Schlumberger Q2 Earnings Call Transcript

123jump.com Staff
03 Aug, 2009
New York City

Oil field services provider Schlumberger quarterly revenue dipped 18% to $5.53 billion. Net income plunged 56.8% to $615 million mainly due to North American performance and severance charges. Earnings per share were 51 cents down from $1.16 in the year-ago quarter.

Schlumberger Limited ((SLB))
Q2 2009 Earnings Call Transcript
July 24, 2009 9:00 a.m. ET

Executives

Malcolm Theobald - Vice President, Investor Relations
Simon Ayat - Chief Financial Officer, Executive Vice President
Andrew F. Gould - Chairman of the Board, Chief Executive Officer

Analysts

Kurt Hallead - RBC Capital Markets
Michael LaMotte – JP Morgan
Ole Slorer - Morgan Stanley
William Herbert - Simmons & Co
Daniel Pickering - Tudor Pickering Holt
Geoff B. Kieburtz - Weeden & Co
Michael Urban - Deutsche Bank
Daniel Boyd - Goldman Sachs
James Crandell - Barclays Capital
William Sanchez - Howard Weil Inc
Waqar Syed - Tristone Capital
Brad Handler - Credit Suisse
Robin Shoemaker - Citigroup
Pierre Conner - Capital One Southcoast
Kevin Simpson - Miller Tabak & Co
Guillaume Delaby - Société Générale
Robert MacKenzie - FBR Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger earnings conference call. (Operator Instructions) At this time all lines are in a listen-only mode and there will be a question-and-answer session and instructions will follow at that time. If you do need assistance during the call today please press the * followed by the 0 on your touchtone phone and an operator will help you off line. As a reminder today’s call is being recorded. At this time then, I would like to turn the conference over to Vice President of Investor Relations, Mr. Malcolm Theobald. Please go ahead, sir.

Malcolm Theobald – Vice President Investor Relations

Thank you, Ken. Good morning and welcome to the Schlumberger Limited second quarter 2009 results conference call. Today’s call is being hosted from Paris where the Schlumberger Limited Board meeting took place yesterday. Before we begin with the opening remarks, I would 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. Joining me for today’s call are Andrew Gould, Chairman and Chief Executive Officer; and Simon Ayat, Chief Financial Officer. Prior to Andrew’s overview of the second quarter and his comments on the outlook, Simon will first review the quarter’s financial results. After the prepared statements, we will welcome your questions.

And now I’ll turn the call over to Simon.

Simon Ayat – Chief Financial Officer

Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. Second quarter income from continuing operations, excluding charges was $0.68 per share, down $0.10 sequentially and down $0.48 compared to the same quarter of last year. We continue to actively manage our cost base. In this regard, we have continued to reduce our headcount which resulted in charges of $0.07 in the quarter, primarily relating to severance. Additionally, as a result of these workforce reductions, we were required to record a non-cash pension and other post-retirement benefit curtailment charges in the quarter of $0.10. These headcount reductions are expected to be largely completed by the end of the third quarter.

Turning to the business segments, oilfield services second quarter revenue fell by 9% sequentially, while WesternGeco revenue increased 1%. Oilfield services generated $1 billion in pretax operating income, down $233 million sequentially with margins declining by 245 basis points to 20.6%. By area, oilfield services sequential pretax operating margin’s highlights were as follows. North America declined to 1% on the heavy pricing pressure across most of the area and the sharp drop in activity, primarily in U.S. land and in Canada. The sequential margin decline is equally attributable to U.S. land and Canada. Internationally, margins were at 25.1%, a decline of 170 basis points from Q1. Latin America decreased by 206 basis points to 17.6%, primarily due to a less favorable revenue mix coupled with cost inflation in Brazil, currency revaluation losses and pricing pressure in the Peru, Colombia, Ecuador, and the impact of the lower activity in the Venezuela, Trinidad, and Tobago. These decreases were partially offset by the increased IPM activity in Mexico Central America. Europe/CIS/Africa margin was 24.2%, which was 172 basis points lower than last quarter, primarily due to the lower activity levels and less favorable revenue mix, Nigeria and Gulf of Guinea, West and South Africa, and the North Sea. These decreases were partially offset by an increase in Russia as a result of the improved activity levels. Finally, Middle East/Asia slipped 107 basis points to 32.1%, primarily as a result of the lower overall activity in the area.

At WesternGeco, pretax income was $97 million, reflecting an increase in pretax margins of 739 basis points to 17.3%. The increase was primarily due to higher multi-client sales and improved profitability in marine, as cost reductions initiatives more than offset the impact of the lower revenue. Now turning to Schlumberger as a whole, the effective tax rate excluding charges was 18.2%, and including the charges, it was 19.8%. The rate was lower than last quarter due to the substantially lower proportion of pretax earnings in North America. The ETR for the year is expected to be in the lower 20s. As a reminder, the ETR is very sensitive to the geographic mix of earnings and as such, we may experience volatility on a quarterly basis.

Net debt was $990 million at the end of the quarter, an improvement of $537 million from Q1. This improvement was driven by strong cash flows from operations. We ended the quarter with $4.9 billion of cash and investments on hand. In addition, $2.3 billion of committed debt facilities with commercial banks remained unused and were available at the end of June. This compared to short-term debt of only $1.6 billion, which includes $321 million of our convertible debentures, which are now classified as short-term. Significant liquidity events during the quarter included $503 million of CapEx, $229 million of pension funding, and $186 million of acquisitions. We did not buy back any of our stock during the quarter.

