Schlumberger Q4 Earnings Call Transcript

123jump.com Staff
25 Jan, 2010
New York City

The oilfield services provider quarterly revenue declined 16% to $5.74 billion. Net quarterly income slumped 31% to $795 million reflecting a downswing in the Oilfield Services and WesternGeco revenues. Earnings per share dipped to 65 cents from 95 cents a year-ago quarter.

Schlumberger Limited ((SLB))
Q4 2009 Earnings Call Transcript
January 22, 2010 9:00 a.m. ET

Executives

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

Analysts

Ole Slorer - Morgan Stanley
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
Alan Laws - BMO Capital Markets
Kurt Hallead - RBC Capital Markets
William Herbert - Simmons & Company International
Daniel Boyd - Goldman Sachs
Geoff Kieburtz - Weeden & Co.
James Crandell - Barclays Capital
William Sanchez – Howard Weil Inc.
Bradley Handler - Credit Suisse
Robin Shoemaker - Citigroup
Pierre Conner - Capital One Southcoast
Marshall Adkins – Raymond James & Associates
Waqar Syed – Macquarie Capital
Scott Gruber – Sanford C. Bernstein & Co.
Kevin Simpson – Miller Tabak & Co., Llc

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger Limited earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, you will press star one to ask a question and we ask that you limit your time to one question and one follow up only. And should you require assistance at any time during this call, please press star then zero. As a reminder, this conference is being recorded. And I''d now like to turn the conference over to your host, Vice President, Investor Relations, Mr. Malcolm Theobald; please go ahead.

Malcolm Theobald

Thank you, Rachel. Good morning and welcome to the Schlumberger Limited fourth quarter and full-year 2009 results conference call. 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 results and his comments on the outlook, Simon will first review the quarter''s financial results. After the prepared statements we will welcome your questions. 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. And now, I''ll turn the call over to Simon.

Simon Ayat

Thanks, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. Fourth quarter income was $0.67 per share, this is up $0.02 sequentially and down $0.36 compared to the same quarter of last year, excluding the $0.08 of charges we took in Q4 of last year.

Turning to the business segments, Oilfield Services fourth quarter revenue increased 4% sequentially, while WesternGeco revenue increased 19%. Roughly one-third of the sequential increase in OFS is attributable to the traditional year-end surge in product sales.

Oilfield services pre-tax operating income of $1 billion decreased 3% compared to the prior quarter. Oilfield services margins declined by 157 basis points sequentially to 19.5%, as improvements in the Middle East and Asia was more than offset by declines in North America, Latin America, and Europe/CIS/Africa.

Overall international margins in OFS were 23.4%. By area Oilfield services sequential pre-tax operating margins highlights were as follows. North America declined by 129 basis points to 2.1% as increased activity in the US Land and Gulf of Mexico GeoMarkets were insufficient to increase the impact of less favorable revenue mix in Canada and lower activity in the Alaska GeoMarket.

Latin America decreased by 254 basis points to 15.8% primarily as a result of the reduced activity and the less favorable revenue mix in the Mexico/Central America GeoMarket. Europe/CIS/Africa margin was 21.6%, 208 basis points lower principally due to lower activity in Russia as a result of year end customer budgetary constraints.

Finally, Middle East/Asia margin improved by 66 basis points to 32.4% primarily due to the positive impact of a more favorable mix of deepwater and exploration related activity and year-end software sales.

At WesternGeco, pre-tax income of $115 million reflected an increase in pre-tax margins of 776 basis points to 20.9%. This increase was largely attributable to year-end multi-client sales partially offset by the impact of the lower pricing and the project delays in marine.

Now turning to Schlumberger as a whole, the effective tax rate was 17.6%. This was lower than last quarter primarily due to more favorable geographic earnings mix. As we have previously mentioned and as you saw this quarter, the ETR is very sensitive to the geographic earnings mix and as such we may continue to experience volatility on a quarterly basis.

Net debt was $126 million at the end of the quarter as compared to $660 million at the end of Q3 and $1.1 billion at the end of last year. This improvement was driven by strong cash flows from operations. We ended the quarter with $5.4 billion of cash and investments on hand. In addition, $2.8 billion of committed debt facilities with commercial banks remained unused and were available at the end of December.

This compares to short-term debt of only $1.1 billion which as a reminder includes $321 million of convertible debentures which we expect to be converted to equity by the end of second quarter of 2010. Significant liquidity events during the quarter included $500 million of stock repurchases, $676 million of CapEx and $231 million of pension funding.

We restarted our stock buyback program during the quarter and bought back 7.8 million shares at an average price of $63.91. Our Q4 buyback activity served to offset the vast majority of the dilution caused by our stock based compensation programs during all of 2009.

Oilfield services CapEx is expected to be approximately $2.4 billion in 2010 as compared to $1.9 billion in 2009. WesternGeco CapEx is expected to approach $300 million as compared to $460 million in 2008.

In summary, our balance sheet remains very strong and it continues to provide us with a tremendous amount of financial flexibility. And now I will turn the conference over to Andrew.

Andrew F. Gould

Thank you, Simon. Good morning everybody. Fourth quarter revenue increased sequentially in North America, Latin America, and Middle East/Asia areas as offshore revenue quality improved with increasing deepwater rig count while software and product sales saw the usual fourth quarter strength.

Europe/CIS/Africa area revenue was flat with the previous quarter though stronger offshore activity and year-end software and product sales in the area were not sufficient to offset the seasonal decline in Russia. Amongst the technology, sequential growth was driven by increased deepwater and exploration-related activity leading to demand for wireline testing services and drilling and measurements technologies, while growth was also recorded on land in North America primarily from increased well services activity.

