SLB (SLB) — Q4 2015 Earnings Call Transcript

Thank you. Good morning and welcome to the Schlumberger Limited fourth quarter and full-year 2015 results conference call. Today's call is being hosted from Houston following the Schlumberger Limited Board meeting yesterday. Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer and Simon Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paal. Simon will first review the financial results and then Paal will discuss the operational and technical highlights. However, before we begin with the opening remarks, I’d like to remind the participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10-K filing and other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our fourth quarter press release which is on our website. We welcome your questions after the prepared statements. I’ll now turn the call over to Simon.

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Fourth quarter earnings per share excluding charges and credits was $0.65. This represents decreases of $0.13 sequentially and $0.85 when compared to the same quarter last year. During the quarter, we reported $2.1 billion of pre-tax charges. These charges are the direct result of the very challenging market conditions we’re operating in and they include severance, impairment, and restructuring charges. The asset impairment charges largely relate to our North America business, which, as you know, has been the hardest hit during this downturn. All of these charges are described in detail in our earnings press release. Our fourth quarter revenue of $7.7 billion decreased 9% sequentially. Approximately one-third of the revenue decline was attributable to pricing. Despite the very challenging environment, both in terms of pricing and activity, pre-tax operating margins only declined by 132 basis points sequentially to 16.6%. This was due to continued strong and proactive cost management across the entire organization. Sequential highlights by product group are as follows. Fourth quarter Reservoir Characterization revenue of $2.2 billion decreased 7% sequentially, while margins decreased 230 basis points to 24.2%. These declines were due to decreases in exploration spending that largely impacted wireline internationally. We also did not see the year-end surge in multiclient and software sales that we typically experience in Q4. Drilling Group revenue of $3 billion decreased 8%, primarily due to pricing pressure and activity declines internationally that have mostly affected drilling and measurements and M-I SWACO. As a result of strong cost management, Drilling Group margins only declined 173 basis points to 16.7%. Production Group revenue of $2.7 billion decreased 10% primarily due to the continued decline in land activity and further pricing pressure in North America. Production Group margins were essentially flat at 11.3% as SPM projects and higher earnings from our investments in OneSubsea compensated for the effects of the lower activity and pricing pressure. Now turning to Schlumberger as a whole. The effective tax rate excluding charges and credits was 18.2% in the fourth quarter. This was lower than the previous quarter by about 2 percentage points. This decrease was largely due to the geographic mix of earnings between North America and the Rest of the World, as well as the favorable revolution of certain tax contingencies and an R&D credit during the quarter. Excluding the impact of Cameron, we expect the effective tax rate in 2016 to be around 20%. On a pro-forma basis, we expect the combined Company effective tax rate to be in the low 20s, although this would remain sensitive to the geographic mix of earnings. Our cash flow generation continues to be very strong. During all of 2015, we generated $8.8 billion of cash flow from operations. During the fourth quarter, we generated $2.2 billion of cash flow from operations. This is all despite making severance payments of approximately $800 million during 2015 and $200 million during the fourth quarter. In light of our strong cash flow generation, yesterday our Board of Directors approved a new $10 billion share buyback program. This new program will be effective once the remaining $1.4 billion of authorization under the current program is exhausted. During the quarter, our net debt deteriorated by $343 million to $5.5 billion as we continue to invest in future revenue streams. During the fourth quarter, we spent $627 million on CapEx and invested approximately $600 million in SPM projects and $150 million in multiclient projects. Full-year 2016 CapEx excluding multiclient and SPM investments is expected to be around $2.4 billion. During the quarter, we spent $398 million to repurchase 5.4 million shares at an average price of $73.86. This is despite being prohibited under securities laws from repurchasing our shares for about one month prior to the Cameron shareholder vote. Let me take this opportunity to talk a little bit about the Cameron transaction. In order to ensure an efficient capital structure within the group, Schlumberger Holding Corporation, our principal U.S. subsidiary that we will also refer to as SHC, is the legal entity that will acquire Cameron. SHC will acquire approximately 137 million shares of common stock from its parent and transfer these shares to Cameron shareholders. SHC will also pay cash of approximately $2.8 billion in connection with this transaction. During the fourth quarter, SHC issued $6 billion of notes. These notes have a weighted average interest rate of approximately 3.15% and have maturities ranging from 2017 to 2025. SHC will use the proceeds from this debt issuance to partially fund the purchase of the 137 million shares from the parent company. SHC will then use a combination of cash on hand and commercial paper borrowings to finance the difference between the proceeds received from the issuance of these notes and the cash required to complete the Cameron merger. As a result of this debt issuance, Schlumberger’s pre-tax interest expense will increase approximately $40 million in Q1 as compared to Q4. As we close the Cameron transaction, we will begin to incur merger and integration-related costs. These will include transaction costs, the cost of the integration team, one-off purchase accounting adjustments, as well as one-off costs to achieve the synergies. These amounts will be most significant in the quarter the transaction closes and the quarters immediately following the merger. We will separately call out these charges for you as they are incurred. And now I will turn the conference over to Paal.

