Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Malcolm Theobald, please go ahead.
Malcolm Theobald - VP, IR: Thank you, Greg. Good afternoon, and good morning; and welcome to the Schlumberger Limited second quarter 2013 results conference call. Today's call is being hosted from Paris where the Schlumberger Limited Board meeting took place yesterday.
Joining us on the call today are Paal Kibsgaard, 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 Paal will discuss the operational and technical highlights.
However, before we begin with the opening remarks, I'd like to remind the participants that some of the information in today's call may include forward-looking statements, as well as non-GAAP financial measures. A detailed disclaimer and other important information are included in the FAQ document, which is available on our website or upon request. We will welcome your questions after the prepared statements.
Now, I'll turn the call over to Simon.
Simon Ayat - EVP and CFO: Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. Second quarter earnings per share from continuing operations, excluding charges and credits was $1.15. This is an increase of $0.18 sequentially and is $0.14 higher when compared to the same quarter last year.
During the quarter, we completed the wind-down of our operations in Iran, and as a result, we have now classified this business as a discontinued operations. All prior period amounts have been restated. As previously disclosed, we completed the formation of our OneSubsea joint venture with Cameron prior to the end of the quarter. We recognized a $1 billion gain in connection with this transaction which equates to $0.77 in terms of EPS. We also recorded $0.26 of charges relating to the impairment of drilling-related equity investments.
From an operational perspective, we had a very strong quarter. Oilfield Services second quarter revenue of $11.2 billion increased 5.8% sequentially. Pre-tax operating income increased 15.9% sequentially, while the pre-tax operating margin improved 178 basis points to 20.4%.
Sequential highlights by product group were as follows. Reservoir Characterization revenue of $3 billion increased 9.6% and pre-tax income grew by over 25%. This resulted in margins improving by 380 basis points to 30.1%. This growth was driven by very strong performance in both Wireline and WesternGeco, combined with the seasonal rebound in SIS software sales and maintenance.
Drilling Group revenue of $4.3 billion increased 4.4% and margins improved by 97 basis points to 18.7%. These increases were largely attributable to the Drilling & Measurements and M-I SWACO on robust international activity.
Production Group revenue of $3.9 billion increased 4.4%, while the pre-tax income increased 12.6%. This resulted in margin expansion of 116 basis points to 15.9%. Growth was led by Well Services as a strong performance internationally and in U.S. land more than compensated for the impact of the spring break-up in Canada. Completions and Well Intervention were also significant contributors to the growth.
Now turning to Schlumberger as a whole. The effective tax rate, excluding charges and credits, was 23.3% in the second quarter compared to 23.8% in the previous quarter. We continue to expect the effective tax rate for the full year of 2013 to be in the mid-20s. However, this can vary on a quarterly basis due to the geographic mix of business.
Yesterday, our Board of Directors approved a new $10 billion share repurchase program to be completed at the latest June 30, 2018. Our strong projected cash flow over the next five years allows us to increase the level of share buybacks, while also maintaining enough flexibility to continue to take advantage of growth opportunities.
Let me take this opportunity to remind you how we manage our cash flow. Our first priority is to reinvest into the business to drive growth. We do this through CapEx and the investment we make in R&D and future revenue streams. From a dividend perspective, over the last 10 years, we have increased our dividend on average by 13% per year. We will continue to review this on an annual basis with our Board. After that, we will continue to be strategic when it comes to M&A. Then, the balance will be spent on stock buybacks.
For the first six months of this year, we have generated $3.4 billion of cash flow from operations. Net debt at the end of the quarter was $5.6 billion, as compared to $5.3 billion at the end of the first quarter. Significant liquidity events during the quarter included $906 million of CapEx, $600 million payment to Cameron for the OneSubsea transaction; and $500 million of stock repurchases. During the quarter, we repurchased 6.84 million shares at an average price of $73.07. CapEx is still expected to be approximately $3.9 billion as compared to the $4.7 billion we spent in 2012.
Now I will turn the conference call over to Paal.
Paal Kibsgaard - CEO: Thank you. Simon. Our second quarter results were strong, as international activity recorded significant progress and North American results benefited from solid execution on land and increasing deployment of new technology in deepwater areas.
Sequentially, revenue was up 6%; margins expanded by 178 basis points, which together yielded a 16% growth in operating income. Compared to the same quarter last year, operating income was up 12%. The results were driven by solid activity levels in all our main markets as well as market share gain for a number of our product lines on the back of new technology sales and our strong execution and integration capabilities.
I am pleased with the overall results and even more so with the consistency in our business performance throughout the Company; seen, for instance, in the margin levels of our four main operating areas, which are all at or above 20%.
The focus on the quality and efficiency of our execution is also reflected in our incremental margins, which were north of 50% sequentially, as well as the cash flow from operations, which was $2.3 billion, driven by both improving asset utilization and reduction in the use of working capital.
The strength in our international business was again evident in the second quarter. We had year-over-year revenue growth of 12% and margin expansion of 173 basis points to reach 22%, making of over 70% of the operating income of the quarter.
Activity and customer plans confirm our expectations for the year in all our major growth markets while revenue per rig continues to steadily increase as a function of new technology sales, increased integration related activity and a favorable business mix. Our ability to consistently execute remains critical in the international market, and is a driver for both our market share gains and superior margin performance. While we continue to replace competition on contracts where they are unable to deliver, we're becoming more and more selective in terms of where and when we do so.