WesternGeco achieved highly satisfactory fourth quarter multi-client revenues due largely to wide-azimuth survey sales in the Gulf of Mexico. I will now turn to the areas in more detail.

In North America, where revenue increased sequentially by 6%, the US Land GeoMarket grew on increased drilling activity. This however was offset by lower pricing for well services technologies. The US Gulf of Mexico GeoMarket revenue was up marginally due to improved shelf activity and the beginning of a build up in the deepwater, but these positive effects were hampered by downtime associated with Hurricane Ida as well as some pricing pressure.

Canada revenue was flat with the previous quarter but of lower quality while Alaska revenue fell sequentially due to a slowdown in activity resulting from operator budget constraints. In Latin America, revenue grew 5% sequentially and in the Peru/Columbia/Ecuador GeoMarket revenue increased primarily on greater demand for drilling and measurements, wireline and testing services, with this demand resulting from increased drilling activity. Higher SIS software sales and artificial lift products also contributed to the growth.

In Brazil, revenue was higher from increased offshore exploration activity as well as from the software sales and completions product sales. The Venezuela/Trinidad/Tobago GeoMarket recorded growth primarily from integrated project management activity while activity in Argentina/Bolivia/Chile was higher due to increased activity and SIS software sales.

These increases however were partially offset by a decrease in Mexico/Central America where revenue that resulted declined as a result of reduced activity. Revenue in the Europe/CIS/Africa area was flat with the previous quarter. In Nigeria and Gulf of Guinea, revenue grew as a result of strong testing services product sales and an increase in exploration activity that led to greater demand for wireline services.

In Western/Southern Africa revenue increased on high demand for drilling and measurement services. The North Sea GeoMarket also recorded growth primarily as a result of increased well services stimulation activity while the Libya GeoMarket revenue increased due to higher deepwater testing services and wireline exploration activity.

These increases were however partially offset by the lower revenue in Russia as a result of client budgeting constraints and seasonal weather effects which mainly affected IPM activity. Revenue was also lower in North Africa on reduced testing product sales and in the Caspian GeoMarket on the completion of drilling campaigns. In the Middle East and Asia, sequential revenue growth of 7% was driven by an increase in deepwater and exploration related activities that led to strong demand for wireline services.

Seasonal artificial lift and SIS software product sales also contributed to growth. As I mentioned earlier sequential revenue growth at WesternGeco was led by multi-clients through strong year-end sales of wide-azimuth surveys in the US Gulf of Mexico. Land revenue also grew due to increased activity in the Middle East and North Africa but overall these increases were somewhat offset by a significant decrease in marine as a result of weaker pricing, project start-up delays, and vessel transits.

Our outlook for 2010 remains largely dependent on the prospects for the general economy. At the end of the third quarter we indicated that we were encouraged that signs were emerging that demand for oil and gas would begin to increase. Consensus forecast now predict that oil demand in 2010 will increase particularly in the developing world for the first time since 2007.

As a result, we feel that oil prices are likely to be sustained at current levels and that as our customers’ confidence grows exploration and production budgets will increase. We feel that considerable leverage to increase investment exists in offshore markets, in Russia, as well as in certain emerging investment opportunities such as Iraq.

These events will be dependent on continued increases in economic growth in the second half of the year beyond the current government stimulus packages. For natural gas activity we remain a great deal more cautious. Despite signs of some recovery in industrial demand and recent cold weather, we consider that worldwide markets remain generally oversupplied.

Increased flows of LNG together with additional capacity being added in 2010 as well as a general uncertainty over the decline rates of unconventional gas production have the potential to limit the current increase in North American gas drilling rig count.

We anticipate that 2010 will be a better year for multi-client seismic and improved activity for land seismic particularly in the Middle East and North Africa. While marine activity will be reasonably robust, pricing improvements will be limited due to continued new capacity additions.

Longer-term, we remain increasingly confident that considerably increased spending will be necessary to maintain sufficient reserves in production of hydrocarbons to meet the world’s need. Our technology portfolio and worldwide infrastructure mean we are strongly positioned to capture growth opportunities as our customers begin to increase their investment.

And I will now hand the call back to Malcolm.

Malcolm Theobald

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

Question-and-Answer Session

Operator

Ladies and gentlemen, if you would like to ask a question, please press star then one on your touch-tone phone. You will hear a tone indicating you have been placed in queue, and you may remove yourself from that queue at any time by pressing the pound key. And again, we ask that you limit your time to one question and one follow up only. Our first question comes from the line of Ole Slorer of Morgan Stanley. Please go ahead.

Ole Slorer - Morgan Stanley

Thank you very much. Andrew, I will kick off with Iraq, you’ve been very cautious in your commentary on Iraq all along. This is the first time we hear you highlighting Iraq as a significant area of opportunity in the way you do now. Can you discuss through what it is that’s changed with respect I presume to timing and magnitude and relative to your previous thoughts?

Andrew F. Gould

Well, the change relative to my previous thinking is the results of the second round. And the time constraints have been put on the operators to reach the initial plateau production. If that timetable is adhered to, then it implies a huge amount of service activity over the next two or three years.

Now, you know I have to have my normal caveats. They are that the election takes place with a satisfactory political result and that some form of oil law is put into place because I still don’t think our customers will make major, major commitments until that happens.

But currently given what they’ve signed, it would seem that there is going to be a considerable increase in activity in Iraq. I don’t think it will have a material effect on results in 2010 but we may well start to see the ramp up in the second half of the year.

Ole Slorer - Morgan Stanley

Can you talk a little bit about how you see Schlumberger being proficient? What are the big obstacles, competitive advantages that you would have in Iraq?

Andrew F. Gould

Well, I’m not going to do that over a phone line where all my competitors are listening, Ole, but we have a very robust plan in place. We have inherited relationships from the past in Iraq. We have everything necessary to operate legally from the past. And the signs are very encouraging that the offering we have is going to be competitive.