Oilfield services CapEx is expected to approach $1.9 billion in 2009, while WesternGeco is now expected to reach $530 million, which includes approximately $225 million relating to the construction of seismic vessels. In summary, our balance sheet remains very strong and provides us with a significant amount of financial flexibility.

And now I’ll turn the conference over to Andrew.

Andrew F. Gould – Chief Executive Officer

Thank you, Simon. Good morning, everybody. Schlumberger''s second quarter revenue fell 7.8% sequentially to $5.53 billion. Compared to the first quarter, the overall sequential rate of revenue decline slowed as a further precipitous drop in North America was offset by slowing rates of decline and some recovery in other parts of the world, including Russia, where revenue recovered noticeably due to seasonal trends and improving activity. In North America, gas drilling in both the U.S. and Canada reached a five-year low as demand remained weak and storage levels remained way above the seasonal averages. While production has begun to show some decline and summer demand has been strong, it will still require a further substantial increase in demand, particularly in the industrial and power generation sectors to stimulate and sustain higher levels of drilling. Looking at the areas in detail and starting with North America, the U.S. land geo-market recorded a further steep drop in revenue as the rig count declined approximately 27% and as pricing continued to erode.

Revenue in Canada also dropped significantly due to the impact of the seasonal spring break-up, the general reduction in land drilling activity, and the effect of significant pricing pressure. In the U.S., Gulf of Mexico, however, revenue fell more modestly as lower pricing and further weakening on the shelf drilling activity were partially offset by slightly higher deepwater activity. In the Latin American area, the Venezuela, Trinidad and Tobago geo-markets were the sharpest sequential revenue decrease as a result of lower activity and a revenue deferral pending finalization of certain contracts. This decrease, however, was somewhat offset by an increase in the Mexico and Central America geo-market as integrated project management activity and efficiency both increased. Within Europe/Africa/CIS, revenue in Russia grew sequentially on the seasonal rebound of offshore activity in the East among generally improved activity levels in both East and West Siberia. This growth was also supported through higher sales of artificial lift and completions products.

In North Africa, revenue grew from strong demand for testing services and completions products. These promising factors, however, were more than offset by reduced demand for Drilling & Measurements and Wireline Services in Nigeria and Gulf of Guinea in West and Southern Africa geo markets, in addition to lower Drilling & Measurements in Well Services activities in the Caspian and North Sea geo markets. Lower Schlumberger Information Solutions Software sales, as well as reduced demand for Drilling & Measurements, Wireline and Testing Technologies in Continental Europe also contributed to the overall area sequential revenue decline. Lastly in the Middle East and Asia area, sequential revenue fell primarily due to lower activity in the Gulf geo market, as well as in the East Mediterranean, Arabian, Indonesia, Australia, Papua New Guinea and India geo markets. Pricing pressure also began to impact revenue across the area.

These decreases, however, were partially offset by an increase in revenue in East Asia on strong exploration related demand for testing services, Wireline, and Well Services, and a rebound in activity in the China, Japan, Korea geo market following the winter slowdown in the first quarter. At WesternGeco, there was some recovery in multi-client sales both in North America and overseas, although this together with increased activity in land was offset by weaker Marine revenues. Marine pricing continued to decline due to excess capacity in the market. Several new marine and land contracts were booked during the quarter, giving better visibility on the next few months. However, multi-client sales remain difficult to forecast until there is better visibility on year-end oil prices. Against this background, we have continued to take action to right-size our operations without diminishing our capacity to react to market changes. Overall our operating cost base declined approximately $300 million compared to the first quarter as cost reduction programs continued to be implemented. Careful management of both working capital and investment led to the liquidity improvement that Simon described.

Our outlook for the remainder of 2009 assumes some stability but no major increase in North American natural gas rig count before 2010 and as a result, service pricing will remain depressed. Overseas, further activity declines will occur but will be limited, while the pricing concessions made in the first half of the year will affect revenues in the second half. The current volatility in the oil price makes it unlikely that our customers will sanction any major increases in expenditure. We are aware that a number of projects are continuing to be postponed or cancelled. We are also concerned that higher finding and development costs of new supply, coupled with lower oil and gas prices and more restricted credit markets, is stifling investment flows. This situation, if it persists, will lead to inadequate supply when demand growth returns. The shape of the economic recovery beyond 2009 and the consequent recovery in oil and gas demand remain the determining factors for future activity increases.

Thank you and I will now hand the call back to Malcolm.

Malcolm Theobald

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

Question-and-Answer Session

Operator

(Operator Instructions) Great thank you. Ladies and gentlemen if you do wish to ask a question please press the * followed by the 1 on your touchtone phone. You’ll hear a tone indicating that you’ve been placed in queue and you may remove yourself from queue by pressing the pound key. If you are using a speakerphone you may need to pick up your handset before press the * then 1. Also due to time consideration we do ask that you please limit yourself to one question and one follow up per turn. And our first question today comes from the line of Kurt Hallead with RBC. Please go ahead.

Kurt Hallead - RBC Capital Markets

Good morning or good afternoon in Europe.

Andrew F. Gould

Thank you, Kurt.

Kurt Hallead - RBC Capital Markets

Andrew, at the end of the first quarter, you referenced that the cycle was progressing very similar to the prior cycle periods and that that would lead you to reason that the international markets from a volume standpoint could lead lower into 2010 and I noticed in the commentary that you had here today that your international reference points were really focused on the second half of 2009. So, I was wondering if you could kind of update us on your thoughts as to whether your thoughts have changed and if so, how as you kind of look out beyond 2009 from an international volume standpoint?