Thank you Simon and good morning everyone. Negative market sentiments intensified in the fourth quarter with global oil production continuing, extending the various trend in global oil inventories and causing a further fall in oil prices, which reached a 12-year low in December. The worsening market conditions added further pressure to the deep financial crisis throughout the oil and gas value chain and prompted the operators to make further cuts to the already low E&P investment levels. For many of our customers, available cash and annual budgets were exhausted well before the halfway point over the fourth quarter, leading to unscheduled and abrupt activity cancellations, creating an operating environment that is increasingly complex to navigate and where the traditional year-end product and multiclient seismic sales were largely muted. As planned, we implemented another significant adjustment to our cost and resource base during the fourth quarter, including the release of 10,000 employees as well as further streamlining of our overhead infrastructure and asset base. In spite of these significant structural adjustments, our overall fourth quarter results were in some areas impacted by events that were either outside of our control or where we chose to maintain cost and resource levels, pending availability of additional customer budgets in the New Year. However, as we exited the fourth quarter, I believe we’ve made the necessary adjustments to our cost and resource base and that we’re well positioned to continue to deliver solid financial results in both the first quarter and throughout 2016, which will clearly be another very challenging year for our industry. Looking closer at our fourth quarter results, global revenue fell 9% sequentially, driven by a continuing decline in rig activity and persistent pricing pressure throughout our global operations together with a broad range of activity disruptions, project delays, and cancellations. In North America, revenue was down 14% sequentially, which is in line with the reduction in the drilling rig counts and driven by exhausted customer budgets and cash flows together with the extended holiday period. Our North American pre-tax operating margins remain very resilient at 7.1% driven by proactive cost and resource management, excellent performance from our supply chain and distribution organization, strong execution, and new technology sales from our operations, all of which were further supported by our transformation program. On land, in both the U.S. and Canada, the weakening activity resulted in additional commercial pressure for all product lines and in particular in pressure pumping where pricing levels dropped further into unsustainable territory for both operating margins and cash flow. We also saw continuous pricing pressure and activity reductions in the U.S. Gulf of Mexico, as the drilling rig count dropped by another 2% sequentially and where year-end multiclient seismic sales were largely muted. Turning to the international markets, revenues were 6% lower sequentially as customer budget cuts, the start of the seasonal winter slowdown, and the absence of the traditional year-end product and multiclient seismic sales all impacted results. Our fourth quarter international operating margins dropped to 22%, driven by further pricing pressure and unfavorable revenue mix and a significant impact of activity disruptions, particularly in the Middle East and Asia. In Latin America, revenue declined 1% sequentially with pre-tax operating margins improving by 229 basis points to 23%. In terms of revenue, solid activity in Mexico and Ecuador was offset by further budget reductions in Colombia and Brazil, while the weakening of the peso had a negative impact on our fourth quarter revenue in Argentina. Margins remained resilient across the area as the cost and resource base adjustments made during the previous quarter took full effect and as we continue to leverage our transformation program. This combination more than offset the persistent pricing pressure we saw throughout our customer base. In Europe/CIS/Africa, revenue fell 9% sequentially, while pre-tax operating margins dropped 138 basis points to 20.8%. The drop in revenue was led by Russia and Central Asia, where a further weakening of the ruble, the start of the seasonal winter slowdown in Russia, and a noticeable reduction in activity throughout the Caspian region, all impacted the results. In Europe, activity in Norway was resilient, but this was more than offset by a significant reduction in continental Europe and the U.K., while in Africa, solid activity in Nigeria and Algeria was not enough to offset the further weakening in Central and West Africa. In the Middle East and Asia, revenue declined by 5% sequentially, while pre-tax operating margins decreased by 448 basis points to 22.5%. The sequential drop in revenue was led by Asia where we saw a general weakening in activity throughout the region, which was most pronounced in Malaysia and Australia, where projects ended and customer budgets were cut further. Fourth quarter revenue was also down in the Middle East, where solid activity in Kuwait and Iraq was more than offset by reductions in the rest of the region. In terms of operating margins, pricing pressure across the area was only partly offset by adjustments to our cost and resource base and where project cancellations, delayed start off of new projects, and activity disruptions due to 2015 budget limitations, all contributed to the sequential reduction in operating margins. Our fourth quarter results cap a year where we’ve faced the most severe industry downturn in 30 years, but where we, through proactive management and strong execution, have shown that we can navigate the challenging operating environment better than most and produce solid financial results while maintaining the bandwidth to pursue and capitalize on opportunities that strengthen the competitive position of the Company. So as we prepare for another very challenging year, I’d like to summarize what we’ve delivered in 2015, as this sets a very good benchmark for our expectations and ambitions for the year to come. Looking first at the top line, full-year revenue dropped by 27% in 2015, driven by a 39% drop in North America where we’ve further strengthened our market position in spite of our decision not to pursue work that falls outside of our financial return requirements. Our international revenue fell by 21% in 2015, which is comparable to the drop in E&P investments. Included in this revenue drop is both the impact of our higher leverage towards exploration, deepwater, and seismic markets, where E&P investment saw significantly higher reductions, and also included the impact of the strong dollar against a number of foreign