Ole Slorer - Morgan Stanley

You mentioned exploration, you mentioned development and it seems in your customer inquiry levels with the spec to kind of the next 12 to 18 months compared to the previous 12 to 18 months, are we going to have an exploration recovery or is it going to be drilling in terms of your product offering of not only seismic but everything else from open hole, wireline.

Andrew F. Gould

Well, I think it will be both but the ratio of new deepwater rigs and the places where they’re going means there will be a lot of, quite a lot of exploration and appraisal. So beyond this year if commodity prices hold where they are I think we will see a recovery in exploration.

Ole Slorer - Morgan Stanley

Thank you very much.

Operator

Next question comes from the line of Dan Pickering of Tudor, Pickering, Holt. Please go ahead.

Dan Pickering - Tudor, Pickering, Holt & Co., LLC

Good morning. Andrew, your capital spending for 2010 is fairly significant uptick. How much impact do you think that’s going to have on 2010 or is this really more of a 2011?

Andrew F. Gould

Dan, we’re counting outside the normal replacement CapEx and some IPM projects and stuff like that, we’re counting that in 2008 we had eight deepwater new builds come into our market, 23 in 2009, and 35 in 2010. Now, you know that they don’t all come on the first of January so you probably have to chop those numbers in half in any one year.

But, what it does mean is there is still significant deepwater CapEx that’s going to come through in 2010 and as you rightly point out a lot of that will be only revenue generating in 2011.

Dan Pickering - Tudor, Pickering, Holt & Co., LLC

If I think about, I’m just - your commentary is I guess a little bit cautious, your actions are more aggressive. I’m thinking about as we look out to 2011 and I realize that’s still a year away but I look back at ’08 and see a $27 million revenue number, we’re clearly lower than that in ’09, we’ll be lower than that in ’10, but is that in the gun sights for ’11 given everything you see and the amount of money you’re spending and the way you think the marketplace is out.

Andrew F. Gould

Well actually, Dan, that depends entirely on North America. I have no doubt we will have a significant upswing overseas but don’t forget the significant drop in our revenue is in North America compared to the $27 billion you’re talking about. North America and seismic, put it that way.

Dan Pickering - Tudor, Pickering, Holt & Co., LLC

Okay. I think I used my two questions. Thank you.

Operator

And our next question comes from the line of Alan Laws, BMO Capital Markets. Please go ahead.

Alan Laws - BMO Capital Markets

Good morning.

Andrew F. Gould

Good morning, Alan.

Alan Laws - BMO Capital Markets

I have a question on the gas side actually, you definitely appear more confident in the oil fundamentals than gas and you mentioned natural gas in the note and your comments, that’s really a challenge. But that wasn’t really clearly a North American comment was what I read into it. How important to global upstream activity do you think an uptick in gas-related activity is?

Andrew F. Gould

We’re not counting on any big uptick in gas-related activity in the next couple of years outside North America. The big Qatar projects have all come on, the Yemen project has come on, there are other projects that are coming on, so yes, you will see a few big gas developments in Asia probably but we’re not counting on a big increase in gas because as I said earlier, worldwide the gas market is substantially oversupplied at this point in time.

Alan Laws - BMO Capital Markets

My follow up is then –

Andrew F. Gould

Can I just qualify that on? There are domestic gas plays that people are doing to substitute energy sources particularly in the Middle East. So in Saudi, Kuwait, Oman, places like that, there is a lot of – Abu Dhabi, there is gas activity, but it is local, it’s not for export, it’s for substitute power sources within the country.

Alan Laws - BMO Capital Markets

Okay. I guess does this modestly or highly contain the potential upside or maybe the pace of what we looks like the beginning of another upcycle here. You had mentioned that North America was going to limit your ability to get to those numbers that Dan had laid out. Is this a bigger deal or just sort of a smaller deal, the international gas activity?

Andrew F. Gould

No, I don’t think - I think it’s a smaller deal than the two factors I mentioned to Dan.

Alan Laws - BMO Capital Markets

Okay. I have one follow up I think. How does international gas activity rank in terms of oil service intensity versus oil or even domestic natural gas activity?

Andrew F. Gould

The sources of gas are becoming so diverse that’s a very difficult question to qualify. For example, most of the Middle East gas is highly toxic. It has very high H2S fractions, a lot of it has high CO2 content and therefore, these are fairly high-cost operations, they’re fairly service intensive and they imply specialized equipment and a lot of measurement to establish what the gas stream consists of.

And then you go to other places like the North West Shelf in Australia where it’s really nice clean gas and they’re less intensive. But overall, I would say in the development phase there is not a great deal of difference.

Alan Laws - BMO Capital Markets

Okay, that’s perfect. Thanks.

Operator

Our next question comes from the line of Kurt Hallead of RBC Capital Markets. Please go ahead.

Kurt Hallead - RBC Capital Markets

Thank you, good morning.

Andrew F. Gould

Good morning.

Kurt Hallead - RBC Capital Markets

Andrew, I was wondering if you would be able to give us some color on some of the pricing trends that are evolving both in North America and international and what kind of an impact that would have on either margin improvement or margin degradation as we move out into 2010.

Andrew F. Gould

As I said in my script, US Land revenues were up but we did not feel any pricing traction in US Land until December. So it didn’t affect the quarter really. The pricing traction we have in US Land particularly in pressure pumping is in the more complex operations where frankly if we don’t get price increases we lose money because we’re tearing our equipment to pieces.

And they are individual contracts and in no way could we today impose a blanket price on our pressure pumping price list. So that trend has continued through the beginning of the year that we have been able to get good price increases on specific operations.

