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Schlumberger Limited (NYSE:SLB)

Q2 2007 Earnings Call

July 20, 2007 9:00 am ET

Executives

Malcolm Theobald - Vice President of Investor Relations

Andrew F. Gould - Chairman of the Board, Chief Executive Officer

Simon Ayat - Chief Financial Officer, Executive Vice President, Treasurer

Analysts

Bill Herbert - Simmons & Co.

Ole Slorer - Morgan Stanley

Michael LaMotte - J.P. Morgan

Kurt Hallead - RBC Capital Markets

James Crandell - Lehman Brothers

Dan Pickering - Pickering Energy Partners

Brad Handler - Wachovia Securities

Geoff B. Kieburtz - Citigroup

Michael Urban - Deutsche Bank

Ken Sill - Credit Suisse

Alan Laws - Merrill Lynch

Robin Shoemaker - Bear Stearns

Kevin Simpson - Miller Tabak

William Sanchez - Howard Weil Incorporated

TRANSCRIPT SPONSOR
Wall Street Breakfast

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger earnings conference call. (Operator Instructions) At this time then, I’d like to turn the conference over to the Vice President of Investor Relations, Mr. Malcolm Theobald. Please go ahead, sir.

Malcolm Theobald

Thank you, Kent. Welcome to today’s second quarter 2007 conference call. Before we begin today’s call, I’d like to review the logistics and agenda.

Some of the information in today’s call may include forward-looking statements as well as non-GAAP financial measures. A detailed disclaimer and other important information are included in the FAQ document which is available on our website or upon request. For today’s agenda, Simon Ayat, Chief Financial Officer, will begin with commentary on the financial results. And then Andrew Gould, our Chairman and Chief Executive Officer, will provide an overview of the second quarter activity and outlook. Finally, we’ll take questions from the audience.

Now, Simon Ayat will discuss the financials.

Simon Ayat

Thank you, Malcolm. Ladies and gentlemen, good morning or good afternoon and thank you for participating in this conference call. Second quarter net income was $1.02 per share, up $0.06 sequentially and $0.29 above the same quarter of last year before charges, $0.33 after charges.

Oilfield Services generated $1.5 billion in pretax operating income, reaching a pretax margin of 30.4%, a sequential improvement of 90 basis points. By area the highlights were as follows: North America pretax margin declined 21 basis points sequentially to 31.2%, due to the seasonal spring break-up in Canada and erosion of the pressure pumping stimulation pricing, which was largely compensated by strong exploration-related activity in Alaska, increased deepwater drilling offshore in the Gulf Coast, and service intensity combined with a slightly higher rig count in U.S. land.

Latin America pretax margin was 23.6%, sequentially up 118 basis points, reflecting improved margins in Venezuela, Trinidad, and Tobago and Peru, Colombia, Ecuador geo-markets, partially offset by higher project start-up costs in the Mexico geo-market.

For ECA, our Europe, Africa, CIS unit, the pretax margin improved 43 basis points sequentially to 28.7%, with Russia rebounding after the seasonal winter slowdown and sustained exploration activity in the North Sea further augmented by strong performance in the North Africa geo-market.

Middle East, Asia pretax margin increased 103 basis points sequentially to 35.3% on improvements in the Brunei, Malaysia, Philippines, China, Japan, Korea, and East Mediterranean geo-markets with increased activity. Specifically, a boost to exploration efforts across Asia and the Middle East while margin in Arabian and Gulf geo-markets remain steady.

WesternGeco pretax margin was $216 million, a deterioration of 525 basis points sequentially to 32.5%. Multi-client margins declined. There was a seasonal slowdown in sales, particularly in North America while marine margins improved as pricing and vessel production gains more than offset the impact of increased transits and scheduled dry docks.

Now turning to Schlumberger as a whole, the effective tax rate was 22.3%, 1.7 percentage points lower than last quarter, which is mainly due to the geographic mix of earnings. Both OFS and WesternGeco had a lower proportion of pretax earnings in North America and internationally, various geo-markets with lower tax rates contributed to greater percentage to pretax earnings.

Based on the projected geographic mix of earnings within OFS and WesternGeco for the remainder of the year, the full-year ETR is expected to be slightly lower than last year and above Q2 levels.

The earnings for the quarter included $34 million of expenses relating to stock-based compensation as compared to $37 million in the previous quarter. We expect this expense for the full year 2007 to be approximately $140 million, a $26 million increase over 2006.

As of June 30, net debt was $2.1 billion. Significant liquidity events during the quarter included $172 million for the stock buy-back program; CapEx, including multi-client, of $802 million. In addition, during the quarter, $396 million of series A convertible debentures were converted by holders into approximately 11 million shares of Schlumberger common stock. CapEx, excluding $61 million of multi-client surveys capitalized, was $741 million for the quarter and is expected to reach approximately $3.1 billion for the year 2007.

During the quarter, we bought back 2.2 million shares for $172 million at an average price of $78.20. This brings the total share buy-back under the 40 million shares repurchase program announced last April to 20.9 million shares for $1.3 billion at an average price of $62.90 per share.

Now, I turn the conference over to Andrew.

Andrew F. Gould

Thank you, Simon. Good morning, good afternoon, everybody. Second quarter results were driven by the increasing pace of international activity with sequential growth for Oilfield Services accelerating in all areas except North America, where higher activity on land and in the Gulf Coast was not sufficient to completely offset a significant downturn in Canada.