currencies. These revenue mix headwinds are fully absorbed in our results at this stage, which makes our international business a highly compressed coiled spring, which we will capitalize on when E&P investments and customer activity starts recovering. In addition to this, we’ve in the past year significantly increased our tender win rate, which further strengthens our very solid contracts portfolio and puts us in a great position to increase market share going forward. Looking at 2015 profitability, full-year global operating margins fell by only 342 basis points to 18.4%, as we maintained our wide margin lead in the international markets and as we now are also approaching a similar margin gap in North America. We’ve managed to protect our margins due to a very proactive approach to cost and resource management and by further accelerating our corporate transformation program. Together, these actions have delivered sustainable margins of 31% in 2015, which is about half the level seen in previous downturns. Turning next to cash, our free cash flow in 2015 was about $5 billion, which represents a net income conversion rate of 114%. This includes CapEx of $2.4 billion, which is now down to 59% of D&A, in addition to investments of $1.4 billion in future revenue streams in the areas of SPM and multiclient seismic. Our ability to generate free cash in this part of the cycle is unmatched in the oil field services industry and gives us a unique ability to capitalize on the significant business opportunities that the current market conditions present. From our free cash flow we’ve returned $4.6 billion of cash to our shareholders through $2.4 billion in dividend payments and $2.2 billion worth of stock buyback. In addition to this, we’ve spent about $500 million on M&A, where we continue to target smaller disruptive technology companies that we can integrate into our existing and future workflows and deploy through our expansive global organization. The strength of our free cash flow can also be seen from our net debt level which has only increased by $160 million on a full-year basis, driven by the financial performance I’ve just described. With respect to the pending Cameron transaction, the integration plans are now largely completed and we are fully ready for day one. We still expect to close the transaction during the first quarter of 2016, and we’ve already received antitrust approvals from the U.S., Canada, Russia, and Brazil. The fact that we structured the deal to include 78% of stock provides us with a necessary insulation from the ongoing market turmoil and during the fourth quarter we also secured the required financing for our U.S. entity that will make the acquisition. Turning next to people, we’ve in the past year unfortunately had to reduce more than 34,000 employees, which represents an unprecedented number for the Company and where we all have been impacted as we’ve gone through the disheartening process of letting colleagues and friends go in all parts of the Company. I’m at this stage optimistic that we’ve completed the workforce reductions required in this downturn and I look forward to being able to shift focus throughout our organization from the negative sentiments of the past year towards a brighter future as we work through the remaining challenges of this downturn. In terms of R&D, we did reduce investment levels in 2015, but we were still able to protect our capabilities and ensure the progress of all our key projects. In the past year, we made solid advances on several new technology fronts through a combination of organic and inorganic efforts and we look forward to updating you further on this in our external communications in the coming year. And lastly, in 2015, we significantly accelerated our corporate transformation program, stepping up both investment levels and the detailed engagement of our global organization. As part of this, we prepared a comprehensive and granular three-year transformation plan covering each of our 600 business units with specific deliverables and business impact goals set at all levels in our organization. In parallel with this, we’ve delivered noticeable cost savings and efficiency gains that can be seen in our 2015 financial results, together with a 23% reduction in our customer non-productive time rate, which is the largest annual improvement we’ve ever achieved. In summary, while 2015 has been extremely challenging year for the industry and for Schlumberger, we’ve clearly demonstrated our ability to navigate a complex landscape and capitalize on the opportunities the current business environment presents and we’re fully prepared to repeat these efforts and achievements in 2016. So while we all look forward to a recovery in the oil price, and the market conditions in our industry, it is evident that the longer the current market environment continues, the stronger we will emerge as a Company relative to our competitors when the upturn ultimately comes. Turning next to the market outlook, we still believe that the underlying balance of supply and demand continues to tighten, driven by both solid growth in demand and by weakening supply as the dramatic cuts in E&P investments are starting to take effect. In North America, our shale oil production is declining more or less as we expected and was in December below the levels from one year ago. The apparent resilience in production outside of OPEC and North America is in many cases driven by producers opening the taps wide open to maximize cash flow, which also means that we will likely see higher decline rates after these short-term actions are exhausted. So while the global oil market is still being weighed down by fears regarding growth in Chinese demand, the magnitude of additional uranium exports, and the continued various trends in global oil inventories, we still expect positive movement in oil prices during 2016, with specific timing being the function of the shape of the non-OPEC decline rates. This means that the market outlook for oilfield services in the coming quarters will remain challenging as the pressure on activity and service pricing is set to continue. It also means that 2016 E&P investment levels will fall for a second successive year and that any significant recovery in our activity levels will be a 2017 event. Still, at Schlumberger, we remain confident in our ability to weather this downturn much better than our surroundings and through our global reach, the strength of our technology offering, and our corporate transformation program, we’re currently creating considerable leverage that will enable us to increase revenue market share, deliver superior earnings and margins, and continue to generate unmatched levels of free cash flow. Thank you very much. We will now open up for questions.