Andrew F. Gould

Well, I don’t think my thoughts have substantially changed. If there is an element of doubt in predicting beyond the end of the year, it is the fairly rapid recovery that is taking place in the oil price. As I said in the comments this time, I think that there’s too much volatility in the oil price at the moment to sanction much increase in spending. But if at the end of the year it persists at the higher end of the range that we’ve seen so far this year, then I do think that it might, if you like, not lead to the same reduction in activity next year that I was perhaps originally thinking of. But it really, really, does depend on where the oil price is at the end of the year and not where it is now.

Kurt Hallead - RBC Capital Markets

Okay. That’s great, I appreciate that color. Now, my follow-up is you made some explicit reference here to some deferrals of revenues in Venezuela and we know obviously the mess that country has been in. Can you give us your updated view on what you see as the prospects of any recovery in Venezuela? And can you update us on the receivable situation there, please?

Andrew F. Gould

During the quarter, we made very satisfactory progress on the receivables situation. And we also made considerable progress on the renewal of three major contracts but we were not able to book the revenue in the second quarter because the actual inking hasn’t been done and therefore there was a fairly large sum of, fairly large amount of revenue that was deferred to the third quarter. As to the overall levels of activity in Venezuela over the coming months, it’s a little early for me to say what I think PDVSA is going to do but certainly the general situation in terms of receivables and contracts has shown a marked improvement over where we were at the end of Q1.

Kurt Hallead - RBC Capital Markets

Okay, great. Thank you.

Operator

Great thanks and we have a question now from the line of Michael LaMotte with JP. Morgan. Please go ahead.

Michael LaMotte - JP. Morgan

Thanks and good afternoon. If I could ask quickly on the OGX contract, and maybe talk about the differences between this structure and a typical IPM contract and whether or not there are other offshore opportunities like this out there?

Andrew F. Gould

So the difference is that whereas what we are providing in the OGX contract is very similar to what we would provide in a classic IPM, obviously the size of the amount and the risk involved means that we cannot take the same risk as we do in land IPM contracts. So this is somewhere between IPM and bundled services. So there’s not perhaps the same scope for incremental due to performance but the actual rate, the remuneration is a lot better than it would be in a basic IPM contract and we are providing a lot of the technical services around the development, as we would do in IPM. And yes, there are other opportunities of this type.

Michael LaMotte - JP. Morgan

In terms of market size, if I think about IPM opportunities on land versus this type of thing offshore, is this an emergent market? Is this a big market that is just, you get a little bit of share into? What’s the penetration rate?

Andrew F. Gould

I think there are two. So firstly, I don’t think this is a huge market. It’s obviously a very profitable market because it’s deep water. I think that the market falls into two types of market. The first is the OGX type where there is a definite wish to harness the Schlumberger technical expertise. The second type where this occurs is the remote market where a customer doesn’t have any infrastructure whatsoever and rather building a complete infrastructure, so this would typically be more in exploration or the delineation than in development, they will ask Schlumberger to manage a lot more of the process than we would in a normal offshore operation.

Michael LaMotte - JP. Morgan

Great, second question on Russia, I’m intrigued by your comments that the improvement was not just seasonal. Would you care to elaborate and perhaps talk about how you would characterize Russia today in the recovery?

Andrew F. Gould

Well, I think that, to be honest, there were two events which are not seasonal. The first is the fact that the Ruble exchange rate improved considerably against the dollar. And the second is that the Russian oil companies who count in Rubles, obviously their first quarter results were huge. Therefore, there is more cash to invest and perhaps a greater willingness to invest than there was in the fourth quarter of last year. So I think that it’s probably very definitely sustainable through the rest of this year. In addition, I understand there’s a probably change in the tax law, so I think that while it’s not going to be gangbusters, there is the scope of considerably more investment in Russia than we originally thought.

Michael LaMotte - JP. Morgan

That’s great. Thanks, Andrew.

Operator

Thank you and our next question then comes from the line of Ole Slorer with Morgan Stanley. Please go ahead.

Ole Slorer - Morgan Stanley

Thank you very much. Andrew, you mentioned that it sounds like you are quite concerned about the 2010 cost outlook for oil supply, given the current delays in investment trends that you are seeing out there. Would you care to elaborate a little bit more because we just had the IEA come out and increase their estimates on an OPEC production and could you just sort of talk a little bit about how you might differ or agree or what you see?

Andrew F. Gould

Well actually the thing that worries me more than anything else, and that’s why when I answered Kurt’s question, I stressed the level of the oil price so much, is our customers’ cash flows because even our very largest customers are having to borrow or dip into their war chests to sustain their spending and they will only go on doing that for a certain period of time. And therefore if we don’t have a fairly substantial improvement in the oil price by the end of this year then the risk is that the cash flows will be such that they will not actually increase at all in 2010. So that’s why I am so insistent that it hinges on the level of the oil price at the end of this year. Now, in terms of supply, you have seen the easy stuff go away, the heavy oil and the tar sands and all the rest of it, which is a fairly substantial chunk of production that was originally included in the sort of 2012 estimate, and I think what we are seeing now is a very definite caution on the part of our customers which leads them to postpone fairly substantial projects and if they don’t see an increase in their cash flow, they are going to go on doing that and my point is that if that happens, it’s just going to accelerate the supply decline and if that occurs at the moment when demand starts to grow, the crossover could be quite valid. I don’t comment on the IEA’s forecast.