Overseas I would say that we are still feeling some effect from the pricing concessions we made in 2009 but that currently I would say prices in offshore markets are in the process of flattening and I always said - I’ve always said since the beginning of this that the overseas cycle was 18 months and it would probably bottom at the end of the second quarter of 2010 and I would still stick to that story, Kurt.

I think that if oil prices are maintained, if offshore activity recovers somewhat, there will be a little bit more pricing traction in the second half of this year.

Kurt Hallead - RBC Capital Markets

So more a trend 2010 transition year and 2011 inflection.

Andrew F. Gould

Exactly.

Kurt Hallead - RBC Capital Markets

Okay. My follow-up for you Andrew is obviously a lot of noise coming in through Mexico toward the tail end of the year and it appears that they are now in process of signing new incentive based type of contracts. Could you give us some perspective on what those new contracts may mean for opportunities for service companies in Mexico and given the production decline that Mexico is experiencing, what kind of mix of business do you see happening next year?

Andrew F. Gould

So the only incentive contracts I’ve talked about are for production in Chicontepec. I haven’t heard of any others. The Pemex activity we think will swing back more towards the south and we think that a lot more of it will actually be directly controlled by Pemex rather than IPM.

Obviously with a huge amount of equipment that flowed into Mexico when they were ramping up Chicontepec and the subsequent decrease in activity in Chicontepec which is going to happen throughout the year, it hasn’t really happened yet, there is going to be a lot of surplus equipment in Mexico, which will either hopefully I don’t know, flow back to North America or decrease pricing in Mexico and probably a bit of both.

Kurt Hallead - RBC Capital Markets

Okay. Thank you.

Operator

Next question comes from the line of Bill Herbert of Simmons & Company. Please go ahead.

William Herbert - Simmons & Company International

Thanks, good morning. Andrew, I’m struck by the fact that on the one hand that we are I think for good reasons relatively subdued on global gas development prospects over the next few years if I understood you correctly, and yet you juxtaposed that outlook with the Exxon purchase of XTO, increasing IOC participation in Ferber (ph) with regard to shales, how do you reconcile those two.

Andrew F. Gould

I think that the IOCs have generally realized that there are lots of criteria to judge where you invest. One is stable political environment, large domestic market, and new resource and I think the IOCs have realized that there is a substantial new resource in North America and the technology for that resource has been developed in North America and therefore, they are now investing in it. It seems very logical to me.

William Herbert - Simmons & Company International

Okay. Secondly, any update with regard to your perspective on the activity outlook for Russia.

Andrew F. Gould

I think that we would say that Russia was able to sustain its domestic production in 2009 through the addition of new fields in Eastern Siberia, notably Vankor. But at the same time production in Western Siberia decreased fairly dramatically and that they are going to have to spend a lot more in Russia - Western Siberia if they want to sustain their production level in 2010.

That’s why we’re feeling fairly optimistic on Russia coupled with the fact that it will be another good year for us in Sakhalin and there are still quite a few new projects in Eastern Siberia.

William Herbert - Simmons & Company International

Okay. And then Simon, just very quickly do you know what the sequential increase in North American land revenues was?

Simon Ayat

Well, most of the increase we had in North America that really came from land and most of the increase, slight increase from the, 12%.

William Herbert - Simmons & Company International

It was 12%.

Andrew F. Gould

Yes, Q4 over Q3.

William Herbert - Simmons & Company International

Thank you very much, guys.

Operator

And the next question comes from the line of Daniel Boyd of Goldman Sachs. Please go ahead.

Daniel Boyd - Goldman Sachs

Thanks. I have a quick question on WesternGeco. One of your competitors talked about not having available capacity through the first half of 2010, what are you seeing in terms of your forward visibility on the contract side and could the market get back into balance in the back half of ’10 as well?

Andrew F. Gould

I think if we, so you have to remember that we have converted some recording boats to source boats, right, so our actual fleet size for recording is down. Total fleet size is the same but recording boats are down. We have some very large multi-client programs in the Gulf of Mexico which are very well funded. And the rest of our capacity through the half year I think is largely booked up.

But it is not yet; the bidding situation is not robust for us to convert those source vessels back to recording vessels. I think it’s highly unlikely given the amount of capacity that still has to hit the market that the supply-demand will come back into balance in 2010.

Daniel Boyd - Goldman Sachs

Even towards the back end of the year -

Andrew F. Gould

If you’re in November, December of 2010 bidding contracts which will be for 2011 then the situation may be a lot better but I don’t think we’ll reach balance in 2010.

Daniel Boyd - Goldman Sachs

Would you suggest though that margins overall for Geco are up as multi-client starts to come back?

Andrew F. Gould

You know multi-client is a crapshoot, we never know until the last minute. The lead sales this year are good but they’re not great. So we think there’ll be some improvement as I said in my commentaries but how good it’s actually going to be I don’t know.

Daniel Boyd - Goldman Sachs

Okay. I’ll turn it back over.

Operator

Your next question comes from the line of Geoff Kieburtz, Weeden & Co. Please go ahead.

Geoff Kieburtz - Weeden & Co.

Thanks. Andrew, I’d like to come back to the natural gas topic again and specifically your comment about the uncertainty surrounding decline rates, that seems to be fairly significant, could you elaborate on that a little bit. This is the topic most people I think have said these unconventional resources are steeply declining production profiles, you seem to be raising a question about that.

Andrew F. Gould

No, I don’t disagree that there are steeply declining production profiles, but I don’t think we know yet because of the backlog of gas behind pipe that had not be stimulated and completed because of the actual huge increase in the profile of unconventional gas that we really, really know how much it’s going to decline in 2010.

And you know, actually I saw a very good paper from a rival firm Geoff recently, which showed actually LNG has the potential to balance that decline. Gas consumption is Europe is way off. So a lot of that - LNG becomes spot, it has the capacity to offset the decline. Now whether that will happen is another story but that’s why I’m cautious.