Across all areas, demand was high for drilling and measurements, wireline, artificial lift and well services technologies, as well as for Schlumberger Information Solutions products and services. Oilfield Services pretax margin reached a new high of 30.4%, led by an exceptional performance in the Middle East Asia area due to continued favorable revenue mix from exploration services, particularly in Asia.

In North America, the U.S. land geo-markets recorded strong sequential growth due to higher activity and higher service intensity, particularly for well services, wireline, and drilling and measurement technology directed at horizontal wells in unconventional gas reservoirs. Further north in Alaska, demand remained high for exploration related services.

Growth was also seen in the U.S. Gulf Coast geo-market as the service mix returned more to drilling and measurements, well services and well testing following the shift to completion-related services seen in the first quarter. This positive performance was overshadowed, however, by the expected weakness in Canada that resulted from the early spring break-up and lower natural gas prices reflected in lower activity levels.

In Latin America, strong revenues were recorded as the remaining negotiations with PDVSA related to the [Presa] rig management and engineering contracts were concluded, enabling recognition of previously deferred revenue. This had only a marginal effect, however, on sequential growth in the area’s revenue and pretax operating income, which were primarily driven by demand for technologies, products and services across the area. The technologies that benefited included wireline, well testing and artificial lift in Venezuela, Trinidad, and Tobago; wireline, well services, well testing and information systems and completions in Latin America itself; wireline and IPM in Peru, Colombia and Ecuador; and well services in Mexico.

Sequential revenue growth in Europe, the CIS and Africa was driven by higher activity in the East Russia, Continental Europe, Libya and North Africa geo-markets. Demand was strong for exploration-related wireline, drilling and measurements technologies in the North Sea, and for well services technologies in North Russia. The North Sea and North Russia geo-markets also saw higher sales of artificial lift systems products, while completion product sales were higher in the North Sea. Growth was, however, moderated by seasonal weather effects in South Russia.

The strong sequential growth in revenue in the Middle East, Asia area was driven by higher activity in Brunei, Malaysia, Philippines, Indonesia, [Ghata], Australia, Papua New Guinea and China geo-markets; stronger exploration-driven deep water activity in the Eastern Mediterranean; and higher demand for wireline completions and artificial lift technologies in the Arabian geo-market. But this growth was partially offset, however, by a lower exploration rig count in Thailand and Vietnam.

During the quarter, integrated product management saw increased demand for services in the Peru, Colombia, Ecuador and North Russia geo-markets. Since the beginning of the year, integrated project management has been awarded an impressive $3.8 billion of new and extended contracts that cover project management, technology deployment, and third-party services in the regions of Latin America, Russia, North Africa, Europe, and Malaysia. Building on long-term customer relationships, these awards have increased the contracted IPM through the end of the decay to a total of $4.8 billion. The achievement of clear performance objectives as part of the long-term nature of IPM services has been key to this expansion, where increasing market acceptance of the IPM business model can be measured by the continuing performance improvement that has been achieved over a number of successive contracts.

Turning now to WesternGeco, pretax operating income decreased sequentially in spite of the increased activity in marine acquisition and stronger data processing sales. Vessel productivity was higher than predicted in spite of seasonal transit and scheduled dry-dock inspections. These positive results proved insufficient to counter flat land revenue that resulted from the crew costs associated with certain projects and the usual seasonal decrease in multi-client data sales. As a result, the pretax operating margins dropped to 32.5%.

In order to meet the increasing demand for Q technology services, the seventh Q vessel, the Western Spirit, was launched at the end of the quarter. This vessel incorporates a development to the Q technology platform known as dynamic spread control system. This system automates vessels, source and streamer steering to achieve higher levels of performance. The benefits lie in far more accurate survey positioning to yield even higher repeatability in time-lapsed applications. The new vessel has already begun work for Statoil on a 40 reservoir seismic survey in the North Sea.

In another technology development, we acquired Geosystem land and marine electromagnetic and seismic imaging services. Geosystem has considerable expertise in the joint inversion of multiple geophysical measurements acquired through seismic, gravity, or magnetotelluric surveys, and it will become part of WesternGeco Electromagnetics.

In the short-term, the future natural gas activity in North America remains uncertain, as record imports of LNG, a slower-than-forecast decline in Canadian gas production, and the backlog of wells stimulated and brought online have all led to a rapid rise in gas storage levels. In this market, pricing erosion for pressure pumping stimulation equipment accelerated during the quarter due to increasing capacity. However, we continue to believe that the high decline rates of existing fields and the poorer quality reservoirs now being drilled would ultimately lead to renewed activity in the area.

Global demand for oil remains robust while non-OPEC supply continues to disappoint, due largely to acceleration in the decline rates of the existing production base, delays in new and complex projects under development, and inadequate industry investment from shortages of people and equipment.

We remain convinced that international activity will continue to increase as operators combat production shortfalls and continue to increase expiration budgets to renew reserves.

I’m now going to hand the call back to Malcolm.

Malcolm Theobald

Thank you, Andrew. We will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question this morning comes from the line of Bill Herbert with Simmons & Company. Please go ahead.

Bill Herbert - Simmons & Co.