Thank you very much and congratulations on another strong year with free cash flow and solid performance.

Thank you, Ole.

Thanks.

When it comes to the macro outlook that you just painted, how should we think about the overall oilfield macro cycle? And relative to the internal momentum that you’re creating within Schlumberger with respect to the ongoing transformation process, I presume that a lot of the lowest hanging fruit has been picked in the transformation process. So if you could just bring us up to speed about how we should think about earnings projections over the next couple of quarters, several quarters with respect to those two kind of factors?

Well, if you look at our earnings trajectory in the coming quarters, it is obviously largely going to be driven by what continues to happen in the market around us in terms of the spend from our customers. But if you look at our ability to, I would say, counter the significant pricing pressure as well as the activity reductions, the transformation is indeed playing a significant role. It’s fair to say, like you say that a lot of the low hanging fruits we’ve already picked, but we’re now getting into the deeper part of the transformation where we’re making significant structural changes to how we go about doing our work and conducting our business. This is basically laid out in the three-year plan that we worked on in 2015, which is going to take us from 2016 all the way out to 2019. Here we’ve broken down all the initiatives into specific actions and plans and targets for all the various business units we’ve around the world and I think with this, I would say, formalized way of driving performance I think we should look to put even more impact into our results in the coming three years than what you’ve seen in the previous years.