Geoff Kieburtz - Weeden & Co.

Okay. And the related follow-up is that you mentioned that you’re beginning in some specific markets to see some pricing traction in the frac business, would these sort of broader trends that you’re referring to put that at risk.

Andrew F. Gould

I think if the rig count plateaus, yes they will.

Geoff Kieburtz - Weeden & Co.

Risk of reversing?

Andrew F. Gould

Stabilizing or reversing, it depends, I think we have, it’s the usual story, we have to wait until the end of the winter, see where storage is and see what the production profile looks like and then we’ll have a much better idea whether people need to drill more or less. I think the only joker in the pack this year is that in 2009 a lot of people predicted that more LNG would come to the US and it didn’t.

But with the amount of new capacity that the Qatar put on last year and Qatar is putting on this year, plus Yemen, plus a couple of others, it has to go somewhere.

Geoff Kieburtz - Weeden & Co.

Right. If I could sneak one in, would you mind commenting on the Venezuela devaluation and its impact on Schlumberger?

Andrew F. Gould

Simon is going to do that Geoff.

Simon Ayat

So we are yet to understand the actual rate that will be applicable during Q1. However, we in Schlumberger look at our currency exposures very closely and this is not going to have an impact on the reevaluation of the balance sheet. Going forward if the official rate will - the devaluation will take place, it will reduce our revenue because of the local currency portion will obviously be less in the corresponding dollars, however, it has no impact on the profitability. It is slightly better as a matter of fact.

Geoff Kieburtz - Weeden & Co.

Right. Thank you.

Simon Ayat

Okay.

Operator

Your next question comes from the line of Jim Crandell, Barclays Capital. Please go ahead.

James Crandell - Barclays Capital

Good morning, Andrew.

Andrew F. Gould

Good morning, Jim.

James Crandell - Barclays Capital

I have a sort of three-part follow-up on Iraq, number one of the - let’s say seven to 11 projects it seemed like they could go forward, do you see most of these going IPM. Secondly, how do you see the likely profitability of the work in Iraq versus other countries in the region, and thirdly, do you think that there’ll be issues surrounding the capacity of the oil service industry to service all these projects if they all seem to want to come in the second half of the year.

Andrew F. Gould

So, if I can answer the third part first, if they all want to come in the second part of the year, yes. And if I can answer the first one then, yes, I do think that they’re largely going to be IPM type projects largely because there is very little infrastructure on the ground, particularly rigs. And therefore, the capacity to do IPM and to put rigs on the ground is going to be extremely - a determining factor in the first year or so.

And what was the second part, Jim? I am sorry.

James Crandell - Barclays Capital

The last part is given what you said about that the industry could have trouble servicing it, it would seem that this should be given the risks and everything else highly profitable work.

Andrew F. Gould

Well, I don’t think people are going to - particularly given the risks, I don''t think people are going to give it away.

James Crandell - Barclays Capital

I agree. Second question, a follow up. Andrew, back to the US, what is the magnitude of the increase in the rig-related recovery before you’d begin to see pricing improvement for conventional bread and butter work for pressure pumping, directional and wirelines.

Andrew F. Gould

I think wireline is almost there. Directional has never been affected as much as wireline or pressure pumping because as you know the horizontal count has grown so much that I think there’s issues - no pricing issues with directional equipment. And pressure pumping, I don’t really know but I think it’s considerably higher than where we are today.

I think one of two things is going to happen, either all these, either the rig count will increase, or and I suspect this is more likely, all these massive fracs are going to tear up so much equipment that the market will come in to balance through equipment disappearing more rapidly than it usually does.

James Crandell - Barclays Capital

Okay, if I could just sneak a last question and it’s sort of a strategic question. Looking at the international land business Andrew, do you see an increased amount of that business going IPM in the future and if so will there be a significant increase and what are the implications for margin and profitability if indeed that is the case.

Andrew F. Gould

Well let me put it this way, despite the drop in Mexico, Schlumberger’s IPM revenues will increase in 2010 largely due to Russia and the Middle East. And the profitability will vary in functions of the type of project that you are doing. And it will never be anything like offshore but it will be perfectly satisfactory.

James Crandell - Barclays Capital

Okay. Thank you.

Operator

Your next question comes from the line of Bill Sanchez of Howard Weil. Please go ahead.

William Sanchez – Howard Weil Inc.

Andrew, a question just back on international margins here specifically Middle East/Asia, we saw an improvement here versus third quarter, just curious how much confidence do you have right now given some of your prior comments that margins have troughed in the Middle East/Asian region. I guess as a follow-up, if we look at your CIS/West Africa down 200 bps but you talked about Russia being the culprit there, and we know weather was a problem, should we assume you recover those 200 basis points in the first quarter in that region.

Andrew F. Gould

I don’t think we’ll recover it in the first quarter because we don’t get the Sakhalin activity back until the second and third quarter and the ramp up will only happen towards the end of the first quarter so I very much doubt we will get back the 200 and actually, there will be other, for example Libya is not going to be so strong because the exploration success in Libya has been very low.

So we’ll see a lot of exploration programs winding down. I think you have to go back to what I said on an earlier comment, Bill, that I’ve always said that the cycle in the Eastern Hemisphere would sort of trough towards the middle of this year and our margins will be lumpy depending on our revenue mix.

The improvement in MEA, Middle East Asia, this quarter was large, just as we said due to exploration, wireline testing, and very strong software sales. So I think you have to assume they’re going to be lumpy for a couple more quarters.

William Sanchez – Howard Weil Inc.

