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Schlumberger Limited (NYSE:SLB)

April 30, 2012 9:00 am ET

Executives

Julio M. Quintana - Chief Executive Officer, President and Executive Director

Robert L. Kayl - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

William Cornelius Conroy - Pritchard Capital Partners, LLC, Research Division

John R. Keller - Stephens Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the TESCO Operational Update. [Operator Instructions] As reminder, this conference is being recorded. I would now like to turn the call over to your host for today, Mr. Julio Quintana, President and CEO. Sir, you may begin.

Julio M. Quintana

Thank you, Ben. Good morning, ladies and gentlemen, and welcome to TESCO's conference call on sale of CASING DRILLING. I'm Julio Quintana, TESCO's President and CEO, and I will be hosting our call today. Bob Kayl, our Chief Financial Officer, is with me on the call.

Before I begin, it is important to note that during the course of this call, Bob and I will make forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 and Canadian securities legislation. These statements are based on current expectations that involve risks and uncertainties which could cause actual results to vary from those anticipated. These risks and uncertainties have been and are more fully described in our annual reports and quarterly reports filed with the SEC and with the securities regulatory authorities in Canada. You should not place any undue reliance on these forward-looking statements made in the conference call nor do we intend to update these forward-looking statements. We will not be discussing any Q1 financial information. That information is currently expected to be released on Thursday, May 3, after the market closes.

This morning, TESCO announced the sale of 100% of the CASING DRILLING business line to Schlumberger for $45 million in cash. The sale includes the transfer of all assets, contracts, working capital, intellectual property and personnel associated with this business. TESCO currently expects to realize a pretax gain of between $16 million and $19 million from this sale. The effective date of the closing is currently expected to be on or before May 31, 2012.

In the agreement, TESCO will keep certain license rights for accessories run on our Tubular Services business and associated software licenses. Our technologies associated with our CDS casing running tools are not included in the sale. However, CDS tools will be needed by Schlumberger for CASING DRILLING. As a result, customer has entered into a long-term supplier agreement, which will allow Schlumberger to purchase and/or lease CDS tools from TESCO as needed for the CASING DRILLING operations.

To all investors who have followed TESCO's commitment to CASING DRILLING over the past decade, thank you. This transaction is an endorsement of the technology by the industry leader in oil and gas services. We're also gaining an important CDS customer. TESCO's investment in CASING DRILLING yielded not only the gain noted earlier, but it all also created our CDS tool. This tool has revolutionized tubular running and has created a business for TESCO which continues to grow and is heading towards the better part of $200 million in annual revenues.

I would also like to thank all of our employees in the CASING DRILLING team. Many of you have been with TESCO a long time, and I know you share my passion for this technology. You are going to a great company, and I'm certain your future and the future of CASING DRILLING are in good hands. The decision to sell CASING DRILLING was not because TESCO doubted the technology. It is a result of a realization that this technology needed a larger international footprint than what TESCO could offer. I'm confident that it will succeed under its new ownership.

Now what's next for TESCO? This conference call is less about where TESCO has been and more about where TESCO is going. I, for one, see this transaction as a new dawn, a chance to get our company performing as a first quartile company yielding best-in-class return on capital employed and delivering value for our customers and our shareholders.

TESCO has grown tremendously in recent years, almost all organically and almost all in Top Drives and Tubular Services. These 2 segments have delivered most of TESCO's revenue in recent years and all of TESCO's net operating income.

Our Top Drive segment continues to perform well. EnergyPoint Research, Inc. recently released their annual customer satisfaction survey. TESCO was chosen as the #1 company in the industry for overall customer satisfaction in the top drive product space. In Tubular Services, our CDS technology is the best-in-class offering in the industry. Demand for CDS services and sales remains strong.

We call ourselves a drilling innovation company. CASING DRILLING is but one example of our ability to innovate. Creativity is in our blood. Innovation will drive our future. As we look forward towards the future, our tasks are clear.