Thanks. Good morning, guys. Andrew, with regard to the outlook for seismic, I was wondering if you could share with us what the pricing trends are at present on a leading edge basis. So for work that you are bidding into for 2008 and 2009, is pricing flat or up from where we have been?

Andrew F. Gould

We still have some pricing leverage on the 2008 horizon. I’m sure you’ve noticed that some of the new builds have slipped. And also, if you add to that the popularity of wide-azimuth, which uses a lot of vessels, and general demand, we don’t see any capacity issues in 2008.

Bill Herbert - Simmons & Co.

When you make mention of pricing leverage, does that imply -- what magnitude of pricing increase are you guys getting, relative to where you are at present? Is it double-digits?

Andrew F. Gould

I don’t know, Bill.

Bill Herbert - Simmons & Co.

Okay, and --

Andrew F. Gould

Quite deliberately, I didn’t ask, so I can’t answer your question.

Bill Herbert - Simmons & Co.

And then secondly, with regard to visibility, I’ve been struck by the fact that really size of backlog has been flat for about four quarters in a row now, notwithstanding the fantastic visibility going forward. Walk me through in terms of how sold out you are with regard to 2008, and are you beginning to bid for projects in 2009?

Andrew F. Gould

So the answer is we are not in any way sold out in 2008. The only thing that’s happened as far as 2008 is concerned is that work that would normally have been bid at the end of the summer is being bid now. So we have visibility on a number of bids, if you like, but we don’t yet have visibility on the total backlog.

Bill Herbert - Simmons & Co.

Lastly, with respect to wide-azimuth, to date wide-azimuth projects have been I think only confined to the Gulf of Mexico. Are you optimistic that wide-azimuth is going to be exported to other spheres?

Andrew F. Gould

We certainly think that in any arena where there are large salt bodies, that wide-azimuth will be tested.

Bill Herbert - Simmons & Co.

Which would be where?

Andrew F. Gould

Well, it could be West Africa, it could be offshore India, it could be certain parts of the North Sea.

Bill Herbert - Simmons & Co.

Thanks very much, guys.

Operator

Thank you. We do have a question now from the line of Ole Slorer with Morgan Stanley. Please go ahead.

Ole Slorer - Morgan Stanley

Thank you very much. Andrew, you mentioned an impressive $3.8 billion of IPM work since the beginning of the year, and a backlog now of 4.8. This is something you’ve been talking about for a long time and marketing pretty aggressively, so could you give us a little bit of flavor on whether there are new types of customers that you are now seeing embracing this for one reason or another and elaborate a little bit on how this is being widened out and accepted in the markets? We all know about a certain country where it’s very ideal but to what extent is it getting wider acceptance and why?

Andrew F. Gould

I think it is certainly getting a wider geographical acceptance than the initial concentration in Latin America. I think that it is being driven by a number of things. Firstly, I think it is being driven by our track record. Secondly, I think it is being driven by the fact that everyone is short of people and therefore short of people to manage their own projects and therefore if they can use an integrated project management offering to augment, to increase their own capacity to do work, they will do so.

And thirdly, there are certain types of operations where we have put together technical packages which allow us to market a technical package through IPM that is not otherwise available in the market. That’s particularly the case in Russia.

Ole Slorer - Morgan Stanley

Is there any trend between IOCs or larger EMPs, or national companies that are now embracing this, or is it broad-brushed? How would you characterize it?

Andrew F. Gould

I would say that every category you mentioned is using it in one form or another but the dominance is still through NOCs or relatively inexperienced exploration and production companies.

Ole Slorer - Morgan Stanley

I mean, 3.8 is a very big ramp by the sounds of things. Is this something unusual in this first-half or is this a --

Andrew F. Gould

When I say impressive, it is because we’ve never ever had a volume of work bid and won of that size in any period of time and certainly not in six months, so it is quite exceptional.

Ole Slorer - Morgan Stanley

Just one follow-up question; you mentioned in Brazil you are doing the first CSCMI survey. Are you afraid in any shape or form of some of the patent allegations that are existing or do you think that you have protection on that front?

Andrew F. Gould

We’re not concerned by any of the current patent claims that are made by any of our competitors.

Ole Slorer - Morgan Stanley

Is this your first commercial survey now?

Andrew F. Gould

No, but this is the first commercial survey with a new boat.

Ole Slorer - Morgan Stanley

Thank you very much.

Operator

Thank you. We are going now to a question from the line of Michael LaMotte with J.P. Morgan. Please go ahead.

Michael LaMotte - J.P. Morgan

Thanks and congratulations on a great quarter. Andrew, I’d like to talk a bit about natural gas and the Middle East North Africa area. If I just look at Algeria, for example, they’ve abandoned their oil production target of 2 million by 2010. They are not spending any less. They are probably spending more though and getting more aggressive in terms of the incremental spend on the natural gas side. We’re seeing more capital in Saudi and Abu Dhabi and even Kuwait on the gas side. Can you talk about what that means from a P&L impact standpoint for your business and the region, how we can think about mix shift and --

Scott A. Greenstein

Firstly, I think you need to be careful to distinguish between investment in natural gas in North Africa and investment in natural gas in the Middle East. Investment in natural gas in North Africa is still very much attuned to an export market. In other words -- in the case of Algeria, as you’ve seen in the last quarter, that can be gas sold into the U.S.