Okay. One follow-up, specifically the declines on Mexico, and I know it was addressed earlier, kind of your broad thoughts there, but how much of that was due specifically to Chicontepec slowdowns, or how much of that was really due to activity declines in areas like the Burgos that we know one of your competitors mentioned during the fourth quarter, or was it a bit of both.

Andrew F. Gould

I think there’s - I think Pemex is relooking at everything. Gas prices got to a point where it’s probably cheaper for Mexico to buy rather than drill in Burgos. And I think that we will - activity will be decent but it’s not going to, there’s so much equipment in Mexico it’s not going to do us a lot of good.

William Sanchez – Howard Weil Inc.

Is some of the talk Andrew about dollars shifting away from Chicontepec to say Cantarell I got to believe would be a favorable trade for you given your high market share there and what’s probably higher margin direct service work.

Andrew F. Gould

As I said on an earlier call we feel that quite a lot of what - both onshore and offshore will shift back towards direct Pemex contracting, yes.

William Sanchez – Howard Weil Inc.

Okay. Thank you, Andrew.

Operator

And the next question comes from the line of Brad Handler pf Credit Suisse. Please go ahead.

Bradley Handler - Credit Suisse

Thanks. Good morning. A couple of unrelated questions please, first can you just give us a little more color on what happened in the fourth quarter in Canada. I think it was a surprise to see flat revenues, a little bit more on that mixed commentary please.

Andrew F. Gould

We had a very, very strong Q3 because we had an extremely profitable campaign for one of the operators. So we just - that was a one-time campaign and it didn’t repeat in Q4. So we probably should say that the margins in Q4 were stronger than were sustainable without that extremely profitable piece of work.

Bradley Handler - Credit Suisse

Sorry, I didn’t get that. The margins in Q4 were higher -

Andrew F. Gould

The reason the margins in Canada declined in Q4 was nothing to do with the level of activity, it was to do with the type of activity because in Q3 we had an extremely profitable campaign for one operator which increased the margins, which did not repeat itself in Q4.

Bradley Handler - Credit Suisse

So this is, let me make sure I’m clear on it, you moved a fair amount of equipment out of Canada at some point as part of cost reduction efforts, has equipment moved back in, are you equipped to take advantage of winter drilling seasons in a more general sense.

Andrew F. Gould

We don’t have an issue of equipment in Canada. We did move some out, yes, a couple of years ago, but we don’t have an issue at the moment.

Bradley Handler - Credit Suisse

Fair enough. And the unrelated follow-up is can you, you talked about the strength in the software sales and there were some references for artificial lift strength and year end product sales as well. I guess I’m curious what you read into that relative to customers and managing discretionary spending in ’09, if anything, was it a positive, did you take it as a positive sign that they were still going to proceed as normal.

Andrew F. Gould

I wouldn’t read anything into artificial lift or completions except perhaps some restocking after having pared down their inventories in late ’08, early 2009. Software sales, I think the purse strings were freed up a bit so maybe particularly in software they did an excellent job and we probably had a really, really strong fourth quarter in software relative to other fourth quarters I mean.

Bradley Handler - Credit Suisse

Okay. But you’re taking some of the credit just for the business development.

Andrew F. Gould

Yes.

Bradley Handler - Credit Suisse

All right. Thanks very much.

Operator

And the next question comes from the line of Robin Shoemaker of Citi. Please go ahead.

Robin Shoemaker – Citigroup

Good morning, Andrew.

Andrew F. Gould

Good morning, Robin.

Robin Shoemaker – Citigroup

I wanted to ask you, going back to the deepwater theme, as more deepwater rigs come into the market and based on your experience I think you mentioned 23 that started up in 2009, are your revenues and the quality of revenues from those new deepwater rigs matching your expectations or above or below, could you characterize that broadly.

Andrew F. Gould

Well, so far they’re certainly matching our expectations. In some areas they’re better, in some areas they’re not quite as strong but overall yes, they’re matching our expectations.

Robin Shoemaker – Citigroup

Okay. And then you mentioned in the Middle East to Asia region you cited deepwater contribution, where specifically and what makes that stand out.

Andrew F. Gould

I would say that India, Indonesia, and Australia and a little bit of Southeast Asia as well, Malaysia, that sort of thing. It’s quite scattered in fact.

Robin Shoemaker – Citigroup

Okay. So what you were saying earlier, I just want to clarify, the 35 deepwater rigs that are delivered this year, they really don’t contribute until ’11 but the 23 -

Andrew F. Gould

Well, they do but not on the basis of 35 because if we get 20 of them in Q4, if you calculate that in rig months, it doesn’t correspond to anything like 35 for a full year. So you really only get the effect in the full year which will be 2011.

Robin Shoemaker – Citigroup

Right and so the 23 from last year really impact -

Andrew F. Gould

Yes, 2010.

Robin Shoemaker – Citigroup

Got it. Thank you very much.

Operator

Next question comes from the line of Pierre Conner of Capital One Southcoast. Please go ahead.

Pierre Conner - Capital One Southcoast

Good morning, Andrew. Andrew, WesternGeco, I don’t want to put too fine a point on this, but you mentioned that pricing improvements would be limited to incremental capacity and I just wanted to clarify that, obviously your point is you don’t see further weakness in future bidding projects.

Andrew F. Gould

Not at this point in time, no.

Pierre Conner - Capital One Southcoast

Okay. And then within the quarter some moving parts, and I’m just trying to dissect I think earlier, maybe Brad was asking about margins so, Dan was, with the multi-client but yet some impact due to delays, absent the multi-client margin impact, what was the underlying trend on the margins at WesternGeco if you can tell us that.

Andrew F. Gould

DP was fine, land would have been up slightly and marine would have been down.

Pierre Conner - Capital One Southcoast

And the marine impact really due to the delays of the project start-ups.