In the short term, our focus will be profitability and maximum return on capital employed. We must focus all our efforts at continuing to grow but maximize the use of capital and yield a world-class performance organization. In the medium term, we will pursue a relatively straightforward tag-on acquisition that will continue to drive our global presence and create the critical mass needed for efficient use of our capital. And in the long term, defined as 2 years and beyond, innovation will drive our culture as it has in the past.

Our mission to eliminate nonproductive time from the drilling process is our passion. This mission is not compromised with the sale of CASING DRILLING. It is, in fact, enhanced. We have several interesting products already in the works for our core product lines and much more to come.

We look forward to the rest of 2012 and beyond. I am highly confident that we will look back at this event, and we will recognize the sale of CASING DRILLING as a defining moment in TESCO's history. I am confident that our management team and our employees are ready for the challenge.

I will now open the lines for questions. Ben?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from the line of Joe Gibney from Capital One.

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Bob, just a question for you. I was curious if there's any material changes to -- kind of overhead and G&A overlap as you guys move away from CASING DRILLING a little bit, looking forward. If that's something you're discuss more fully on the upcoming call, I understand.

Robert L. Kayl

Yes. We'll likely discuss more of that on Friday's call, Joe. As you know, CASING DRILLING does give a share of our overall overhead cost, such as -- example, such as a shop like in the local business unit. So obviously, we're not going to be getting rid of those shops, so some of that cost will have to be absorbed by our remaining core product lines.

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Okay. Fair enough. And then Julio just one question. Just as you guys get the cash infusion here, just any particular priority where you'd be focused more on, obviously, flexing up rental fleet now maybe perhaps more aggressively or CDS tools set growth or just maybe more manufacturing efficiency initiatives? Just kind of curious of the prioritization now of the incremental cash.

Julio M. Quintana

I don't know that prioritization changes any of the results of this, Joe. I mean, we've been pretty clear that we want to invest in kind of tag-on acquisitions like the one we did in the Middle East that really captures a key geographical market for us. So certainly, you'll see us continue to push those aggressively. The decision to invest heavier or less in, say, the expansion of the rental fleet is really much more driven by market. So I don't know that we'll change anything there, but we had a pretty good balance sheet before, and so my guess is that continues. So look to us to get more aggressive with acquisition work and then certainly take advantage of the rental expansion where it makes sense.

Operator

Our next question comes from the line of Doug Garber from Dahlman Rose.

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

I wanted to ask you, with the cash infusion expected midyear and a good balance sheet already, what are your thoughts on share repurchases? Or maybe if you can extrapolate on also your acquisition pipeline and how deep that is at this point.

Julio M. Quintana

Yes. Let me take the latter one first. We've been looking kind of consistently over the last couple of years at opportunities that make sense for us in the acquisition front. And typically, we maintain, I'd say, 1 dozen to 20 companies of various sizes that we're seeing. If they make sense, we would buy them, and they really kind of focus around really kind of 3 categories. One is, as I mentioned already, the casing running opportunities. It tended to be really more about capturing a specific geography. The second one would be products that would be a good tag-on for packaging with our Top Drive business. And then the final one would be any differentiated technologies that we say, "This technology has an opportunity to have some pretty good running room." And they're usually pretty small in nature, meaning single-digit millions kind of investment that we think have a great potential. So those are kind of 3 categories, and like I said, at any one time, we seem to have from 1 dozen to 20-or-so of those opportunities. How much they come to fruition, it's hard to say. Basically, all those tend to be private companies, so getting those things over the line can sometimes take a while. On the issue of share repurchasing and our dividend, I think I've mentioned this to investors in the past. Our view is that we have great opportunities to expand the business primarily around investment of capital in the base businesses and acquisitions. And so it may be something that we visit in the future, but it's not part of the strategy at this point.

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

Okay. And also, can you talk about the process of the sale of CASING DRILLING kind of -- I'm not sure if you could go into kind of when you put it up in your thought process or just how you went about it. Was it competitive? How many people bid on it? Because I know Schlumberger and I think one other company had a marketing [ph] JV or something of the sort with it?