And in the case of the Middle East, the increase in gas activity is being very much driven by domestic shortages of gas for their own industrialization programs. So you are quite right. We’ve seen a number of rigs diverted away from oil programs in several countries towards gas programs.

I would say that in the short-term, that really doesn’t make a great deal of difference to us in the P&L arena except for the fact that in some of the countries, some of the gas work that’s being done is gas exploration and therefore there is, if you like, probably a marginal quality effect on our revenue in the initial stages of gas development.

Also, a lot of the gas that’s being developed is either sour or at high pressure and high temperature and therefore requires a very somewhat specialized tools and therefore, some -- and also probably a greater degree of reliability and therefore probably commands a slight premium to the company that can provide them. But you are quite right to point out there is a general trend, particularly in the Middle East, towards more gas work but it is being driven by domestic shortages.

Michael LaMotte - J.P. Morgan

Okay, and so I guess just continue to watch industrial growth and GDP growth in the region I guess broadly for that.

Andrew F. Gould

Yes.

Michael LaMotte - J.P. Morgan

Secondly, can you help us characterize -- I mean, to be down just $0.01 sequentially in the North American region versus some of the other numbers that are likely to come out this quarter, can you characterize what it is in terms of what you are doing in North America that would lead to such differentiated performance?

Andrew F. Gould

Well, you have to, as you well know, the service mix between us and some of our competitors is not the same and therefore, they are more or less affected by the drop in natural gas drilling in Canada.

As I pointed out last quarter, our people did an excellent job of downsizing and therefore, they got their cost base right very early on. I would actually say that the technology increment in non-conventional gas is increasing quite rapidly. This is true in well services but it is also true in drilling and measurements and completions. Therefore, with a relatively smaller exposure to the generic market, we are probably able to hold up a bit better.

Michael LaMotte - J.P. Morgan

Is it fair, I think in a commoditized or what has traditionally been a commoditized market like North America, we tend to see relative performance within the lens or through the lens of market share. Is it fair to say that this is really more about technology content than just raw market share points?

Andrew F. Gould

I think it is fair to say that there is a trend where us and some of our competitors, not just us, are bringing technology to the non-conventional gas market that improves well performance but at the same time also protects the service industry to a certain extent from the pure generic hydraulic horsepower.

Michael LaMotte - J.P. Morgan

Okay, great. Thanks, Andrew.

Operator

Thank you. We have a question now from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

Good morning. Andrew, just along the lines of a follow-up on your mentioning getting your costs right in Canada and North America in general. I just want to know if you have taken any additional steps to reduce your exposure in North America. With other companies doing the same, are you concerned? Are you starting to see any pricing pressures internationally?

Andrew F. Gould

Additional steps in North America, we certainly haven’t moved any equipment. We have done some organizational fine-tuning in the second quarter but nothing like on the scale of what we did in Canada in Q4 last year or the beginning of Q1 this year.

International, yes, we’re seeing frac fleets arriving in Russia and certain other places. It’s had an effect on pressure pumping pricing in the Western Siberian market but not really anywhere else yet.

Kurt Hallead - RBC Capital Markets

Okay, and I also had a question here on the electromagnetic market and your what looked like a bigger entry into it, this acquisition. I just wonder if you could give us some general color on what you think the market size is for those services, its strategic importance and the technological differentiation Schlumberger may bring.

Andrew F. Gould

I think we have always taken the point of view that the CSEM, or control source electromagnetic or magnetotelluric measurement on its own standalone was not really worth a great deal. I mean, yes, it allows you to pinpoint resistivity contrasts or to define bodies better, but unless it was constrained with other measurements, notably a structural measurement and the structural measurement is seismic and others like gravity and then further from that, the inversion of the whole model for reservoir properties -- the actual individual measurements on its own was not the end game.

Therefore, we’ve taken the point of view that you need to have the ability to make those measurements but the real value is in constraining them with each other and then making interpretations. And I think you’ve seen some of our seismic competitors make moves in the recent weeks which take you very much along the same line of thought. In other words, you need the measurement but it’s basically each measurement constraining the other that’s going to make the difference.

And what is the overall size of the market? I actually don’t think we know. I don’t think it’s anything like some of the numbers that have been tossed around but it is undoubtedly reasonably large. If you can produce a better image with some definition of hydrocarbon presence from constraining seismic with CSEM and other measurements, it obviously increases the value-added of the seismic you produce.

Kurt Hallead - RBC Capital Markets

Great. Thanks, Andrew.

Operator

Thank you. Our next question comes from the line of James Crandell with Lehman Brothers. Please go ahead.

James Crandell - Lehman Brothers

Congratulations, Andrew, and I’d also like to congratulate JF on his promotion, if he’s on the line.

Andrew F. Gould

He’s here, Jim.

James Crandell - Lehman Brothers

Congratulations, JF. I have a couple of questions and I’ll ask them both here and then listen to your answers on each of them. On the U.S. land stimulation market, first of all, Andrew, my question is capacity growth in U.S. land stimulation second-half versus first-half, companies like FracTech and Tritan still seem like they are adding equipment but others have stopped. Do you see a slowing in the rate of capacity additions here?

Secondly, do you think the combined effect of demand growth, retirements, the booming equipment internationally, will be able to offset the continued creep up in capacity and cause prices to stabilize soon?