In Latin America, revenue was flat sequentially despite a 2% drop in rig count, while margins increased 107 basis points to 20.6%. On a year-over-year basis, revenues increased 3% while margins expanded 153 basis points. Our Latin America business showed commendable resiliency this quarter by maintaining laser focus on execution, technology sales and cost control overcoming both activity headwinds, and new contract mobilizations and startups.
In Mexico, the third bid round for production incentive contracts was concluded where we ended up bidding for only one of the six blocks. Drilling activity remained soft in the north and east regions of the country following the budget shifts announced in the first quarter, while the business offshore continued to ramp up.
In Venezuela, we signed a new agreement with PDVSA at the end of May, and we are now in the process of ramping up our activity in the country while payments are on plan. Elsewhere in Latin America, the Shushufindi SPM project in Ecuador is progressing well with production levels well above the agreed targets. While in Argentina, we continue to be active in reservoir studies and wellhead operations relating to the Vaca Muerta shale developments.
In Brazil, we continued to mobilize resources during the quarter for the new contract signed with Petrobras, although overall activity levels were down sequentially. We have several new IPM projects starting in the second half of the year; however, the overall activity level is expected to remain flat to slightly down for the rest of the year.
Overall, our outlook for Latin America remains unchanged, with 2013 being a transition year in terms of activity for the region, and we remain comfortable with our position, our plans, as well as the actions we have taken to handle the somewhat challenging business environment.
In the Middle East & Asia, revenue grew 11% sequentially on a 3% rig count increase, while margins increased 178 basis points to 24.6%. On a year-over-year basis, revenues increased 28% while margins were up by 330 basis points.
In the Middle East, growth was again spearheaded by Saudi Arabia and Iraq, but our United Arab Emirates and Oman GeoMarkets also posted strong results.
Common to all these markets is that we have gained noticeable share in the past quarters.
Our business in Saudi Arabia continues to grow through a diverse portfolio of projects on both land and offshore, and driven by both drilling and rigless activity.
In Iraq, we have on the back of an unmatched execution track record built up a significant business that is now starting to yield excellent results. Activity levels continue to increase both in the north and south of the country, and with our business footprint and contracts portfolio, we have clear leadership in what is shaping up to be a interesting market for us.
Asia also contributed strongly to the area results by delivering record revenue in four geo markets, driven by robust market share and new technology sales.
China led the Asia growth on a rebound from seasonally low land drilling and stimulation activity in the previous quarter and also helped by an upswing in offshore activity.
We also posted very strong growth in Australia, driven by continued growth in unconventional activity on land, as well as offshore and deepwater activity in the Northwest and in Papua New Guinea.
In Europe/CIS/Africa, revenue was up 10% sequentially and margins increased 275 basis points. On a year-over-year basis, revenues increased 7% while margins increased 33 basis points. As expected, Russia led the growth in the second quarter as the high volume land as well as the offshore business entered the most active phase of the calendar year.
E&P investment and activity levels in the country remained very strong in terms of offshore and land activity as well as for exploration and development, and Russia will be one of our fastest growing markets in 2013.
In the North Sea, WesternGeco saw strong activity as the seismic acquisition season started, while the offshore drilling rig count stayed more or less flat.
In North Africa, rig activity in Algeria started to rebound following the security incident in the first quarter, while rig activity in Libya remained flat due to delays and ongoing security challenges.
In Sub-Saharan Africa activity in the Gulf of Guinea as well as in East Africa was robust. On the other hand, activity in Angola was subdued in the second quarter due to project delays. However, the activity outlook for the second half of the year remains strong driven by both exploration and development projects.
In North America, revenue was up 2% sequentially, while margins increased 65 basis points to reach 19.7%. On a year-over-year basis, revenues were flat, while margins were down 83 basis points. In the North America land market, the rig count dropped 14% sequentially, driven by the Canada breakup, and also impacted by the June flooding in Alberta. While the downwards pricing trend in U.S. land continued in the areas of drilling, stimulation and Wireline, although this slowed in pace during the quarter. However, continued strong drilling efficiency resulting in solid growth in horizontal wells and frac stages completed partly offset these headwinds.
Looking at our land performance, we continue to execute very well in all our product lines and we also see a gradual improvement in the uptake of our new shale technologies throughout the characterization, Drilling and Production groups.
In the U.S. Gulf of Mexico, the deepwater rig count is now 17% above pre-Macondo levels, and on a year-over-year basis, activity has increased by 30%. The call for reliable and efficient service delivery, in addition to risk mitigation technologies continues in this growing market and is yielding very strong results for a number of our high margin and higher market share product lines. In addition to the dual coiled fleet operating in the Gulf of Mexico, WesternGeco also started isometrics operations in Eastern Canada during the quarter.
Turning next to technology, during the quarter, we closed the OneSubsea joint venture with Cameron, and the JV is now operational. Cameron with its long history of innovation and firsts in the subsea market is an industry leader in design capability, manufacturing excellence, and successful installations.
In addition to this, Schlumberger brings a deep understanding of the reservoir as well as industry-leading well completions, subsea processing, and integration capabilities. Through the combination of these strengths, OneSubsea will offer best-in-class subsea solutions; optimizing the complete subsea production system and helping our customers improve production and recovery from their subsea developments.