Julio M. Quintana

Yes. So as you recall, Doug, and we've been kind of saying that for a couple of years, going back 2009, was that 2011 was a critical year for us, that if we didn't get the right traction in 2011, that we were going to take action to do something differently. Between operating income losses last year and R&D and indirect SG&A, we spent arguably between $20 million and $25 million or effectively saw a loss of that in 2011 associated with this business. So we came to the reality that the issue for us really is not the technology. The technology is great. I have no doubt this is a big thing for the industry. The problem is it really takes a global infrastructure that TESCO just doesn't have. I think we've been pretty clear, going back to last fall, that we've been talking to several parties about some kind of potential joint venture agreement. We visited that and contrasted those opportunities against an outright sale. I know we actually did go through a formal process with multiple parties involved and ultimately settled on the highest bidder. And so that was Schlumberger, the highest bidder.

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

Okay. And just last one here. I know in CASING DRILLING that we were looking for some milestones in terms of the liner drilling down in Brazil. Did that impact the process at all? Did you think potentially that might be able to take CASING DRILLING to the next level for TESCO? Or was that just a little too small, too late?

Julio M. Quintana

No, the issue -- in fact, CASING DRILLING is a good example of why this deal needed to be made. It's a great technology. In fact, I think it's got great potential. But for example, the problem for TESCO is that we're not a deepwater company, and we're not seen as a deepwater by our customers today. And so it would have us several years of working ourselves in the deepwater arena to get customers convinced that this technology has potential because, in fact, we're not qualified. In fact, we would have had to spend a lot of time actually qualifying our tools to be able to get them into the well in the first place. So this is a good example where the bigger companies like Schlumberger can come in and immediately make an impact with the technology. They're already qualified. They're already doing the directional work that adds this technology onto the package. And what takes us 2.5, 3 years, they could probably do in 8 months. And so that really is a good example of why, ultimately, they are the logical owners of this technology.

Operator

Our next question comes from the line of Daniel Burke from Johnson Rice.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Julio, are there any CDS sales that will occur here almost immediately over to Schlumberger? And then maybe as the second one, along the same line, just trying to understand your forward leverage to CASING DRILLING. If Schlub were to perform a lighter drilling job, I mean, what's the revenue opportunity for TESCO if they're successful at accelerating that product line?

Julio M. Quintana

Yes. There's a -- the supplier agreement contemplates a couple of technologies. One is the CDS tool. The other one is accessories, downhole accessories that we include in CASING DRILLING. The way the deal is structured, that we kind of have a preferred agreement, but it is not required by Schlumberger to use TESCO. And so they can choose to go out and kill [ph] their own tools, or they can choose to buy them for us or rent them from us. So certainly, I think there's a predisposition to come to us. We think we have the best -- we know we have the best CDS tool in the market. And so our view is that they will probably buy some tools and rent some tools throughout 2012 just to get up and running with the business. And then, of course, the volume beyond 2012 will be a function of how fast they grow the business. But certainly, at this point, we have full expectations that they would purchase and/or lease a fair amount of units in 2012 just to get that up and running. And we're quite excited about how big that could be, because we believe in CASING DRILLING. So that's the plan.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Sure. And then one other one for me. Julio, you referred to the $20 million to $25 million P&L loss that you carried in 2011. I mean, is it reasonable to conclude then that as a result to this sale, you see that level of relief? Or does the R&D budget and overhead stay and get allocated into new initiatives?

Julio M. Quintana

Well, certainly, on the operating level, that goes away. So that's straightforward, with a couple of caveats, one being the comment that Bob made which is there'll be some allocations that were given to CASING DRILLING in the past, such as a percentage of a shop, for example, with the shop doesn't go away, so that means Top Drive and Tubular Services have to absorb that. So that's one. The R&D investment last year was $7 million. We will not invest anywhere near $7 million in 2012 in R&D, but we will invest some money in R&D, because there is -- there are some technologies that I think are going too slowly for us that need some investment, but it won't be anywhere near $7 million. If I had to guess, it'd be $1 million or $2 million versus $7 million. And then, of course, the SG&A side, one of the things that we have done over the last few months is looked at the -- our SG&A indirect cost, and we have already taken some actions to bring that in line with a 2-business-line operation. So my guess is most of that cost goes away but not all of it.