Andrew F. Gould

No, well essentially in the quarter we had three vessels in transit so no revenue.

Pierre Conner - Capital One Southcoast

Okay, so just timing mostly.

Andrew F. Gould

Yes.

Pierre Conner - Capital One Southcoast

Okay. I think the rest have been answered. Thank you.

Operator

Your next question comes from the line of Marshall Adkins of Raymond James. Please go ahead.

Marshall Adkins – Raymond James & Associates

Good morning, gentlemen. Let’s come back to the pressure pumping just for a second, we’ve been hearing that very recently of course pricing has been improving as you mentioned. Is that due to equipment wearing out, what you addressed or is it people shortages, just having trouble getting people back in the system, and how does that evolve over the next quarter or two?

Andrew F. Gould

Well I think it’s both, I think actually in some of the more complex plays it’s availability, it’s certainly the tearing up of equipment and people a little bit, yes. We are also beginning to see increases in product cost again. But I think that the underlying reason for the price increases at this point in time is the fear of how available equipment is going to be over the next three or four months.

Beyond that, be it pricing traction or the state of the pressure pumping industry, beyond that really depends at what point the rig count plateaus.

Marshall Adkins – Raymond James & Associates

Okay, thank you. Switch to another one, the end of year sales we talked about, software was exceptionally good, are you worried that there’s going to be a fall off here in Q1 more than we’ve seen historically.

Andrew F. Gould

Yes, I am a little bit.

Marshall Adkins – Raymond James & Associates

Is that going to be made up by Canada or other areas?

Andrew F. Gould

Very difficult to tell but we certainly, we know software is going to fall off pretty strongly in Q1.

Marshall Adkins – Raymond James & Associates

Okay. Thank you.

Operator

Next question comes from the line of Waqar Syed of Macquarie Capital. Please go ahead.

Waqar Syed – Macquarie Capital

Good morning, Andrew. Just on the theme of pressure pumping again, what you’ve seen in the US is that not only in the, rig count has been going up but also the number of frac stages have been going up, can you see a scenario where even if you have a kind of flattish rig count but frac just continue to go up, thereby driving demand for pressure pumping equipment.

Andrew F. Gould

No, there’s absolutely no doubt that every time they increase the size of the - or the number of stages that increases the size of the frac fleet that’s necessary. It’s another factor that’s going to absorb equipment but I come back to what I said on the last question, it really depends to where the horizontal rig count goes.

The flipside of what you’re saying is these wells have very high PIs which means that they can turn around production quite quickly.

Waqar Syed – Macquarie Capital

And then on the related question, another market there was recently a shale gas initiative signed in China, when do you see that translating into maybe activity increases in China and do you see a role of Western service companies in that development?

Andrew F. Gould

In China, there are a number of shale gas projects that are being discussed and yes, we see a role for Western service companies, in design of the fracs and execution of the fracs in China, yes.

Waqar Syed – Macquarie Capital

What would be the timing of that?

Andrew F. Gould

I really don’t know. I can’t tell you.

Waqar Syed – Macquarie Capital

Thank you very much.

Operator

Next question comes from the line of Scott Gruber of Bernstein. Please go ahead.

Scott Gruber – Sanford C. Bernstein & Co.

Yes, good morning. What percentage of the growth in your oilfield CapEx is actually associated with the deepwater?

Andrew F. Gould

We don’t disclose that but you can assume it’s a very substantial portion.

Scott Gruber – Sanford C. Bernstein & Co.

Okay. More than half you’d say.

Andrew F. Gould

No, less than half, more than a quarter and less than half. It’s a substantial number.

Scott Gruber – Sanford C. Bernstein & Co.

Okay, and then your peers have been spending well ahead of DD&A with significant growth investments outside of North America, is this starting to show up in any pockets where capacity growth is outpacing demand or pricing pressures starting to emerge in any product lines.

Andrew F. Gould

Not really. In fact I’m sort of quite concerned that if the offshore activity comes back strongly in the second half of the year that in high-end equipment certain shortages will start to show up. So I think a lot of it is infrastructure. Everyone seems to have built a building in the Middle East and a building in South America and in Brazil, so I think a lot of it is infrastructure.

Scott Gruber – Sanford C. Bernstein & Co.

Okay, great. That’s it. My other question has been answered. Thanks.

Operator

Next question comes from the line of Kevin Simpson of Miller Tabak. Please go ahead.

Kevin Simpson – Miller Tabak & Co., Llc

Thanks and good morning.

Andrew F. Gould

Good morning, Kevin.

Kevin Simpson – Miller Tabak & Co., Llc

I wanted to get into the margins in MEA were substantially greater than I thought for, it looks like some of that I guess would be the benefit of software sales, but is it fair to say at this point that based on your last commentary the pricing and margin trends are relatively stable in that part of the world for even if there’s a little bit of dip, that’s about it.

Andrew F. Gould

It will depend greatly on how much exploration there really is in every quarter and how much testing there is in the quarter. So it will vary in function of the software sales, Kevin, but it will also vary in function of the revenue mix. So they will still be a little lumpy.

Kevin Simpson – Miller Tabak & Co., Llc

Lumpy but -

Andrew F. Gould

I don’t think I’m not probably going to regret this a great deal, but I don’t think we’ll see a major decline in the Middle East from this point forward.

Kevin Simpson – Miller Tabak & Co., Llc

Okay. That’s really what I was looking for. And then one other, you were citing your offshore deepwater rigs coming on at a pretty good increase in CapEx, can you say that you already have placements at your traditional share for upper-end equipment for the deepwater rigs that are coming on, particularly -

Andrew F. Gould

I am extremely satisfied with our market share on the new build deepwater rigs.

Kevin Simpson – Miller Tabak & Co., Llc

Okay. It’s good enough for me. Thanks. That’s it.