In other areas, we saw growing customer interest in a number of our new or recently commercialized technologies. In Wireline, the Saturn 3D fluid sampling probe is enjoying one of the most rapidly growing deployments of new formation evaluation technology for a number of years. Its ability to acquire reliable pressures and high quality samples in difficult reservoirs has been impressive.
Elsewhere, in Characterization, the SIS Studio Manager software which went from concept to market release in only eight months is enabling an increasing number of customer geoscientists to access data, collaborate with peers, and share best practices within Petrel workflows.
Within the Drilling Group, new and innovative drillbit technologies recorded significant progress. Drillbits equipped with Stinger conical diamond elements that add stability and improve drilling speed have now made more than 650 runs in North America alone since their introduction in the first quarter, and have achieved an average improvement of 15% in rate of penetration. And in the second quarter, we commercialized the ONYX 360 rotating cutters that we believe will lead to dramatic improvements in (indiscernible) lengths in abrasive formations.
Lastly, at the Production Group, join deployment of LIVE slickline with active coiled tubing services demonstrated clear benefits in the efficiency and effectiveness of our Well Intervention services both on land and offshore, and units were active in the quarter in both Latin America and the Middle East.
Let's now turn to the macro environment, where the business outlook for 2013 has remained largely unchanged since April as expansion in the global economy remained soft. In summary, the U.S. has shown little or no impact of the financial sequester. The Eurozone is still in a two-year recession, although the risk of any (concrete) to leave the monetary union appears reduced. And recent Chinese data have been mixed with the outlook for long and progressive soft landing remaining unchanged.
The oil market picture is also largely unchanged. The market is more comfortably supplied than it was in 2012, but spare capacity remains below pre-Libya conflict levels. The year-on-year increase in North American supply is enough to face both increasing global demand and the production decline in other non-OPEC producing countries. The call on OPEC remains unchanged and is in line with the Group's production target of 30 million barrels per day. Overall, the market continues to support Brent prices over $100 per barrel.
For natural gas, the apparent rebalancing of the U.S. market is still fragile as gas production remained steady and as the power sector has already switched back to coal in some regions on higher gas prices.
Internationally, Asian LNG prices eased on weaker Chinese demand trends, but remained close to oil parity, while in Europe regional supply declined from the North Sea and very cold weather supported high spot prices.
Despite the overall slow progress in the economic environment, the latest releases of the third-party E&P spending surveys saw upwards revisions of upstream CapEx estimates, making 2013 the fourth consecutive year of double-digit growth by spending gains, driven by the international and offshore investments, noticeably in the Middle East & Asia regions while the North American spending remained flat to slightly up. These estimates are further confirmed by the rig count outlook that shows double-digit growth in the number of both shallow water and deepwater rigs active worldwide and a 6% growth in the international land rig count in 2013.
In this market, we continued to focus on what we control; which is the quality, efficiency and integration aspects of our operational execution. Through this focus which permeates our entire organization, we continue to demonstrate our ability to deliver tangible results today as can be seen by our revenue market share gains, unmatched operating margins, strong cash flow, and consistent double-digit growth in earnings per share. We also remain confident in the outlook of the industry in our strategic position within the markets we operate in and in our ability to further improve all aspects of our performance going forward, which remains the overarching objective of the entire Schlumberger team.
That concludes my remarks. I will now hand the call back to Malcolm.
Malcolm Theobald - VP, IR: Thank you, Paal. Greg, we'll now open the call for questions.
Operator: Kurt Hallead, RBC Capital Markets.
Kurt Hallead - RBC Capital Markets: Question, Paal for you on the North American market. You continue to show some differential performance on the margins front despite the fact that – and show improvement in terms of activity, revenue, and margins despite an anemic rate progression and a lot of discussion here about the well count and so on. So, I was just wondering if you can give us a little bit of additional color as to what product lines that you see will be benefiting from the shift in the type of drilling that's taking place in the U.S. marketplace and what kind of technologies that Schlumberger has that will continue to enable Schlumberger to show differential margin performance going forward?
Paal Kibsgaard - CEO: Well, I think if you look at what enables us to show differentiated margins, I think it's the – there's several things. Firstly, our ability to, I think, execute very well on land, whether that is on drilling or on pressure pumping. But also the fact that we have a very well balanced portfolio in between drilling and production related activities on land as well as in between land and offshore. So, we obviously have a very strong offshore business, both rig-related as well as the seismic but what we have done in recent years, starting off in 2010 was to restructure the business on land which in previous years, I would say, had underperformed. Through that restructuring, I think we are performing on par with the best if not better in most of our product lines. So if you look at the trends of drilling in North America land market now going towards more and more horizontal wells, predominantly focused on liquids, all our drilling segments obviously benefit from that. At the same time, our pressure pumping business through new technology deployments such as HiWAY are also benefiting from this. We're also introducing to the market our own multistage completion technology which has been a gap in our portfolio in recent years, which also should enjoy quite significant growth going forward. So I think it's a good balance between land and offshore, good balance between drilling and production on land and overall very strong focus on execution.
Kurt Hallead - RBC Capital Markets: As a follow-up, Paal, on that, with respect to the overall margin performance of Schlumberger, especially in the international marketplace, are you getting in a sense that we're starting to see a shift in the industry that will demonstrate Schlumberger's relative product and services strength, whether its deepwater or otherwise? You think we're at a kind of inflection point in the marketplace where we're going to see the strengths of Schlumberger?