Thirdly, how currently do you see prices on contract rollovers that will take place later this year for 2008?

Andrew F. Gould

So on the first question, yes, we are aware that certain equipment orders have been cancelled. I don’t think we’ve seen anything yet that makes us feel that the reduction in new capacity is to the point where it is going to affect our original thinking on pricing in the second-half of the year.

Secondly, retiring equipment, moving equipment overseas, a gradual increase in activity in North America, when is that going to bring the market into balance and allow pricing to stabilize -- I have to say, Jim, I don’t know because so much depends on Canada. While I don’t think Canada will stay down forever, I can’t judge whether it’s this year or next that it turns back up. You’ve seen what the operators have said but operators can change their minds very fast.

The third thing in contract rollovers, we have seen price erosion in the second quarter more in the spot market than in the contract market, but if I was an operator I would wait for the second-half year to do my contract rollovers because there is going to be more capacity in the market, so I don’t think we know the answer yet as to how far or how much pricing could be hurt in the second-half.

James Crandell - Lehman Brothers

But you would think that rollovers -- in general, would you think would be lower pricing for ’08 versus ’07?

Andrew F. Gould

That’s why they’re waiting.

James Crandell - Lehman Brothers

Is that what you think?

Andrew F. Gould

Oh, yes.

James Crandell - Lehman Brothers

Okay, good. Thank you very much.

Operator

Thank you. We have a question now from the line of Dan Pickering with Pickering Energy Partners. Please go ahead.

Dan Pickering - Pickering Energy Partners

Good morning. I apologize, I’ve got a cold here. Andrew, as we looked at the second quarter, obviously very strong margins and I’m just wondering if there’s anything in the quarter that we should view as unusual or if this is kind of a new baseline as we step forward for the second-half of the year in terms of profitability -- any place where you would expect to see softer profitability in the second-half of the year?

Andrew F. Gould

I think it would be unfortunate if you took MEA -- Middle East Asia -- as a baseline because the service mix -- very strong exploration campaigns in Asia means that the quality of revenue mix in Asia was exceptionally good in Q1 and in Q2 and I can’t promise that that will repeat every quarter. So I wouldn’t be surprised if you saw a little fluctuation up and down in Middle East Asia. I think in North America, I would love to think that the margin decline is over but given what I just said about pressure pumping, I would be amazed if it doesn’t drop a little more.

In Europe, Africa there is some seasonality effect in the margin improvement because you have Russia coming back, you have a very busy season in the North Sea which you know, basically only starts in the beginning of summer. But generally, I think they have the best chance of sustaining or improving still.

Dan Pickering - Pickering Energy Partners

Okay, that’s helpful. I think you answered this question somewhat but can you help us understand the magnitude of Canada’s impact on this particular quarter? You muted it, it sounds like, with cost control but I’m just trying to understand how well the U.S. did based on what Canada did.

Andrew F. Gould

Well, the Canadian rig count was down by 60% and sequentially -- just let me look at the sheet here. Sequentially, you are looking at a huge change in revenue, much more than the normal seasonal change. So the U.S. in fact did very well to make up for almost all of that. I would point out that I think even we were surprised by the strength of U.S. land and we were certainly -- we were helped by the Gulf Coast switching back more to a drilling mode than a completion mode and also the continuation of exploration activity in Alaska.

Dan Pickering - Pickering Energy Partners

Andrew, do you think you took share in the U.S. in the quarter?

Andrew F. Gould

I don’t think so, Dan, no.

Dan Pickering - Pickering Energy Partners

Okay. Fantastic. Thank you. Good quarter.

Operator

Thank you. We have a question then from the line of Brad Handler with Wachovia Securities. Please go ahead.

Brad Handler - Wachovia Securities

Thanks. Good morning. I guess I’m going to wind up touching on a couple of the same topics but I just want to be clear that I’m in the sense reading some of what you’ve written here correctly. Since you’ve listed U.S. land first in terms of sequential revenue increases, is it fair to say we’re talking about 15% or better sequential growth in U.S. land in the quarter?

Andrew F. Gould

We didn’t say it was the largest.

Brad Handler - Wachovia Securities

No, yeah, I don’t want to over read. I mean, you listed it first --

Andrew F. Gould

I think you are reading too much into it, Brad.

Brad Handler - Wachovia Securities

All right. That’s -- I just asked if you would clarify that for me.

Andrew F. Gould

No, we listed it first but it’s by no means the largest sequential increase, by no manner of means.

Brad Handler - Wachovia Securities

Okay. And then if I switch gears to IPM, perhaps I could just ask for a little bit more detail with respect to a couple of the aspects. For example, can you share either the mix of third party services versus your own provision of services? And If you could comment on the progression, which I understand is a longer term progression but the progression of drilling versus production-related work.

Andrew F. Gould

So there is no doubt that the progression in the $3.8 billion is very largely drilling work because that’s where people are really short of capability. There is some production but not nearly on the scale of the drilling.

In terms of the split between third-party revenues, project management revenues, and Schlumberger technology-related revenues, the ratios are roughly the same as they’ve always been. We will help you guys on that going forward for your modeling, as we did previously.

Brad Handler - Wachovia Securities

If I could slip in one more, please; there has been talk out there with respect to your presence with partner [Valerik] with respect to intelligent pipe. I know it’s sort of a small topic but can you make any comment on your pending presence in that area?