Ole Slorer - Morgan Stanley

Okay, so if the oil price continues to drift higher with an economic recovery gaining traction, under that scenario how do you see the outlook?

Andrew F. Gould

Then I think there will be some time in 2010, and please don’t try to tie me down to the exact day Ole, sometime in 2010 our customers will gain sufficient confidence to start to rebuild activity. But please don’t, I do not think that’s in 2009 and I do think that’s in function of the oil price and their cash flows as they see them going into 2010.

Ole Slorer - Morgan Stanley

Just one more follow-up question on WesternGeco, you mentioned for the first time now CSEM and the TM integration with you. Could you talk a little bit about the scope to use this as a tool to maybe withstand some of the general margin and pricing pressures that you highlighted in seismic in general?

Andrew F. Gould

I think that the capacity to do the integration is going to lead to a higher value, multi-client product and therefore a better priced multi-client product. That’s the scope I see for it at the moment, Ole.

Ole Slorer - Morgan Stanley

Thank you.

Operator

Thanks and our next question then comes from the line of Bill Herbert with Simmons. Please go ahead.

William Herbert - Simmons & Co

Thanks good morning. Andrew, getting back to the roadmap, if you will, for non-North American margins, recognizing that 2010 is certainly opaque and there’s enough uncertainty with regard to the remainder of 2009 but quarter-on-quarter, you are down about 170 basis points internationally. By year-end, what do you expect within a range, the margin contraction to be into non-NAM realm? And to sort of frame it for you, Andrew, just very quickly, one of your peers suggested that international margins would be down 300 to 500 basis points within the next two to four quarters and I’m just curious as to whether you ascribe to that view.

Andrew F. Gould

I don’t think that’s an unreasonable position to take.

William Herbert - Simmons & Co

Okay.

Andrew F. Gould

I don’t know whether they will go that far but that really is going to depend a great deal on what, if you say two to four quarters, it’s really going to depend a great deal on what activity looks like in the back-end of that.

William Herbert - Simmons & Co

Right. Because if I recall correctly here, the first quarter, your prophecy for non-North American margins was a typical eastern hemisphere correction, if you will, 18 months taking to unfold, margins down basically 50% from the recent peak, which would imply margins somewhere in frankly the high-teens and margins to bottom either first or second quarter of next year. And if you are suggesting 300 to 500 basis points from here and you are thinking that that could be on the high-end with regard to the rate of margin contraction, it sounds like you are a little bit less, what’s the right word, I guess pessimistic with regard to where margins are going to bottom.

Andrew F. Gould

I think in what I know today, that’s for the rest of 2009, it is probably reasonable to assume I am a little less pessimistic. However, I would put this big, big rider on whether or not that we have another leg down in 2010 because activity, because our customers’ cash flow or our customers’ consolidating, or whatever else they do, means that there is another leg down in activity in which case, I would become much more pessimistic.

William Herbert - Simmons & Co

Understood. Second question relates to North American margins, I mean, clearly everybody is sort of enduring a lot of duress for reasons that we all know. You are taking a lot of costs out of the system. The North American, at least the U.S. recount is groping for a bottom; Canada, seasonal recovery. It looks like most of the pricing woes are behind us, although you are going to get some quarter-on-quarter flow through. Should we expect margins, assuming that activity basically is not going to take another significant leg down, that margins have essentially bottomed for you in North America?

Andrew F. Gould

I am going to be very bold and say that Canada will improve on the basis of some modest seasonal rebound and North America I don’t think will go any lower.

William Herbert - Simmons & Co

Okay, great. Thank you very much.

Operator

Great thank you and our next question then comes from the line of Daniel Pickering with Tudor Pickering Holt. Please go ahead.

Daniel Pickering - Tudor Pickering Holt

Good morning. I just want to clarify a comment that you made, Andrew, in your remarks where you talked about, or I think Simon maybe said that Canada and the U.S. contributed equally to the correction in margins from Q1 to Q2. Does that mean they were both down the same amount in dollars or percent or I just, it would make a very big decline in Canada if it was the same dollar amount.

Simon Ayat

No, it’s in the percentage term, Dan. If you take the drop that we experienced from Q1 to Q2, the major part of it is a split equally between Canada and U.S. land, yes.

Andrew F. Gould

And in percentage terms.

Simon Ayat

Yes.

Daniel Pickering - Tudor Pickering Holt

Okay. Thank you. That helps. And then Andrew, last quarter I asked you about whether or not we could make more money in 2010, Schlumberger corporate entity than we did in 2009 and you said it didn’t seem logical that you would. As I look at the world today, oil prices are better, as you mentioned. North America is maybe a little bit worse. Pricing issues, there’s a lot of mix issues going on for Schlumberger. I mean, has your view changed? Is it not logical to make more money next year or is it not possible?

Andrew F. Gould

Well, an awful lot will depend what happens in North America, because we could hardly make less. And then again, it comes back to all the, everything I said to everybody else about what is the oil price going to do towards the end of this year. I mean, there is one element of this cycle that we don’t understand yet and it’s a logical element in every cycle and that is what do our customers do when their cash flows really start getting crimped? So the hedge has run out, they need to go to the bank or cut their dividends or whatever else they need to do to fund their projects. Do they do that or do they cut their projects? And that really is going to depend on their perspective of oil prices towards the end of this year. Then the next logical phase in any cycle is that they start to consolidate. And we actually haven’t seen very much of that.

Daniel Pickering - Tudor Pickering Holt

Yet to be determined.