Paal Kibsgaard - CEO: Well, if you look at our margin performance in international over the past couple of years, I think we've been highly differentiated continuously, right. So, I think we have done well in our contract strategy, what contracts we're prepared to take on and the ones that we see more as must-wins. We have continuously introduced new technology and we're also leveraging very well, I think, our overall size and infrastructure. So, to your question, whether it's an inflection, we don't see any imminent inflection in bid pricing at this stage. We are seeing a continuous uptick in another pricing indicator that we track which is revenue per rig. That is continuing to grow and going upwards. And that, obviously, helps our profitability. And what drives that up is new technology sales. It is our integration capabilities where we do more and more services and products on each rig, and it is also down to the nature of the work that we take on. Typically, we take on the more complex and more intense work because it is more difficult to do. And if you perform well in that, that also is quite accretive to margins. So, bid pricing, we still don't see any imminent inflection, but we continue to drive revenue per rig upwards through new technology, through integration, and this very solid execution.
Operator: James West, Barclays.
James West - Barclays Capital: You mentioned in your prepared comments the third-party service, which, of course, you're well aware that we do a very large survey. And what we saw when we reran the numbers here in May and early June was that international spending was creeping up about 300 basis points to 400 basis points. So, curious, if you're seeing the same things from your customers who you're having the same, of course, conversations that we are with? And then secondarily, which markets – do you agree with what we showed as the biggest growth areas of kind of the Middle East, Eastern Hemisphere in general, and which seemed like markets that are kind of Schlumberger's backyard essentially. Do you see this as the best growth markets for this year?
Paal Kibsgaard - CEO: So, to the first part of the question in terms of the spend, yeah, if you look at the average of the spend surveys – and we look at several – I think for the international it was about 9% early in the year, and it was generally all of them revised upwards lately to average about 13%. So, we generally agree with that upward revision. We see continued strong activity levels in the international market and those spend surveys are also, I would say, confirmed from the rig count outlook and also the rigless outlook in terms of activity that we have for the second half of the year. So, yes, we are in agreement that upward revision seems to be reasonable. Then the second part of your question was?
James West - Barclays Capital: On the specific regions where the spinning is increasing, particularly the Middle East?
Paal Kibsgaard - CEO: Yeah, so we highlighted going into the year five major growth regions, right. So we said that international would grow north of 10% this year. We would see growth in Latin America, but due to the kind of transitional nature both in Mexico and Brazil as we indicated early in the year, we weren't expecting a lot of growth coming out of Latin America which is being confirmed and we said that the main growth markets would be Sub-Saharan Africa, Russia, Middle East, in particular, Saudi and Iraq, China and Australia, those were the five main drivers. So basically ECA and MEA were the main drivers of growth in international market.
James West - Barclays Capital: Then just a follow-up for me the market share gains that you also highlighted in your prepared remarks. Are those happening in those markets that are growing the most rapidly?
Paal Kibsgaard - CEO: I think, in general that's fair. I would say in particular in MEA, we are gaining quite good market share
Operator: David Anderson, JPMorgan.
J. David Anderson - JPMorgan: Paal, just staying on this subject real quick, basically we've seen a (indiscernible) the Saudi rig count is about six months behind schedule. Do you concur with that and does that have any impact on kind of your outlook for the next 12 months?
Paal Kibsgaard - CEO: Well, if you look at our view on the Saudi rig count, we are still expecting the total rig count, both drilling and workover to reach about 170 rigs by the end of 2013, or early 2014. So the rig count evolution in Q2 was flattish, but it is all about when new rigs arrive and how they are commissioned and so forth. But we are still expecting that we will reach the number that we've indicated earlier roughly by the end of the year or early 2014
J. David Anderson - JPMorgan: Then on the subject of Mexico, you touched on the Chicontepec bids from last week. I was just curious – what was it about those contracts that kept you away? Was it location of the work? Was it the contract structure? Or you guys are just holding out for another set of tenders here?
Paal Kibsgaard - CEO: Well, let me just give you a little bit of background on our view on these production incentive contracts. So, we've been very clear about our interest in production incentive contracts, but we also stress the importance of picking the right project with the right terms. So, we evaluated all the six fields offered in the (indiscernible) Mexico and based on the very detailed technical and commercial evaluations we did, we only found one field interesting. Now, we've been at this field at the price that will give us the returns that we required and that is really factoring in the additional risks associated with these contract terms. The winner bid at a fee close to zero fee per barrel and basically we were not interested in doing that, so we did not win it.
J. David Anderson - JPMorgan: One last quick question on some of the buyback you announced today. Could you just kind of give us a sense on your philosophy on the pace of that buyback? You talked about the cash flow you're generating over the next couple of years. Should we expect the majority of that to go towards share repurchase? I heard (indiscernible) broke down terms of the deal but it seems like you have an opportunity here to kind of accelerate that over the next, call it, I don't know, three or four quarters here. Am I right in my assessment?
Simon Ayat - EVP and CFO: Well, as I mentioned in my remark, that the buyback is basically a balancing number for us when it comes to utilization of the cash flow. And you're right in your assumption of the cash flow. That's why we said latest by 2018. So if the cash flow proved to be significantly better than what we have factored in the five-year scenario in making the $10 billion program, we will accelerate it. We did this in the past. We look at our excess cash over a period of time, taking into consideration the growth that we are anticipating in terms CapEx, and as I said, investment in future revenue stream activity, be it multiclient or production incentive contracts, and any balance will go into the buyback, yes.