Andrew F. Gould

No, we are working with [Valerik]. I don’t think I want to make any comment on when we will be testing and offering.

Brad Handler - Wachovia Securities

Okay, fair enough. Thanks very much.

Operator

Thank you. We have a question now from the line of Geoff Kieburtz with Citigroup. Please go ahead.

Geoff B. Kieburtz - Citigroup

Thanks very much. I guess really the last question I had was if you could quantify at all the magnitude of the pricing erosion that you are seeing in the U.S. stimulation market, maybe what you are thinking it might be in the second-half?

Andrew F. Gould

On the second-half, Geoff, I honestly don’t know. We have seen I think an acceleration in the second quarter to the point where I don’t know but I would estimate it’s close to double-digits -- not double-digits, but close to.

Geoff B. Kieburtz - Citigroup

You’ve mentioned before that a large fraction of your U.S. stimulation business is on contract. Could you just elaborate a little bit in terms of how does that work in terms of giving Schlumberger a differential protection against pricing erosion?

Andrew F. Gould

I think that it’s fair to say that the pressure pumping companies who work on contract have a greater degree of protection in the first-half of this year and the difficulty that we will have along with some of our competitors who are also on fairly long-term contracts, is in the contract renewal in the second-half of the year.

Geoff B. Kieburtz - Citigroup

And typically, would you expect those rollovers to move to spot pricing?

Andrew F. Gould

No, not necessarily. Spot pricing can vary even more. Spot pricing can go lower. If there’s no spot market, spot pricing can go even lower.

Geoff B. Kieburtz - Citigroup

And you made a comment that kind of surprised me earlier in regards to the increasing technological content of the unconventional reservoir development. Can you talk at all about how you see -- I mean, you are being reasonably sort of negative about the outlook for pricing but on the other hand, you seem to be saying that there’s some structural developments going on that are likely to offset that.

Andrew F. Gould

No, I think there’s a segmentation in the pressure pumping market between those people who can only pump and people who can provide a completion solution together with their pressure pumping.

Geoff B. Kieburtz - Citigroup

And the relative size of the market from a demand perspective, that last category --

Andrew F. Gould

I think we’re proving, we’re in the process of proving that the technical solution which combines the completion with the pressure pumping adds value to the well, the non-conventional horizontal gas well. I think the market is quite small at the moment but growing quite fast.

Geoff B. Kieburtz - Citigroup

Okay and just a clarification in terms of you talk about a backlog of well -- I wasn’t quite sure what you meant by a backlog.

Andrew F. Gould

Well, as you know, the reason the spot market for stimulation has been so strong is that you have wells drilled and completed but waiting to be perforated and stimulated. So those wells, as they come online, they bring on new production even though they may have been drilled two months ago. So as long as there is a spot market for a backlog in stimulation, there is gas production behind pipe where the wells have already been drilled.

Geoff B. Kieburtz - Citigroup

Is your sense that that backlog has increased or decreased over the last --

Andrew F. Gould

No, we think it’s decreasing at the moment.

Geoff B. Kieburtz - Citigroup

Okay. Great, thanks very much.

Operator

Thank you. We have a question now from the line of Michael Urban with Deutsche Bank. Please go ahead.

Michael Urban - Deutsche Bank

Good morning. I wanted to jump down to Latin America and talk about Venezuela a little bit. You were able to resolve some of the contract issues down there and that helped the quarter a little bit. Going forward though it looks like Venezuela is going to need to ramp up activity, and there’s actually as we’re on the call here a story going across the tape about them cutting the original number of rigs but that actually implies a 50% increase from where they actually are.

Going forward, would you anticipate ramping up your activity there or bidding on new work, or are you taking a little more cautious view of the market?

Andrew F. Gould

No, we are very happy, more than happy with our current relationship with PDVSA and we are perfectly prepared to invest if they invite us to tender for work.

Michael Urban - Deutsche Bank

Is that something that you are seeing, because again the rig count comments and we’ve spent a little time with them ourselves, would suggest that they -- now that they are kind of through the nationalization program that they are going to need to and in fact actually go ahead and start to ramp up work maybe in the second-half but certainly ’08. Is that consistent with --

Andrew F. Gould

We are certainly hearing talk of plans for a greater scope of work going forward, yes.

Michael Urban - Deutsche Bank

But it hasn’t really translated into anything in terms of contracts or activity yet?

Andrew F. Gould

For individual services, yes, but for large new programs, not really -- not yet, no.

Michael Urban - Deutsche Bank

Okay. That’s all for me. Thanks.

Operator

Thank you. We have a question now from the line of Ken Sill with Credit Suisse. Please go ahead.

Ken Sill - Credit Suisse

Good morning, Andrew. I wanted to follow-up a little bit on the IPM. You guys used to tell us about how big that was as a percentage of revenue. Is that something you are prepared to let us know now or something we should talk about offline?

Andrew F. Gould

I think it’s something we’ll come to fairly shortly. We’re still sorting our way through all this before we decide how we formulate it for you because we want a formula for everybody that’s easy to understand.

Ken Sill - Credit Suisse

That’s fair enough. And then, I guess my question though, big backlog, I would imagine that’s going to flow through gradually but is that because the [pass] are going to start putting some pressure? Maybe your growth is a little bit better than we were thinking but the margins come in a little bit lower?