Andrew F. Gould

To be determined, that’s the big rider on where the oil price is in the last quarter of this year.

Daniel Pickering - Tudor Pickering Holt

Okay. Thank you.

Operator

Great thanks and the next question comes from the line of Geoff Kieburtz with Weeden. Please go ahead.

Geoff B. Kieburtz - Weeden & Co

Thanks good afternoon. Andrew, you’ve several times described this sort of huge uncertainty that faces us toward the end of the year as to what customers are going to do, based on in your view, what oil prices are doing at the time. How do you manage Schlumberger with that sort of uncertainty? You’ve got cost-cutting efforts going on, you’ve reduced headcount. Do you do more of that and take a chance that you don’t have enough, if the activity picks up or do you hold on and take the risk that if it’s weaker, your profitability suffers?

Andrew F. Gould

We would I think in these circumstances, having gone where we’ve gone with the headcount, hold on.

Geoff B. Kieburtz - Weeden & Co

Okay.

Andrew F. Gould

Now, we do have a volume of skilled people who have been put on leave of absence. So I am not going to tell you how many but we could call back a considerable body of people on one month’s notice. So we have a considerable body of people who badly needed a rest, Geoff, because they’ve been working very hard for the last three years, who have gone on an intended leave of absence.

Geoff B. Kieburtz - Weeden & Co

Okay, all right so you have kind of an option there. And does that option expire?

Andrew F. Gould

After one year, so it’s not, it’s towards the middle of next year.

Geoff B. Kieburtz - Weeden & Co

Okay and a second question is as you reference the uncertainty about what your customers do in regards to consolidation, how do you look at the oilfield service market in terms of current conditions and consolidation or M&A opportunities?

Andrew F. Gould

I think if North America remains sort of bumping along the bottom for the next six months, then you will see some consolidation in the industry. I’m not saying it’s going to be us. I’m just saying that I think the bumping along the bottom for the next couple of quarters will tire, wear some people out.

Geoff B. Kieburtz - Weeden & Co

Could it conceivably be Schlumberger?

Andrew F. Gould

Well, we are always open for a good opportunity but the opportunity has to be real and material and I’m not sure that we are going to see that because as you know, what we can buy is quite limited.

Geoff B. Kieburtz - Weeden & Co

Okay. Thanks very much.

Operator

Thank you and we have a question now from the line of Mike Urban with Deutsche Bank. Please go ahead.

Michael Urban - Deutsche Bank

Thanks good afternoon. Andrew, I would generally agree with your comment that I wouldn’t expect your customers to reopen ’09 budgets based on where we are today but I am a little surprised that maybe some projects that had been budgeted but delayed aren’t potentially moving forward or delayed maintenance or deferred maintenance not moving forward, because those are pretty short lead times and high impact activities with the oil price, where it is. I was wondering if you could comment on that a little bit.

Andrew F. Gould

I think if you’re talking about work over, I think that’s quite work over projects, production enhancement, enhanced maintenance, all the rest of it absolutely. They may loosen up a few more dollars. I was talking about a net increase in the number of projects. I don’t think you are going to see any major projects sanctioned until there’s a much greater confidence, degree of confidence over the stability in the oil price. I mean, it’s bounced around by a considerable amount already this year. It’s been up, down, now it’s up again. They are going to want to see some boundaries on it before they commit.

Michael Urban - Deutsche Bank

Okay, but some of the marginal stuff is kind of shaky.

Andrew F. Gould

Yes.

Michael Urban - Deutsche Bank

Okay all right, great. And then the follow-up would be, obviously the international markets aren’t necessarily monolithic and you’ve talked about Russia increasing a little bit. So if you are talking about still a net decline on the major project side, I mean, what’s going to be a little better or a little worse over the balance of the year?

Andrew F. Gould

Well, I think that for example if the oil price holds up where it is, there will be, the North Sea will be a little bit better than we thought but that’s from it being way down. Then I think that certain parts of Southeast Asia may be a bit better than we thought. I don’t think it’s, it may be a little, it may help North Africa a little bit, particularly Algeria. It may help even parts of South America a bit. But this is, yes, it’s nice to have but it’s not going to move the needle in the industry if people spend a little more money on work over.

Michael Urban - Deutsche Bank

I was referring to your comment about continued declines in activity level. Some of those things are…

Andrew F. Gould

Continued decline?

Michael Urban - Deutsche Bank

Yeah, than what’s worse, those things are a little better.

Andrew F. Gould

Well, what is worse is if in some of the very big projects, some of the partners say we don’t want to do the next phase and all the other partners say if you’re not going to do it, we’re not going to do it either. And we haven’t seen a lot of that yet but I have heard some of our customers say if X doesn’t follow, we won’t follow either. So this is where I talk, this is where I start to talk about strain on the cash flow.

Michael Urban - Deutsche Bank

Okay got it. Thank you.

Operator

Thanks and our next question comes from the line of Daniel Boyd with Goldman Sachs. Please go ahead.

Daniel Boyd - Goldman Sachs

Hi thanks. Andrew, when we look at the breakdown of international margin pressure going forward, I would assume that some areas such as land may have felt the impact of lower pricing sooner, just because it’s shorter cycle, whereas price concessions on longer term projects such as deep water may have not actually flowed through results yet, as you pointed out, that’s still to come. Can you comment on what you are seeing here and how that might impact different geo markets?