Operator: Judd Bailey, ISI Group.
Judson Bailey - ISI Group: I wanted to ask a couple of questions on Mexico, if I could. The first is, that's obviously a big market for you guys. It's obviously a big market for you guys. You are pretty diverse. PEMEX still has pretty ambitious growth expectations in the next few years; they've obviously pulled back activity in the North. I wanted to get your thoughts – they have a lot of tenders coming up and tenders in process, and it would look like you could see pretty strong growth in that market next year. In your view, is there any reason for skepticism that PEMEX maybe wouldn't follow through? Or is there anything else going on down there that will give you some caution in terms of the growth opportunities down in Mexico?
Paal Kibsgaard - CEO: No, I don't see any reason for that. I think PEMEX has signaled that there is a number of bids coming out for the remaining part of this year, and probably into next year. We are going to actively compete for all of that work, and we continue to see Mexico as a very interesting market for us.
Judson Bailey - ISI Group: Then next question just on North America, obviously very strong margin results factoring in Canada and everything else going on in that market. With the continued growth in the Gulf of Mexico, and let's just say that the U.S. land market kind of continues at this methodical pace with very little pricing traction, how should we think about Schlumberger margins in terms of – are we to assume you get some more market share gains, you benefit from the very strong Gulf of Mexico and a rebound in Canada? Can you help us think about maybe the near term and the long-term margins for Schlumberger, and then the North America market?
Paal Kibsgaard - CEO: Well, I would say that we – over the past year, when there has been a significant struggles on in the pressure pumping business, I think we have shown commendable margin resilience. And again, as I alluded to earlier, it's down to how we execute on land as well as the balance between land and offshore. So in terms of what the margin progression is going to be, the main uncertainty is still what is going to happen in terms of pricing on land. As I mentioned in my prepared remarks, we still saw pricing pressure both in the drilling, stimulation and Wireline product lines in the second quarter, but that was slowing somewhat in pace. So, assuming that the pricing is reasonably behaved and drilling efficiency continues to be the main activity driver going forward, I would expect us to show continued margin resilience. Obviously, we're looking to drive up margins in any operating areas. I can't promise you exactly how that's going to progress, but we have a lot of focus on margins in every part of our business, and we will continue to look drive it up in North America.
Operator: Bill Herbert, Simmons & Company.
Bill Herbert - Simmons & Co.: Paal, I was wondering if you could sort of reconcile on the one hand for the double-digit E&P capital spending growth, not so much for this year; but on a structural basis perhaps going forward internationally; and reconciling the tension between on the one hand, the increasing need on part of the customer base to reinvest simply to keep production flat and on the other hand increasingly challenge cash flows in a range bound oil price environment and rising cost environment. What do you think ultimately happens over the next several years assuming range bound oil prices? Does the rate of E&P capital spending growth decelerate or what happens?
Paal Kibsgaard - CEO: Well, I think we're still optimistic about the further need to increase overall E&P spending going forward, right. So, we saw the upward revision for the spend survey is this year. At this stage, although it's early to conclude, but next year, the customers need to go through their planning process, but we're still optimistic about the initial projections for 2014. The resilience in the spend, as you say, is linked to partly the work intensity linked to (fighting) decline, but also due to the overall size and the complexity of the projects that are undertaken in particular in the international market. So, I think for the Company – for E&P companies that potentially are or will be facing cash flow issues, we expect them to be likely to shift more of the spend within the E&P spend from more infrastructure-related projects towards more well CapEx. So, that obviously will be good for our business, because that's sort of where we make most of our money on, right? So, I think the general shift from infrastructure towards well CapEx is where I expect to happen for those E&P companies that are facing cash flow issues.
Bill Herbert - Simmons & Co.: Then secondly, switching gears, at the reservoir level, I'm curious as to what your views are with regard to the outlook for U.S. oil production growth. I mean, clearly, it's been extremely vigorous. We're up about 1 million barrels per day on a leading edge basis, that's 15% to 20% year-over-year, yet I think there is a healthy debate here with regard to the prospects going forward, the prospect of the Bakken growth flattening out and filling that production growth vacuum with other basins, perhaps not as easy as some contend. Where do you fall out with regard to the domestic production outlook going forward; stronger for longer, or decelerating, or too early to make a case either way?
Paal Kibsgaard - CEO: It's a good question. So, first of all, I would say that the overall production increases that we've seen on our North America liquids – they have been very impressive. We always maintained that it's too early to extrapolate the early production trends in terms of how great they see. Also, I think it's too early to conclude on whether the trends we're seeing on the backend is something that is also sustainable, right. So for the early production trends, I think we need more information to look at the production of these wells over a longer period of time. I think we also need to look at the initial rates of the inflow performance for the wells that the operators are starting to drill outside of the fairways, alright, as they step out on the acreage. So, I'm going to have to go for option three of your multiple choice there. I think it's too early to say both, whether we can extrapolate the initial overall trend from North America, or whether there is any significant impact of the recent trend that we've seen in the Bakken.
Operator: Scott Gruber, Bernstein.
Scott Gruber - Sanford C. Bernstein: Paal, I found your comment about becoming more selective regarding when and where you choose to replace peers interesting. Is this a reflection of capacity constraints, desires to avoid problematic contracts. Some of both – why is the stance shifting?