Okay. I’ll take that. With respect to the free cash flow that you generated and clearly having a strong balance sheet, today is, I’d imagine, whereas an awful lot when it comes to the bargaining power that you’ve around the world. So how should we think about the opportunity around generating that or putting that to work as internal CapEx versus SPM, which I saw you just picked up a bit now again in the fourth quarter, and versus acquisitions?

Well, first of all, we continue to have a very strong focus on generating the cash. I think 2015 was another solid year. It was not perfect. There were several things that I think we could have done better, but $5 billion of free cash flow in this environment is not bad. Now how we go about spending the cash, there is really no change to the philosophy that we’ve in any part of this cycle. The first thing we look to is to reinvest into the business and that is CapEx for the service and product segments that we have. In 2016, we’re going to keep CapEx flat with 2015 and that you may ask why? If you look at the base business, it is indeed coming down, but we’ve certain new activities that we’re looking to invest into in particular the land drilling market for the rig of the future and there are a few other strategic investments that we’re looking to make regarding our internal CapEx. In addition to this, we continue to invest in future revenue streams, both multiclient seismic where we’ve a significant program going on in Mexico. And at this stage of the cycle, there are also significant SPM opportunities and we’ve really stepped up our efforts in screening and evaluating these opportunities and we will capitalize on them when they meet our internal requirements. Beyond this, we review dividends annually. We are not increasing dividends this year. And then beyond that for the coming year, it’s going to be a balancing of the opportunities we’ve on M&A and the opportunities we have to buy back our stock. That is how we’re planning to spend the cash. Simon, you want to add something?

No, I think you’ve summarized it very well. I guess, 2016 is going to be marked by the big event of integrating Cameron and there is a lot of transaction as I described. We bought up $6 billion and we will be paying for the acquisition. We are also issuing shares, but we’ve the $10 billion new program that we will commence as soon as we exhaust the previous one.

Thank you very much.

Hey, good morning, Paal.

Good morning.

Congratulations on an excellent execution throughout the year, particularly in the fourth quarter, by you, your management team, and all your employees.

Thank you very much.

I wanted to follow up on what you mentioned regarding the second part of Ole’s question about the SPM business. I noticed an increase in the fourth quarter, likely due to project timing. At this point, are you pursuing more projects? Are you receiving more inquiries? You also mentioned that your screening process has been updated. Could you elaborate on that and your expectations for the next couple of quarters and years?

We are currently experiencing a significant increase in SPM opportunities due to our ability to generate cash and the strength of our balance sheet. While our screening process remains unchanged, we have allocated more resources to it, allowing us to evaluate more opportunities. We are ready to increase our investments in SPM. As you mentioned, there was an increase in Q4, and while that level may not be consistent every quarter, we are focused on further investing in SPM as we move into 2016. This area offers us solid long-term contracts, allows us to utilize our full capabilities, and generates strong returns and cash flow for the Company. Therefore, we find this opportunity very compelling and are actively pursuing it.

Okay. And then maybe another follow-up, the press release was littered with technology success stories and it seems like the technology adoption rate has picked up significantly during the downturn. I know you have given out numbers before on sales, percentage of sales on new technologies. Could you give us an update there on what you’re seeing on the adoption rates and if that percentage has improved?

Yes, during this downturn, the level of new technology sales, which is basically technologies that we have commercialized in the past five years is at a significantly higher level than what we’ve seen in previous downturns. The new technology sales as a percentage of total revenues in 2015 is 24%, which is markedly higher than what we saw in the previous downturn in 2008, 2009. This is partially down to the broad range of technologies that we have, and in fact a number of them are focused on driving, I would say cost and efficiency for our customers. And these type of technology are as valid in terms of being bought and being operated during the downturn as they are in the upturn. So strong sales, and we continue to commercialize new technologies during 2015. This obviously has had a very good impact on our financial performance in the past year, and I expect it to continue to do that in the year to come.

Perfect. Thanks, Paal.

Thank you.

Thanks. Good morning, guys.

Good morning.

I echo the sentiment, a very solid quarter for the quarter and for the year given good business conditions, so well done. Maybe, Paal, we can go a little bit more granular on thoughts and obviously 2016 is a question mark, but thoughts into Q1 on a geo-market basis and walk us through where you’re thinking on a revenue and margin sign, if you will?