Andrew F. Gould

Well, I think actually you need to segregate it more by customer than by type of project because the IOCs have been very quick to react and quick to implement price negotiations, whether it be off-shore activity or land activity. So it’s more, if you like, where you have strong concentrations of IOC activity that we, that the price concessions have been greatest than by any particular type of activity. That’s why, for example, you take somewhere like the U.K. sector of the North Sea or West and Southern Africa, which is largely dominated by large companies, that the pricing pressure is a lot greater.

Daniel Boyd - Goldman Sachs

Okay, that’s helpful. And then as an unrelated follow-up, when we look at North America, can you comment on your ability to remove capacity from the market outside of just pressure pumping? And do you see that as an opportunity?

Andrew F. Gould

Well, I mean, we do relocate assets in the other segments, so Drilling & Measurements and Wireline, a lot of the assets that are in North America are going to fill CapEx requirements in overseas geo markets and therefore reducing the CapEx that we use overseas. It’s a lot more difficult with prime movers, so it’s a lot more difficult to more trucks around the world, for example, than it is to move tools, partly for regulatory reasons and partly because it’s just a lot more expensive. So you might park it.

Daniel Boyd - Goldman Sachs

Okay. Thank you.

Operator

Thanks and our next question then comes from the line of Jim Crandell with Barclays. Please go ahead.

James Crandell - Barclays Capital

Andrew, could you give me your current views on Iraq? How quickly you think that activity could ramp up with both the NOCs and the IOCs, and then do you think this business could be a $1 billion business for you in the next year or two?

Andrew F. Gould

So I think that, so firstly, what are we doing in Iraq? We are currently constructing a base in the southern oilfields on speculation. We don’t have contracts to justify that base. On the basis that when activity does come back in serious amounts, that’s the best physical location to be in. We are, as our competitors have remarked, talking to everybody. The security conditions under which we are operating are still really at a margin of what we could do safely. We probably on a well site visit will have as many security people as we do people doing operations. And I think that the likelihood is that the first activity we will see is going to be with the Iraqi National Oil Company’s oil fields. And I think it’s likely to really only make a difference next year and I think the chances of being at a $1 billion business in two years is zero.

James Crandell - Barclays Capital

Really? Okay, a follow-up question as it relates to North American results here in the first quarter, and I guess it struck me that due to your stronger competitive position in deep water and in Alaska that break-even results must be viewed as disappointing to you, and was this in large part because the pricing deteriorated in some of your core businesses a lot more than what you would have thought?

Andrew F. Gould

I think that actually the shelf, the Gulf of Mexico was quite disappointing because of the reduction in shelf activity. I think that we were disappointed with U.S. land. It is largely a matter of pricing and it is across most of the segment. But we were badly hurt in Canada too, by both activity and pricing.

James Crandell - Barclays Capital

How did pricing trend? How was pricing, Andrew, versus your expectations in businesses such as Wireline and MWD directional?

Andrew F. Gould

I think with Wireline, everyone was a bit surprised by the amount that Wireline pricing declined but then the decline in activity in Cased Hole was so great that we shouldn’t really have been that surprised. And in Drilling & Measurements, I don’t think there was, I don’t think that the pressure was nearly as bad as it was in the other segment.

James Crandell - Barclays Capital

Okay. Thank you.

Operator

Thanks and our next question comes from the line of Bill Sanchez with Howard Weil. Please go ahead.

William Sanchez - Howard Weil In

Morning Andrew.

Andrew F. Gould

Morning Bill.

William Sanchez - Howard Weil Inc

I just wanted to follow back up and I think you touched on it but just to be clear, you mentioned about the pricing renegotiations that took place in the first half, impacting your second half international results. I’m just curious today, are we still at a point in some markets where that has completely abated as it relates to renegotiating existing term contracts or has it just moderated in certain areas? Are there still areas where it’s just as strong today as it was say three or six months ago?

Andrew F. Gould

Well, I think that unless there’s another leg down, we finished, pretty much finished the price renegotiations with all our major IOC customers. But a lot of those negotiations are only finished during the second quarter, so the pricing effect is going to be seen in the third and fourth quarter. And that I think largely, those renegotiations are done. The rest of it will I think be the rollover of tenders, which as you know takes much longer to work through the system, which is why I’ve always said that I think there’s no reason why this cycle would be particularly different from any other cycle and the full effect will take 18 months to work itself through the system. But for the major customers, most of the renegotiations were done in the first half here.

William Sanchez - Howard Weil Inc

Okay. I guess one follow-up, you talked about your thoughts on IPM, I guess, and on the last quarter call and the balance between owning rigs and not owning rigs and successes you could have in IPM going forward, any changes there to your thoughts? I know potentially there’s another competitor, I guess, on the service side coming in on Chicontepec now. Just your thoughts maybe in Mexico incrementally going forward, just kind of your IPM views going forward in terms of owning rigs versus I guess using more of a managed services approach here going forward.

Andrew F. Gould

Firstly, I don’t think there’s one answer to the thing because as the world develops, particularly in countries where the economies are becoming more sophisticated, the issue of local content is going to become greater and greater and the capacity to import particularly a piece of equipment like a rig that’s available on the market is going to become more and more difficult. So generally, we will favor a managed services approach. In terms of Chicontepec, we have an exposure which I would not want to increase. I feel quite comfortable where we are for a number of reasons and therefore I’m not surprised and I’m not at all surprised to see more and more contractors trying to break into that market.

William Sanchez - Howard Weil Inc

Thank you, Andrew.

Operator

Thanks and our next question then comes from the line of Waqar Syed with Tristone. Please go ahead.