Andrew F. Gould

Thanks, Kevin.

Operator

And a follow-up question from the line of Ole Slorer, Morgan Stanley. Please go ahead.

Ole Slorer - Morgan Stanley

Thank you very much. Andrew, just to be clear, can you discuss the impact of international pricing versus the impact of international volume when it comes to when you see your margins troughing as opposed to the pricing troughing?

Andrew F. Gould

Sorry, I don’t know the stand, Ole.

Ole Slorer - Morgan Stanley

It’s two things that drive margins right, it’s the -

Andrew F. Gould

What was the question, was it activity or pricing?

Ole Slorer - Morgan Stanley

It was I think you highlighted you expect pricing to trough in the second quarter internationally but pricing margins isn’t necessarily always the same thing.

Andrew F. Gould

No, I think that we would say the same thing for margins. I’ve always said that. Middle of 2010 and when I gave the number of deepwater rigs, you know that the effect is going to be in the second half of the year not the first half of the year.

Ole Slorer - Morgan Stanley

Okay, thanks for clarifying that. And of course we now get the impact of the ones that were delivered last year, so it’s just quid pro quo.

Andrew F. Gould

Yes, we get a better - it’s much better than in 2009, yes.

Ole Slorer - Morgan Stanley

And when it comes to Brazil, pre-salt and the potential to take some of that technology across to West Africa, could you comment a little bit about how you see technology trends in West Africa particularly on some of the more complex wells that have been drilled in Brazil.

Andrew F. Gould

I think that the plate theory that says that there should be a pre-salt in West Africa as there is in Brazil is gaining popularity. I think we need a few wells and we probably need – we need a few big exploration wells to find out whether or not people are going to consider that as a play. I’m not a geologist at that level and when you look at the suspect, the people who are going to drill those wells, you have to think they’re going to be testing that theory.

Our advantage in West Africa is that we own the multi-client library for Angola. It’s quite old but given the different prospects that people are going to start to look at we can do a lot of reprocessing to make it attractive.

Ole Slorer - Morgan Stanley

So how do you view your opportunities that in West Africa with your position there relative to the competitiveness of the Brazilian market?

Andrew F. Gould

I think it’s - well actually I have no complaints about our position in Brazil but I think that our overall competitive position in West Africa is probably stronger which is a matter of infrastructure, logistics, and presence and the time we’ve been there.

Ole Slorer - Morgan Stanley

And this comes to an OGX type deal where you support a smaller company and everything they do more or less in West Africa as well.

Andrew F. Gould

In the deepwater we haven’t see that, we have seen it and we have done it in the shallower waters in Nigeria.

Ole Slorer - Morgan Stanley

Thank you very much.

Operator

And final question comes from the line of Dan Pickering, Tudor, Pickering, Holt. Please go ahead.

Dan Pickering - Tudor, Pickering, Holt & Co., LLC

Hi, thanks for the follow-up opportunity. Even with higher spending next year, big free cash, no net debt, talk to us about how you think about cash, your comfort levels around letting cash build, your urgency to do acquisitions, roll that all together for us.

Andrew F. Gould

Well, we still are actively pursuing opportunities and acquisitions, Dan. That’s not necessarily a reason to build cash. We will keep the share creep from happening which means that anything we issue for employees stock will get more back and we agreed at a Board meeting yesterday that we would review the dividend in the second half of the year.

Dan Pickering - Tudor, Pickering, Holt & Co., LLC

I would assume a review of the dividend is not for a lower dividend but a higher dividend.

Andrew F. Gould

We have always said Dan that we would never lower our dividend. We never put it at a level where we’d have to cut it.

Dan Pickering - Tudor, Pickering, Holt & Co., LLC

Okay, that’s helpful. And then when you think about dividends generally, I assume you’re talking recurring ongoing quarterly dividends, not special or one-time dividends.

Andrew F. Gould

No, ongoing quarterly, I’m not a great believer personally in special dividends.

Dan Pickering - Tudor, Pickering, Holt & Co., LLC

Okay. And then just to sort of put a point around the nearer term, I think what I heard you saying in your discussion around seasonality, etc. is that our expectation should be that Q1 earnings should be slightly lower because of the seasonality and we should see an international trough in Q2, on margins, and maybe some strength in the second half relative to the first half.

Andrew F. Gould

I think that you should assume that in Q1 seasonality plus the absence of very strong software sales in Q4 will affect the results. And also don’t forget the absence of multi-client in Q1, that will make a big difference. That Q2 will be the one where we’re all holding our breath to see what happens in the second half of the year.

So I’ve been avoiding trying to say it, but it is another year in two halves.

Dan Pickering - Tudor, Pickering, Holt & Co., LLC

And then as we look to ’11, obviously the, Wall Street has a big expectations ramp in terms of estimates, care to comment on those.

Andrew F. Gould

I think that, well it’s way too early to say, but I think that if oil prices remain where they are, and the economic recovery stays on track, then yes, there will be a considerable increase in exploration and production spending in 2011.

Dan Pickering - Tudor, Pickering, Holt & Co., LLC

Thank you.

Andrew F. Gould

Thank you, Dan.

Malcolm Theobald

Okay, so prior to closing the call I would like to mention that the Schlumberger Limited first quarter 2010 earnings conference call will be held on Friday, April 23, 2010 at 9:00 a.m. US Eastern time. Now, on behalf of the Schlumberger management team, I would like to thank you for participating in today’s call. Rachel would now provide the closing comments.

Operator

Ladies and gentlemen, this conference will be made available for replay after 10:30 a.m. today until February 22nd at midnight. You may access AT&T Executive Playback service at any time by dialing 1-800-475-6701 entering the access code 120779. International participants dial 1-320-365-3844 and again that access code is 120779. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.