Paal Kibsgaard - CEO: Well, I think obviously if a customer calls upon us and wants up to deliver, generally we will do our utmost to serve them. At the same time, we also have to make sure that we prioritize putting our equipment into the customers that have initially selected us. If we are going to go and replace the competitor on their contracts, we obviously need a significant pricing increase from the initial rates that our competitors took the work on for, alright. There is also other strategic considerations as to where do we put our capacity? What is the priority in terms of the customer mix as well? So I'm not going to go into the details of how we select, what we do. I would just say that we will always look to serve our customers as best as we can. But at the same time, we are continuing to look at how we optimize our business mix and how we maximize the return from the resources that we have out in operations
Scott Gruber - Sanford C. Bernstein: Then an unrelated follow-up. Can you discuss the efforts internally to improve the working capital management? You look over the last six months, you guys have held the line here on receivables and other current assets; but I assume that you're not completely satisfied in the working capital at this point. Then if you have yearend targets that you could share with us, that would be greatly appreciated.
Paal Kibsgaard - CEO: Well, maybe I'll say a little bit about what I think the investment community calls self-help initiatives, right. So first of all, in Schlumberger, we believe that in order to maintain and extend our market-leading position, we always need to do better tomorrow than what we did today. So, company-wide programs addressing execution improvements, they are not really sporadic or episodic with us. They are a way of life. So we have, in recent years or in the recent year, put more focus on working capital on cash generation. In the past before, we had more focus on more cost and resource management. So we're trying to balance the focus on both cost and resource management with cash management. So we have specific programs around to – focused on capital efficiency, around receivables and also around the inventory management. We build this into our business plans, and we also build this into the incentives of the entire management team. So, this is really how we try to put focus on it, and what we put focus on in Schlumberger, we generally do quite well. Simon, you had...
Simon Ayat - EVP and CFO: I would like to add a bit to what Paal said. The last couple of years since the acquisition of Smith, you probably noticed that the working capital as percentage of our sales has gone up a bit. And this was all planned. I mean, as a result of expanding certain segments or product lines of Smith internationally, which are more inventory-intensive segments or product line, we had to increase inventory to meet the expansion that we have done internationally. One of the main reasons for acquiring Smith and integrating it with the rest of Schlumberger is also to use the footprint of Schlumberger, which meant that some of those segments that were mainly U.S.-focused; we took them overseas, and therefore, increase in inventory. We have managed to do this now, and going forward, we will not have to increase it at the same pace that we have done before.
Operator: Ole Slorer, Morgan Stanley.
Ole Slorer - Morgan Stanley: First of all, congrats on your decision to return a greater part of cash flow to shareholders. I think there is a very clear difference at the moment between the evaluation of companies who do that and those who don't in this slower growth environment that they're in. But first of all, what were the biggest technologies that drove your share gains?
Paal Kibsgaard - CEO: In terms of specific technologies, let me elevate it and maybe focus in on the product lines. So, I would still say we gained more share in Wireline and Drilling & Measurements. Those are the kind of spearheading segments for these efforts, right. So there is number of new technologies that we have introduced in both these product lines over the past year or two and the off-take of them is good. What we also find now, as you know, we've restructured our engineering, manufacturing and sustaining organization about five years ago, and this is really starting to pay dividends now because the new technology that comes out is performing much better than the initial technologies that came out five or 10 years ago. There were a lot more teething programs, which we are basically now avoiding. So, the new technology which is commercialized within its first year is actually now growing significantly faster than what it did maybe five or 10 years ago. So, I would say Wireline and Drilling & Measurements are still the ones that are gaining the more share.
Ole Slorer - Morgan Stanley: So it appears fair then to say that this is largely driven by offshore?
Paal Kibsgaard - CEO: No, I think it's both land and offshore.
Ole Slorer - Morgan Stanley: A follow-up question would be what market share changes are you seeing in the offshore market? I mean you're having only your largest competitors continuously make claims that they are gaining share across all kind of macro workflow technologies?
Paal Kibsgaard - CEO: Well, I don't know who they are gaining share from because it isn't us. So I think we are – in the offshore market, we obviously, already, have quite a high share. But we've referenced Gulf of Mexico in some of these discussions and we continue to gain share in the Gulf of Mexico in several of our high-end product lines.
Ole Slorer - Morgan Stanley: Just finally, how far away do you think from being a new pricing cycle in North America pressure pumping?
Paal Kibsgaard - CEO: Well, I would say there is still significant overcapacity of horsepower sitting on the sides today. So, I don't see that happening in 2013, at least. I think we're still going to have overcapacity as we exit this year.
Ole Slorer - Morgan Stanley: Finally, just what are some of the technologies that are reducing the pressure pumping insensitivity of shale oil and gas in North America?
Paal Kibsgaard - CEO: What technologies do that?
Ole Slorer - Morgan Stanley: Yeah.
Paal Kibsgaard - CEO: Well, HiWAY is obviously one of them. We use significantly less proppants and also generally less water in the operations that we do with HiWAY. The other way of reducing or lowering the intensity of these operations is to use much more of the subsurface approach prior to actually designing the jobs, right. So, having a much better understanding of the subsurface will allow you to design the completion of the well, and the amount of horsepower, water proppant you use by being more selective in which stages you frac, and also using more sophisticated frac fluids like HiWAY.