Waqar Syed - Tristone Capital

Andrew, could you comment on the timing of Saudi gas initiatives? When do you think they could pick up rigs as they have laid off some oil rigs but on the gas side, they’ve been talking about it. When do you think that actually could materialize?

Andrew F. Gould

Well, I think there already has been a considerable shift of rigs, land rigs to gas exploration. That’s taken place. It took place in the first quarter on the end of last year and offshore, there is no doubt that the bulk of the rigs and any increase they do in offshore rigs is going to be focused on gas development, as they have a number of reasonably successful discoveries. So, I don’t think…it is happening. I don’t think it’s about to come.

Waqar Syed - Tristone Capital

Okay and in terms of revenue per rig, how does that compare in Saudi Arabia between oil well and on a gas well? How does the revenue and margins kind of change between the two?

Andrew F. Gould

Well, like anywhere else, if the gas wells tend to have more revenue per rig, not necessarily the same percent, level of profitability or return on sales, and in terms of Saudi, in terms of oil wells, it depends very much what type of oil well you are talking about. If you are talking about a 6,000 foot development well on Ghawar, the revenue is not very high. If you are talking about a very complex horizontal well on Manifa, it’s a very different point of view. So you can’t draw a general rule. But as a general rule, the same ratio of better revenue on a gas well applies in Saudi Arabia as it does anywhere else.

Waqar Syed - Tristone Capital

Okay, and then on unconventional gas outside of North America, what are you seeing in terms of activity and how do you, when do you think it’s going to become a material business?

Andrew F. Gould

Well, I think that there’s no one answer. For example, you can see already that a lot of the coal bed methane work in Australia is already being tendered. If you are talking about shale gas, North America type, the cost of development overseas is going to be very different from what it is in North America. And the chief reason is because North America already has the most developed oil field service infrastructure in the world and therefore rigs, frac fleets, water carriers, all the rest, and the availability of water for this business is something that’s very well understood, whereas that is, with perhaps the possible exception of Germany and Austria, that is not at all the case overseas and therefore we think it will happen but we don’t think it’s something that’s going to spread everywhere very fast. If it does start reasonably quickly, we think it’s probably going to be in Eastern Europe.

Waqar Syed - Tristone Capital

And how about the tight gas initiative in Saudi, is that, how advanced is that?

Andrew F. Gould

Sorry, what do you mean?

Waqar Syed - Tristone Capital

Saudi Arabia was looking at drilling the tight gas reservoirs and has the process started?

Andrew F. Gould

Well, we have had a tight gas center of excellence in our research center in Dhahran for over a year now, staffed largely by specialists from North America, so, I mean, we consider that something that is thoroughly underway.

Operator

Great thanks. Our next question comes from the line of Brad Handler with Credit Suisse. Please go ahead.

Brad Handler - Credit Suisse

Thanks. Could you please speak to the CapEx, modestly lowering of CapEx guidance for ’09 relative to last quarter? Are we looking at cost savings or have you made some adjustments to the CapEx program?

Andrew F. Gould

I think we are largely looking at back-filling with transfers from idle CapEx in other markets. And I don’t think you can talk about cost-savings yet. I do think actually that it is possible that that continues and it drifts a bit lower over the balance of the year.

Brad Handler - Credit Suisse

Okay that’s helpful. That seems to make sense on the oilfield side. On the seismic side, at the WesternGeco, are you deferring some of the CapEx on the new vessels?

Andrew F. Gould

No, we’re not hurrying but we are not deferring them. We are completing them as and when it’s reasonable to do so without incurring additional cost. So we haven’t, with the exception of certain vessels that we did not take delivery of on the leases, we are not deferring any of the CapEx on the owned vessel.

Brad Handler - Credit Suisse

Thanks and for the follow-up, or unrelated follow-up, on the M&A side, $186 million in the quarter, I think we saw a press release on Techsia. Can you give us some information about, I’m going to guess that that wasn’t all for Techsia. Can you give us some information on what else you bought?

Andrew F. Gould

Yeah the rest was a couple of small technology related companies in Russia.

Operator

Thank you and our next question then comes from the line of Robin Shoemaker with Citigroup. Please go ahead.

Robin Shoemaker – Citigroup

Thank you. Andrew, I wanted to ask if in your comment about the postponement of projects, or delay or cancellation, do deep water drilling and development projects, are they also in that category?

Andrew F. Gould

They actually have been surprisingly resilient. So yes, we’ve seen some postponement but not cancellation. So for example, we do see a lot of contracts that will actually come into operation in deep water in the second half of 2010 and in 2011. There’s been very little actual cancellation, where there has been another movement which I think I talked about last quarter, Robin, is a shift from exploration to development on the basis that development produces cash flow.

Robin Shoemaker – Citigroup

Okay, and just staying on that theme then, in your position, market share in deep water prospectively with the rigs that will be entering service over the next couple of years, how do you feel about your market share in various product lines with regard to the installed equipment and awards that may not have already been made?

Andrew F. Gould

Well, I don’t know about awards that have not already been made. What I can tell you is that on awards that have been made for known, for projects that are known and have been tendered, I am very, very satisfied with the market share that we have.

Robin Shoemaker – Citigroup

Okay. All right, that’s good for me. Thank you.

Operator

Thank you so much and our next question then comes from the line of Pierre Conner with Capital One Southcoast. Please go ahead.

Pierre Conner - Capital One Southcoast

Good morning, Andrew. Andrew, on the premise that your answer to Dan’s earlier question about capacity in North America was excluding pressure pumping, I wanted to get your take on that, on North America pressure pumping capacity. Other players in this market have discussed retirements and would you care to talk about your plans?