Operator

Our next question comes from the line of William Conroy from Pritchard Capital Partners.

William Cornelius Conroy - Pritchard Capital Partners, LLC, Research Division

Maybe a quick one for you, Bob, and it gets to accounting. Assuming that this, in fact, does close at the end of next month, what would the accounting treatment be for 1Q? Does it run through your income statement? Or does it show up as discontinued in Q1?

Robert L. Kayl

Yes, it will. We believe -- we're currently reviewing that right now Bill. But we believe, since we're selling the entire segment, that this will likely be treated as discontinued operations, which will be reflected in the Q2 financials.

William Cornelius Conroy - Pritchard Capital Partners, LLC, Research Division

Got it. And Julio, for you and kind of referencing some of the earlier comments you made, can we think of the ongoing investment in CASING DRILLING perhaps having been a governor on expansion of the rental fleet?

Julio M. Quintana

Yes, I think that's a good question. I don't know if it's necessarily a rental-fleet-specific question, but clearly, the push to grow CASING DRILLING, Bill, does take resources and focus away from our executive management team. That doesn't always let us get into the detail that we need to on the base businesses. So absolutely, I think one of the reasons why we decided to do this is the recognition that we need to really get the 2 base businesses running at optimal performance, and CASING DRILLING, by definition, is a deep focus. It takes a large percentage of my time, a percentage of Bob's time and operational management as well. So certainly, I wouldn't limit it to Top Drive rental per se, but you should expect to see improvement or acceleration of our base business as a result of this deal.

Operator

[Operator Instructions] Our next question comes from the line of John Keller from Stephens.

John R. Keller - Stephens Inc., Research Division

Just a couple of housekeeping items. If you said this, I apologize. I missed it. Did you mention what the after-tax proceeds are expected to be?

Robert L. Kayl

We didn't really quote it in after-tax gain, John. But likely, the tax rate for this transaction will be in the 20%. Pretax gain was fixed between $16 million and $19 million.

John R. Keller - Stephens Inc., Research Division

Okay. Got it. And then I think you also mentioned that there are no CDS units included in the sale of -- in the sale. Do you -- where does that fleet stand right now in terms of unit count?

Robert L. Kayl

At the end of the year, we were at 305 units. We haven't disclosed where we are at the end of the quarter. That information should be coming out on Friday, but you're correct. The $45 million does not include any sales or rental of CDS. That's outside this agreement, but there's a separate supplier agreement.

Julio M. Quintana

And Schlumberger, as I mentioned earlier, John, Schlumberger has the right to purchase used units or purchase new units, either one, and we would accommodate that. We realize they need some CDS sales basically effective May 31 -- excuse me, some CDSs available to them effective May 31. So we will accommodate them as needed, including giving them some from -- or selling them, excuse me, from our existing fleet, which is okay. We won't have any problem doing that because, of course, we provide some CDSs now into casing drilling as part of our operations. So that will not be a problem to us. But the point I think earlier I made was that they have not yet determined whether they would like to buy units or lease units, and they have to come to that determination.

John R. Keller - Stephens Inc., Research Division

Okay. Perfect. And then maybe if you could just kind of give us an update on the job board or kind of what was going on from an outlook standpoint in CASING DRILLING at the time of the sale or I guess, currently, as you guys prepare to exit that.

Julio M. Quintana

Yes. If you don't mind, John, we want to include that as part of the Q1 information that we're going to give you guys on Friday morning.

Operator

And with no further questions in queue, I'd like to turn the conference back over to management for any closing remarks.

Julio M. Quintana

Okay. Thank you, Ben. In closing, thank you once again for being in the call and for believing in TESCO. With the momentum provided by the transaction and the strength and profitability of our remaining product line, we're very excited about our future opportunities. Be assured that we are ready for the next chapter, and we will deliver on our promise to be a best-in-class drilling innovation company. We look forward to talking to you on Friday. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.

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