Ole Slorer - Morgan Stanley: So are you seeing a change in attitude there with the shale oil gain becoming more and more of a large company gain?
Paal Kibsgaard - CEO: Not a dramatic change, but I would say we have – we're starting to get several key customers that we're collaborating much closer with than what we've done in the past; and where we engage all the way from Characterization to Drilling and Production and taking a much more sophisticated approach to how we go about working with them on their developments, right. So, it's still relatively slow, but through some of the contracts we won over the past 12 months to 18 months, we have established as part of those contracts, a very strong technical collaboration agreements, which are also benefiting technology penetration.
Ole Slorer - Morgan Stanley: On Forest Oil, the contract in Eagle Ford, how would you characterize that in the context of what you said?
Paal Kibsgaard - CEO: Well, I can't really comment on that. Forest will release their results, I think in a couple of weeks. We'd need to refer you to them
Operator: Michael LaMotte, Guggenheim.
Michael LaMotte - Guggenheim Securities: I wanted to just follow up on the North American onshore market, and a little bit on the Forest Oil as well as SPARK. Let me ask the question just from a context of a shift in business model in North America. I think both with Forest as well as SPARK, you have tried to introduce a new model to the U.S. land market. And I was just wondering, now as you've been out marketing concepts like that for a while, what the perception has been and what you think the uptake and penetration rate might look like?
Paal Kibsgaard - CEO: On SPARK, we have seen a reasonable uptake on it. Nothing dramatic which we weren't expecting either. It's mainly focused on customers that are vertically integrated. They have their own horsepower with very limited capabilities in terms of pumping more sophisticated fluid systems. So we continue to do SPARK-related activity, but it isn't a significant part of our business which we weren't really expecting either. But it's progressed reasonably well and we're happy with the performance from this. We are mainly doing SPARK in North America, but we're also doing SPARK in China for some of the frac operations there. The other part of your question, in terms of the Forest Oil type of deal, initially as we said when we closed the Forest deal, our main motivation for doing that type of a deal was actually to get a display window for our shale technology capabilities, so we haven't really been actively out promoting SPM or production-incentive type of contracts in North America beyond trying to get that deal done, so we could demonstrate our capabilities for the technologies that we have developed. So, really no other progress or we haven't really even been pushing that model beyond that one deal we struck.
Operator: Bill Sanchez, Howard Weil.
William Sanchez - Howard Weil: Paal, two questions. One, I wanted to follow up on just how things are progressing on the SPM side. In the first quarter, you mentioned you had 10 projects; goal was to add two to three a year. I didn't see anything in the press release with regards to another announcement there. Perhaps you could just update us on your thoughts? And maybe perhaps just size for us on our revenue basis annually; what SPM is kind of contributing to the top line for Schlumberger?
Paal Kibsgaard - CEO: Yeah, you're correct. We didn't sign any SPM projects in the second quarter. Our goal of adding two to three projects a year basically stands firm. But again, as I mentioned, on my comments on the Mexico bid round, we will only sign the projects that we believe are right for us. This is all about portfolio management. It is about picking the right projects, the right fields with the right terms, and we have very stringent return criteria in terms of what we will engage in. So, our goal is two to three fields. If we can get the right ones, we will do it; and if we can't find the right ones, we won't do it. In terms of the impact on the business, it's still a relatively small part of our overall revenue stream. But by picking the right projects it is a highly accretive part of our revenue stream and we continue to focus in on maintaining it as highly accretive.
William Sanchez - Howard Weil: Right. Your view has been as that these projects are accretive to margins and essentially every GeoMarket in which you've rolled it out, is that correct?
Paal Kibsgaard - CEO: That is correct.
William Sanchez - Howard Weil: My second question was just a follow-up on North America margin, specifically as it relate to Geco, which was called out in the press release but you didn't specify; perhaps I missed it in earlier comments, whether or not Geco really was being driven in the Gulf more by the marine side of the business or whether we saw multiclient or maybe a combination of both? And then, maybe just address Gulf of Mexico Geco as we think about the balance of '13?
Paal Kibsgaard - CEO: Well, in the Gulf in terms of ongoing operations, we have one dual coiled fleet operating. It continues to operate in the Central Gulf. It's got a good backlog of things to do there on the multiclient side acquisition. We have an ongoing multiclient late sales business where we had some revenue progression which is seasonal basically from Q1 to Q2. We don't break up what that revenue progression was in the multiclient. You can see what the total is. The total for Q2 worldwide was 250, up from 175 in Q1. So, a part of that was North America. But, I would say as a general comment on the multiclient performance in North America in Q2, it was below our expectations. We were expecting more sales in multiclient than what we actually realized. In addition to the multiclient business in terms of late sales and acquisition in the Gulf of Mexico, we also started a third-party survey offshore Eastern Canada, and this is with isometrics. So those are basically the WesternGeco business in North America
William Sanchez - Howard Weil: That sounds like, if that continues in second half of the year, it should be accretive to overall North America margins?
Paal Kibsgaard - CEO: They should.
Operator: Angie Sedita, UBS.
Angie Sedita - UBS Securities: On Mexico, Paal, I appreciate the color on the production of incentive contracts and the bidding there, but your thoughts on, I believe the next round of awards will be IPM potentially as much I have heard is $8 billion to $10 billion in contracts. Do you view that as the better and more attractive opportunity in the region? And then along with that, have you had conversations with PEMEX on the potential timing and is it multi-year for Mexico to open up any opportunities there?