Andrew F. Gould

Well, I mean, we do some retirement and we are doing some mothballing, so, and as I think my competitor described, that has a lot to do with the condition of the equipment and the cost of refurbishing it or not refurbishing it, and the fact that some of these massive frac jobs chew up equipment, as I think they put it, much faster than traditional fracs. But today we have a mix of retirement and mothballing.

Pierre Conner - Capital One Southcoast

And my assumption is that that retirement and mothballing then has increased with the current market and a shift towards higher intensity fracking?

Andrew F. Gould

Yeah, and it’s still going on.

Pierre Conner - Capital One Southcoast

Okay, and then my unrelated follow-up actually has to do with the pricing in marine. I wanted to understand, you have a backlog and I am assuming you are executing against that backlog. Is there active renegotiation on contracts underway or help me understand the mechanics of that.

Andrew F. Gould

Actually, there has been very, very little attempt on the part of our customers to renegotiate seismic contracts that are being executed. They have of course pushed them out or trying to shorten, where they can do it, shorten the duration. But actually renegotiating price, they have not really been trying to do that, probably because they have a fairly clear optic of how far they are committed. But obviously when they re-tender or when they do tender, and in fact there is quite a surprisingly high level of marine tendering going on, then they expect much lower prices.

Pierre Conner - Capital One Southcoast

Okay.

Andrew F. Gould

So the backlog is being renewed but at a much lower price, Pierre.

Pierre Conner - Capital One Southcoast

I understand, thank you gentlemen.

Operator

Great thank you and then we have a question from the line of Kevin Simpson with Miller Tabak. Please go ahead.

Kevin Simpson - Miller Tabak & Co

Thanks. So Andrew, I am going to ask you a very macro question, an opinion which maybe you’ll want to duck. Is that price that you are speaking of in and around $60 for West Texas or whatever light sweet crude which would give them a $10 cushion, or can it be somewhat lower?

Andrew F. Gould

In my opinion, it’s higher, Kevin.

Kevin Simpson - Miller Tabak & Co

Higher than 60?

Andrew F. Gould

In my opinion, it’s more like 70.

Kevin Simpson - Miller Tabak & Co

So if we…

Andrew F. Gould

Because their costs have gone up, because borrowing costs have gone up as well, government tax take has gone up, 60 is okay but it’s not going to lead to a rash of new activity whereas I think 70 might be a lot more encouraging.

Kevin Simpson - Miller Tabak & Co

Okay, and then an unrelated follow-up as well, the uptake of your value-added technologies relative to prior down cycles, it seems like you are holding up better, maybe with the Petrel platform a little more integrated into the decision-making process. And then the same with a cue, differential edge and data acquisition, I mean, would you, what’s your take on…

Andrew F. Gould

I think so probably a bit better but not much, Kevin because our customers have become extremely cost-sensitive and therefore the first thing they do is tell their engineers they are not allowed to buy the bells and whistles. But certainly in the domain of software, Petrel, the penetration of Petrel in the market continues to be extraordinary because it brings our customers immediate efficiency. It’s not price sensitive because it brings them immediate efficiency. But under more traditional services, I would say this is pretty much like any other cycle.

Kevin Simpson - Miller Tabak & Co

Okay, so a little better on some of the incremental software. But okay, thank you very much. That’s it for me.

Operator

Thanks. Our next question then comes from the line of Guillaume Delaby with Société Générale. Please go ahead.

Guilome Delabe - Société Générale

Yes I think my questions have already been answered, so no need to ask it.

Operator

Great thank you so much. Then we go to the line of Rob MacKenzie with FBR Capital Markets. Please go ahead.

Robert MacKenzie – FBR Capital Markets

Thank you. Andrew, I have a question you may not want to answer, given the sensitivities but I’ll ask it anyways. There’s been a lot of talk in Washington, the D.C. area here around potentially increasing regulation on hydraulic fracturing, still very unknown what the outcome is but can you give us a handicap as to where you see that issue going and the potential effects, i.e. potentially even positive or negative, positive potentially for Wireline and other analysis tools and negative obviously on pressure pumping.

Andrew F. Gould

I think that obviously the situation with natural gas in the United States is such that having discovered or unlocked this enormous, huge resource, there’s going to have to be a solution to be found. Now, whether the solution will be positive or negative I don’t know because the one thing you can be sure of is it’s going to increase the cost. To the extent that the solution goes through some form of reporting and monitoring and all the rest of it, I am pretty sure that it will get pushed off onto the service industry. But whether or not we will be able to charge for it I think is going to depend on market fundamentals. But common sense normally prevails and unlocking this resource is a huge positive for the United States’ domestic energy balance and therefore I am sure that some form of solution will be reached.

Robert MacKenzie - FBR Capital Markets

Okay, thanks. That’s all I had left.

Operator

Great thank you very much and that does conclude our question-and-answer portion of today’s call. I would like to turn the call back over to Malcolm Theobald. Please go ahead, sir.

Malcolm Theobald

On behalf of the Schlumberger management team, I would like to thank you for participating in today’s call and we will now turn the call back to Ken.

Operator

Thank you so much and ladies and gentlemen, this conference will be available for replay starting today, Friday, July 24th, at 10:30 am Central U.S. Time through Monday, August 24th at midnight Central Time. And 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 of 100984. 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 100984. And that does conclude our conference for today. Thank you for your participation and for using AT&T’s executive teleconference. You may now disconnect.