Andrew F. Gould

Certainly in Latin America there will be some acceleration of the growth and to the extent that a large part of it is third-party services, there may be some slight overall margin reduction but there’s certainly no problem with the profitability of the Schlumberger services included.

Ken Sill - Credit Suisse

Because it seems like you’ve done really well here in the second-half. International is doing quite well on a year-over-year basis, so is there really any change to your guidance from say Q4, Q1 of 20% plus top line growth and low 40s incremental margins? Or is it --

Andrew F. Gould

No, no, I think we just feel a lot more comfortable about it.

Ken Sill - Credit Suisse

Okay, so no change.

Andrew F. Gould

Not really. I mean, I would say the uncertainty there in my mind when I talk about that overall top line number is not overseas. It’s what happens in North America.

Ken Sill - Credit Suisse

And then a final question on seismic and multi-client. We’ve got a couple of lease sales coming here in August and October. Are you guys seeing a lot of activity related to those lease sales and do you expect a multi-client to pick up substantially in Q3?

Andrew F. Gould

Let me just say that we think that second-half seismic will be better than first-half seismic.

Ken Sill - Credit Suisse

Well that’s pretty good. Thank you, Andrew.

Operator

Thank you. We have a question now from the line of Alan Laws with Merrill Lynch. Please go ahead.

Alan Laws - Merrill Lynch

Good morning. Exploration service integration kind of continues to be a theme through the quarterly reports. Just a question on the integration of services; can you talk a little bit about the trends here? You’re integrating the drilling and the wireline and the seismic for your one earth model that I think you’ve talked about a lot in the past and now you add stimulation. Are these broadening the one earth model or are these more discrete combinations for certain projects?

Andrew F. Gould

I think you have to take a very different view if you are talking about SIS and the Petrel seismic to simulation modeling capability because that model would accept data from anybody, not just Schlumberger.

In terms of bidding of exploration services, actually I think probably what we are seeing is that due to people shortages around the globe on certain exploration packages, people are asking us to manage and integrate our own services. But I would say that it’s a fairly small phenomenon at this point in time.

Alan Laws - Merrill Lynch

So it’s -- right now, it’s a people leveraging phenomenon and it’s mostly exploration related as far as its pick-up?

Andrew F. Gould

Yes.

Alan Laws - Merrill Lynch

Okay, and on a competitive basis, are you -- how are you positioned here versus your peers in your ability?

Andrew F. Gould

In as much as we’re the only company who has all those services in-house, that is to say particularly seismic, D&N, wireline, and well testing, obviously that gives you more leverage to be efficient in your integration than perhaps people who have to do it from different companies because that’s what traditionally the operators would have done.

Alan Laws - Merrill Lynch

I have one other small one here left on my list -- a lot of talk in the report on artificial lift. How would you rate your share in artificial lift in the recent quarters? Do you think it’s picking up? Is it the same?

Andrew F. Gould

Well, you know, Spears has us changing position between number one and number two in electrical submersible pumps and I actually don’t -- I honestly don’t know whether we are number one or number two in any particular quarter, because it changes constantly between us and our major competitor. So the answer is I don’t know, it changes all the time.

Alan Laws - Merrill Lynch

All right. That’s all I have. Thank you.

Operator

Thank you. We have a question now from the line of Robin Shoemaker with Bear Stearns. Please go ahead.

Robin Shoemaker - Bear Stearns

Thank you. Andrew, I was wanting to pursue a little further your comment that on the slower-than-forecast decline in Canadian gas production, which has puzzled me as well, I just wondered if you could explain what you think might be behind the slower decline in Canadian production, given the huge drop in drilling.

Andrew F. Gould

Actually, I think and I absolutely can’t guarantee this, Robin, my feeling is that some of the delays in the heavy oil site B projects mean that less gas is being used in heavy oil production than people were anticipating.

Robin Shoemaker - Bear Stearns

Okay, so production then is sort of declining but the export availability is still the same or perhaps greater?

Andrew F. Gould

It hasn’t been affected to the extent that people probably thought it would be.

Robin Shoemaker - Bear Stearns

And then my follow-up is on the winter season in Canada, which -- when would you -- I guess that’s probably the most realistic timeframe in which we could see a change in the current depressed environment but when would you begin to see an indication of activity levels for the next winter drilling season there?

Andrew F. Gould

Towards the end of the third quarter, I would say. They can turn it on and off very, very fast, as we’ve seen.

Robin Shoemaker - Bear Stearns

Right. Okay, thank you.

Operator

Thank you. We have a question now from the line of Kevin Simpson with Miller Tabak. Please go ahead.

Kevin Simpson - Miller Tabak

Thank you. A couple of questions, Andrew, first on IPM; is that all fixed -- maybe a couple of aspects of that. One, is that all fixed price business? Is there some -- would there be any risk of cost overruns as we’ve seen or do you think you guys have it right now in terms of pricing? And then, is there any performance aspect to the pricing, or how much of that 3.8 has performance aspects to it, where you get an increment if you produce, if you hit certain production benchmarks or beat benchmarks?

