, in many of our contracts, the concessions we have made are either time-limited or they are tied to oil price figures as well. So based on all of this, we believe that some of the pricing at least we will get back.

Waqar Syed - Goldman Sachs & Co.

Okay, great, and then secondly, my follow-up on your SPM investments. How are the returns on your SPM investments relative to the overall corporate returns? Are they higher or lower? And then how does that differential change through the cycle?

Paal Kibsgaard - Chairman & Chief Executive Officer

Simon?

Simon Ayat - Chief Financial Officer & Executive Vice President

I'm going to take this question, Waqar. So normally, our SPM investments and our review of these projects, they are superior to our normal activity. That's the reason why we have developed this type of business, and it is even during the cycles it's giving us a baseline of activity that produces higher margins and higher returns. But you have to remember that this is a long-term project. And in the beginning the model, that it is a negative cash flow, which turns into a positive cash flow after a while. So over a cycle, yes, it is better return and better margins.

Waqar Syed - Goldman Sachs & Co.

Now you mentioned almost $600 million in the quarter in SPM. What are your plans for the remainder of this year in terms of SPM investments?

Paal Kibsgaard - Chairman & Chief Executive Officer

I think if you look at both the fourth quarter and the first quarter of this year, SPM investments have been higher than what you've seen before, and we expect the second quarter to go back into more of a level that you've seen preceding these two latest quarters.

Waqar Syed - Goldman Sachs & Co.

Okay, great. Thank you very much.

Paal Kibsgaard - Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Jud Bailey with Wells Fargo. Your line is open.

Judson E. Bailey - Wells Fargo Securities LLC

Thank you, good morning.

Paal Kibsgaard - Chairman & Chief Executive Officer

Good morning.

Judson E. Bailey - Wells Fargo Securities LLC

Paal, if I could ask you, you mentioned briefly in your prepared comments that you could – the way the market is going, you could see revenue in the second quarter potentially decline by the same amount as the first quarter. It sounds like Latin America, it would stand to reason, could be worse because of Venezuela. Would you see a material difference amongst the regions in revenue decline to get to the same percentage decline, or is there more of a shift to one area or the other in terms of the decline in revenue from 1Q to 2Q?

Paal Kibsgaard - Chairman & Chief Executive Officer

I think if you look at the four areas, we'll see again a significant drop in North America, purely based on how the rig count has fared over the course of Q1. In Latin America, as you point out, we will have a significant impact on Venezuela, where we are in the process of tailoring activity to the rate of collections, which will mean a fairly significant drop in activity in Venezuela in Q2.

And just for the record, I'd just like to also say that our receivable balance in Venezuela at the end of the first quarter was around $1.2 billion, and our revenue in Venezuela was less than 5% of the total for the first quarter and also for the full year of last year, just to give you some perspective of the situation there.

Then going to ECA and to MEA, I don't have the details of the projections there, but I think you would see a similar type of revenue headwinds also going into the second quarter there as well.

Judson E. Bailey - Wells Fargo Securities LLC

Okay, that's helpful. Thank you. And then I guess trying to think about decremental margins on a similar revenue decline, do we think we can perhaps get a little bit better decrementals, or does Venezuela cause decrementals to maybe deteriorate a little bit from what you were able to do in the first quarter?

Paal Kibsgaard - Chairman & Chief Executive Officer

We've laid out the ambition of trying to keep decrementals around 30% since the start of this downturn, which was a lot easier to do five, six quarters ago than what it is to do currently. And obviously, when you have shutdown of significant operations in a large country like Venezuela, it is much more difficult to deal with because, for instance, in Venezuela, we are going to keep a large part of our local organization employed and on the payroll as we go forward. And also we keep our entire asset base in the country to make sure that we are ready to go back and serve our customers there once cash flow is available to pay us.

So there are certain of these decisions that we are making now which are somewhat headwinds to decrementals, but I would say that our ambition is still to try to fight this out and deliver at least close to 30% decrementals, although I cannot promise it.

Judson E. Bailey - Wells Fargo Securities LLC

Thank you, Paal. Appreciate it.

Paal Kibsgaard - Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Kurt Hallead with RBC Capital Markets. Your line is open.

Kurt Hallead - RBC Capital Markets LLC

Hi, good morning.

Paal Kibsgaard - Chairman & Chief Executive Officer

Good morning.

Kurt Hallead - RBC Capital Markets LLC

Great rundown so far, Paal. I was wondering. You mentioned two things about the international, the call on international oil coming from the international markets, part of that coming from OPEC and then you also indicated Russia. Can you give us a little bit more color around Russia? There seems to be a lot of discussion in the marketplace that neither Russia nor Saudi in particular can increase output from where they are currently. Your comments seem to counter that viewpoint. So can you just give us some views on Russia in particular?

Paal Kibsgaard - Chairman & Chief Executive Officer

I think if you look at Russia throughout this downturn, activity has been very strong, and they have done a good job from the oil industry in the country to keep production up between 10.5 million and 11 million barrels per day. So in spite of the challenges we have in Russia with the ruble and then the overall situation there, we've seen strong underlying activity and a very strong focus from the country and from the industry in the country to maintain and even try to increase production slightly. So I think through higher investments, obviously Russia has significant oil and gas reserves. And to increase investments, if there's an appetite to do that, I still think Russia has the potential to increase production yet going forward.