Paal Kibsgaard - CEO: So, what we know about the bids coming out is that there are a series of bids. There'll probably be single-service bids, there will be IPM well construction bids, and there'll probably be more production incentive-type of bids coming out as well over the next couple of quarters. So, as I said earlier, we are very interested in the Mexican market. It is going to be highly competitive. It's always been highly competitive. But it's about, as I said before, being able to bid strategically, trying to pick up the right contracts and the right opportunities and having a plan for how you would create value for PEMEX and at the same time create value for Schlumberger as we engage in these contracts, right. So, I gave you a quick summary of our view on the third run of the SPM contracts, and we will continue to evaluate every opportunity for gaining more work in Mexico and will engage in it with a view to make returns for the Schlumberger shareholders.
Angie Sedita - UBS Securities: Then on the U.S. market, thoughts on the pace of activity for Q3 and Q4, are you seeing, based on your conversations with the customers, still steadily higher in Q3 as far as activity, and Q4, the seasonal decline, or are we going to run into the (spend) budgets that we did last year?
Paal Kibsgaard - CEO: Well, whether Q4 is going to see the same as last year, I think it's too early to say. Obviously, WTI ticking up a little bit over the past month or so could be a positive preventing that from happening, but I still think it's too early to say what will happen in Q4. Our overview on the second half of the year for U.S. land is I think rig count is going to remain relatively flattish, but drilling efficiency is going to be the main activity driver, again generating reasonable growth in stage count sequentially. Looking at Canada, we expect the H2 rig count at this stage to come in or the recovery in the H2 rig count to come in lower than 2012; while the stage count we expect to be more or less flat with last year. Then again, continued strong activity in terms of offshore Gulf of Mexico, both shales and deepwater.
Angie Sedita - UBS Securities: Then finally, you mentioned Russia being one of your strongest GeoMarkets in 2013. Is that in part driven by the Eurasia deal, or is it outside of that project?
Paal Kibsgaard - CEO: Well, the Eurasia deal is part of our business, and it's an important part of our business in Russia. But it is only a part of it. We have significant other activities both on land and offshore both in Sakhalin, and the Caspian, in the Barents, in the Artic. So we are very well – I think diversified in terms of both customers and regions that we operate in Russia. That's why I think we manage to sustain the very high growth rates.
Operator: Jim Crandell, Cowen.
Jim Crandell - Cowen Securities: Paal, one of your competitors was indicating in the marine seismic business, relative softness in bidding activity for the fall winter season. Are you seeing that – or let's say, what are you seeing in the fall winter season relative to the spring summer season? And how does pricing look for that seasons right now?
Paal Kibsgaard - CEO: For the marine markets, we maintain our positive outlook which we have basically conveyed over the past couple of quarters. The way we see it, supply and demand appears to be relatively well balanced. We have – in terms of bookings for Q3, we are basically already fully booked, and also Q4 in terms of backlog is filling up quite well. So, activity wise, things are looking quite good for us. In terms of pricing, in the second quarter, we didn't see any significant further traction in terms of basic bid pricing. But we also track another pricing indicator, which is revenue per streamer, and our revenue per streamer was up about 10% sequentially, and that's mainly at the backend of new technology and the type of service we conduct, and also some seasonality effect. That's basically where we stand.
Jim Crandell - Cowen Securities: One follow-up question about WesternGeco. When you used to break it out, this would of course be obvious, but could you give us some indication where margins are relative to – let's say the oil service average at WesternGeco? And I'm just trying to handle on how much margin leverage there was there going forward?
Paal Kibsgaard - CEO: We're not breaking out what any individual product line is doing in terms of the margins. I can't really comment on that, but given where pricing stands and given the very significant new technology portfolio, we have and just putting into operation both, on land in terms of processing as well as marine, we obviously see margin – upside potential for WesternGeco
Operator: Jeff Tillery, Tudor, Pickering.
Jeff Tillery - Tudor, Pickering, Holt & Co.: One of my questions I had is around the U.S. land business. You mentioned improved well service and pressure pumping utilization several times in the release. What are your thoughts around bringing some of the never deployed equipment into the market given where your margins are? How do you see that as an opportunity in the second half of the year?
Paal Kibsgaard - CEO: So we will look at bringing equipment in from what we have parked when we can get the utilization that we require for the overall (group) and at this stage we are not looking to bring anything back in that we have parked and I don't expect that to happen in 2013.
Jeff Tillery - Tudor, Pickering, Holt & Co.: Then last question just around the Reservoir Characterization business. With the significant margin increase there, I mean, obviously, multiclient helps, but if I look back historically there doesn't really tend to be a fall-off in multiclient sales in the third and fourth quarter relative to the second quarter. So any reason we should think about margins perhaps stepping backwards in the Reservoir Characterization business in the second half of the year?
Paal Kibsgaard - CEO: No, nothing fundamental. I mean, there's always – this is a huge business and there are mix effects depending on what region grows and there is exploration and development type of mixes even in Characterization, but overall, I expect the Characterization Group to continue to post very strong margins.
Malcolm Theobald - VP, IR: Thank you. Okay, on behalf of Schlumberger management team, I'd like to thank you for participating in today's call. Greg will now provide the closing comments.
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