Andrew F. Gould

The production content is low so this is mostly well construction. So a lot of is lump sum. Because of the current market conditions, a lot of our pricing and costs are indexed so we can pass through a lot of it. As in any very large drilling project, there is a risk but I think this has worked generally, we know pretty well, and that certainly as I’ve emphasized in the last couple of presentations I’ve made, the system within IPM now to evaluate projects and bid is probably an order of magnitude more sophisticated than it was when we had the accident in 2004, so I’m pretty confident that we’re okay.

Kevin Simpson - Miller Tabak

Okay, and is there still similar amounts behind the pipe or whatever --

Andrew F. Gould

They’re probably not totally similar but there are still large projects that are under-bid, yes, Kevin.

Kevin Simpson - Miller Tabak

That you’ll pick up and that will come in 2H?

Andrew F. Gould

Yes, I doubt we’ll have half-years like that every half-year, but you know, there’s still plenty of stuff.

Kevin Simpson - Miller Tabak

And then just one other; you’ve been talking about a shift ultimately to more exploration which obviously is very differentially positive for your company. Do you think you are beginning to actually see that, even with rig constraints out there? Or is that really going to still be really a this is just unusual what happened and --

Andrew F. Gould

No, we are seeing it but we’re not seeing it to nearly the extent that we probably will once the new builds start to hit, particularly the deep water new builds start to hit the market.

Kevin Simpson - Miller Tabak

And so if you -- I know you don’t want us to run ahead of ourselves with margins. You’ve done a good job of keeping us suppressed, or at least some of us suppressed, based on consensus but shouldn’t that tilt margins higher for your oilfield business away from North America, which has its own dynamic?

Andrew F. Gould

Well to the extent that the expiration quotient in any one quarter is higher, then it has a very positive margin effect, which is what we’ve just seen in Asia in the last two quarters. It’s undoubtedly had an effect in places like the North Sea in the second quarter. But for it to be more general, Kevin, and to go much further than where it is, we need more rigs.

Kevin Simpson - Miller Tabak

But we know those are coming, and so --

Andrew F. Gould

Yes, but they are 2009 events, a lot of them.

Kevin Simpson - Miller Tabak

Okay. Thanks, that’s it for me.

Operator

Thank you. We have a question now from the line of William Sanchez with Howard Weil. Please go ahead.

William Sanchez - Howard Weil Incorporated

Good morning, Andrew. Andrew, you spent a lot of time talking about over-capacity in the pressure pumping market in North America. I’m curious if you are seeing any over-capacity surface in any of your other product lines and is it causing you any concern as we move to the back-half of ’07?

Andrew F. Gould

No, we are not seeing -- apart from pressure pumping, we’re not seeing any over-capacity in the product lines that we participate in.

William Sanchez - Howard Weil Incorporated

Okay, and Canada for the second quarter, did you see any pricing erosion outside of pressure pumping to speak of or strictly pricing-related in pressure pumping than volume declines?

Andrew F. Gould

No, in Canada the market was so low there was pricing erosion pretty much across the board.

William Sanchez - Howard Weil Incorporated

Across the board, okay. Thank you, Andrew.

Operator

Thank you. We are showing a follow-up from the line of James Crandell with Lehman Brothers, and unfortunately, this is going to be our last question of the day. Please go ahead.

James Crandell - Lehman Brothers

Andrew, I had two questions about the non-North American growth outlook in 2008 relative to 2007. Number one, what is your conviction that growth in Saudi and Russia will slow in 2008 versus 2007 and the way you see it now, given that there’s so many areas that seem to be increasing and given IPM and other things. What do you think that the odds are that there are enough offsets so that international growth overall in ’08 could continue at present levels?

Andrew F. Gould

Firstly, I don’t have any concern about Russia, Jim.

James Crandell - Lehman Brothers

I thought you were concerned about the election and slowing going into the election.

Andrew F. Gould

No, no, I think that there may be -- it may be quite uncertain through the end of the year but I don’t have any doubt that Russia will spend next year.

James Crandell - Lehman Brothers

Okay.

Andrew F. Gould

And on Saudi, yes, I think that absent new plans from the Saudis, that the rig count is going to plateau and therefore the growth is going to plateau.

James Crandell - Lehman Brothers

Okay. How about overall?

Andrew F. Gould

I think overall it’s very early to say but with the visibility we have today, I’ll not say we can match the growth rate of this year overseas but we certainly will still have significant growth.

James Crandell - Lehman Brothers

Thank you very much.

Operator

Thank you. At this time, I would like to turn the call back over to the management team if they do have any closing comments.

Malcolm Theobald

I would just like to thank everybody for participating in today’s call and we’ll now turn it over back to Kent for closing comments.

Operator

Thank you. Ladies and gentlemen, this call will be available for replay starting today, Friday, July 20th at 2:15 p.m. Eastern U.S. Time and it will be available through Saturday, August 18th at midnight Eastern Time. You may access the AT&T executive playback service by dialing 1-800-475-6701 from within the United States or Canada, or from outside the United States or Canada, please dial 320-365-3844 and then enter the access code for today’s call, which is 875949. Those numbers once again are 1-800-475-6701 from within the U.S. or Canada, or 320-365-3844 from outside the U.S. or Canada, and again, enter the access code of 875949.

That does conclude our conference for today. Thank you for your participation and for using AT&T’s executive teleconference. You may now disconnect.

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Source: Schlumberger Q2 2007 Earnings Call Transcript
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