Kurt Hallead - RBC Capital Markets LLC

Okay.

Paal Kibsgaard - Chairman & Chief Executive Officer

And I think to your comment on Saudi as well, obviously Saudi is sitting on several million barrels of spare capacity, which they can put into the market if they so choose to.

Kurt Hallead - RBC Capital Markets LLC

Great, and then just a quick follow-up on Cameron. I fully understand your business plan and business model on integrating the hardware with the reservoir dynamics. What has been the uptake on that? Have you had some definitive successes on selling that business model to the oil companies as of yet?

Paal Kibsgaard - Chairman & Chief Executive Officer

I think it's still early days on that. I think the overall concept I think is widely accepted. This whole focus on total system innovation going forward, combining hardware with sensors, instrumentation, and software controls, this is the way of the future for the industry.

So I still think it's early days. We are seeing some traction in OneSubsea, which has obviously been at this for several years already, and also things around the Rig of the Future system I explained. I think it will be quite interesting when we also roll out our new frac system in 2017. So we have a lot of investments already going on, which means that it's not going to be years before you see the impact of what we are talking about. I think I would expect there to be already some impact in 2016 and even more so in 2017 to introduce these new technology systems.

Kurt Hallead - RBC Capital Markets LLC

All right, that's great. Appreciate that color.

Operator

Thank you. And we have time for one last question, and that will be from the line of Scott Gruber with Citigroup. Your line is open.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Yes. Thanks for squeezing me in and good morning.

Paal Kibsgaard - Chairman & Chief Executive Officer

Good morning.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Paal, in the release you highlighted that you're cautious regarding adding capacity in North America once recovery begins, which I think you highlighted reflects a cautious stance regarding your views towards long-term oversupply and hence profitability. But on the other hand, it appears that you have a good ability to take share in the U.S. given the financial stress being experienced by your smaller competitors. Can you just walk through that strategy a little bit more regarding balancing market share on U.S. land and expanding the U.S. business at what initially would be thin margins? Why not be aggressive during the initial recovery in terms of reactivating equipment to take share and then have greater share when profitability levels can improve later on?

Paal Kibsgaard - Chairman & Chief Executive Officer

That's a fair question. I would say our general philosophy is that we do like not like contracts that are dilutive to earnings. So basically, losing money isn't something that we ideally want to get into. Now we take on contracts at this stage of the cycle that are dilutive to earnings per share if we believe that doing that is going to serve us long term either from a share standpoint or from keeping our capabilities intact as we work through the trough of the cycle.

So in terms of being cautious and adding back capacity, if we are talking about being in the black and basically making profits, I have no issues at all releasing capacity and going for share. But if the share is associated with negative earnings, that's when we're going to be cautious and we're going to stick to basically preserving capabilities and infrastructure as long as pricing levels are at that stage. But I think as soon as you get into the black, we are quite keen to unleash all of the capacity we have available to gain share.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

And then it's my understanding that those frac crews in the U.S. are underutilized today even when active. Do you have an idea of roughly how much more you can expand your frac workload in the U.S. without actually reactivating spreads?

Paal Kibsgaard - Chairman & Chief Executive Officer

The spreads we have today are actually quite well utilized because if you have – with the current pricing levels, if you have poor utilization on top of it, it is a disaster from a profitability standpoint. So the fleets we have in operations are actually today reasonably well utilized. So there might be some upside in capacity on it, but I wouldn't say significant. We would have to reactivate new capacity in order to take on significantly more work.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Great, thanks.

Paal Kibsgaard - Chairman & Chief Executive Officer

Thank you very much. So before we close this morning, I would like to summarize the most important points that we discussed. First, our industry is now in the deepest financial crisis on record, with profitability and cash flow at unsustainable levels for most oil and gas operators. This has created an equally dramatic situation for the service industry. Each successive quarter for the past 18 months has brought increasing cost in E&P spend that have led to falling activity and lower demand for oilfield products and services. This is the toughest environment we have seen for 30 years, and it is likely to get even tougher before the market turns.

Second, so far in this downturn, we have successfully managed a very challenging commercial landscape by balancing margins against market share and aggressively reducing capacity and overhead costs. In parallel, we continue to focus on how to best preserve the long-term technical capabilities of the company. This approach together with the benefits of our ongoing transformation program has enabled us to outperform our surroundings and protect our financial strength.

And third, the current market presents significant opportunities for companies that have both the required capital and strategic bandwidth that enables them to invest. In this respect so far in this downturn, we have closed our largest ever acquisition, made a series of smaller but still significant investments in specific technology niches, and invested in integrated services and projects that will boost our financial performance going forward. We are also actively investing in pre-funded multi-client seismic surveys that will underpin a return to solid exploration activity in several regions around the world. And we also regard the protection of our technical capabilities as well as our immediate operational needs as an investment in our future growth.

In summary, we remain convinced that the tightening of the supply/demand balance is well underway. And while the operating environment remains tough, the market presents a range of opportunities which we will continue to actively pursue. Thank you very much for listening in today.

Operator

Thank you. And, ladies and gentlemen, today's teleconference will be available for replay after 10:00 AM today until midnight, May 22. You may access the AT&T teleconference replay system by dialing 1-800-475-6701 and entering the access code of 385312. International participants may dial 320-365-3844. Those numbers once again, 1-800-475-6701 or 320-365-3844, and enter the access code of 385312.

That does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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