I’m not going to go into the specifics by area, but if you’re looking for insight on our plans and how we expect Q1 to unfold, it’s going to be another very challenging quarter in terms of both activity and pricing. The recent declines in oil prices will likely result in lower rig counts and more disruptions in activity. We anticipate continued budget pressure across the first half from all customer groups, as they need to operate within their cash flow. Additionally, we expect the winter slowdown in the Northern Hemisphere during Q1 to create further challenges for activity. Therefore, rather than discussing margins and revenues, if we focus on earnings per share, the current consensus for Q1 EPS may be considered a best-case scenario based on what we can observe today regarding Q1 earnings.

Okay. That’s helpful. And then on Cameron, I know there is only so much you can say at this point. But if you have any further color, you can talk about the opportunity set within Cameron as you move forward. But also talk us through or walk us through the integration of Cameron within Schlumberger, both operationally and how it will show up in the financial?

Right. So, on the start-up of the integration we are largely ready with our integration plans. We’ve had a sizable team made up of both Cameron and Schlumberger working diligently on preparing these plans since we announced the transaction back in August. We reviewed all the plans in December and they have been approved, and we are basically ready for day one at this stage. Closing is now basically pending a few more countries in terms of antitrust approvals, and we do expect that we will close during the first quarter. In terms of synergies, the detailed work that we’ve done has really confirmed the numbers that we put up at the announcement. Lots of opportunities which initially are going to be cost focused, but this transaction is largely a revenue transaction and we are very excited about what we can do by joining the R&D forces of the two companies and creating the integrated drilling and production systems that we have laid out earlier. In terms of integrating Cameron as an organization, it would actually be a fairly simple task. Because Cameron as it is today will become the fourth product group of Schlumberger together with characterization, drilling and production. And Scott Rowe, the CEO of Cameron is going to join us and continue to head of Cameron in its present form. So the main thing we were focusing on in terms of integration initially. It’s going to be to coordinate the customer interface and to streamline the back office and also then morph or merge over time the R&D organization. So it is relatively a simple integration, because Cameron would slide in, in its present form into Schlumberger as the fourth group.

All right. Fair enough. Thanks. I’ll turn it over.

Hi. Good morning.

Good morning.

Good morning. I have a couple of quick follow-up questions and discussions with investors regarding the SPM dynamic. In that context, Paal, considering the decline in oil prices this year and the write-down on the project in Colombia, there are questions about potential incremental risks related to existing SPM projects. Could you elaborate on how you assess risks on various projects and how you approach this from a portfolio perspective?

Sure. Let’s begin with the write-down we experienced in Colombia, which is quite an isolated incident. This project has been ongoing for about 10 to 15 years, and we are now in the later stages. It is the only project in our portfolio at this point that has our compensation directly tied to the oil price. With only a few years remaining and the oil price being very low, this led to the impairment of the remaining balance. If we examine the rest of our portfolio and the new contracts we have signed in recent years, these are all fee-per-barrel agreements. While the project economics are influenced by the oil price, our compensation operates on a fee-per-barrel basis. Consequently, these projects tend to carry a higher risk compared to our base business. However, I feel very confident in our ability to identify and manage these risks. With the screening process and the internal approval procedures we have in place, I believe we are well positioned regarding the projects we undertake, and I am optimistic that they will yield strong returns for the company. It’s also worth noting that the project in Colombia has delivered good returns and cash flow throughout its duration.

All right. That was great color. Then maybe if I could follow-up just on the margin front. If I understand correctly, you guys are trying to manage your business such that you can maintain a 20% margin maybe internationally here at the trough and maybe 5% in the North American market. I know a lot of that is being driven by your transformation process. And given the drop that we’ve had recently in oil prices and the impact that we’ll have on E&P spend drop in 2016, how much harder do you think it’s going to be to maybe maintain those targets?

But obviously fighting the margin pressure with both dramatic reductions in activity and significant pricing pressure, it’s tough. We have the added tool in our toolkit which is the transformation on top of our very, very solid management team that is excellent at executing, but it is tough to maintain margins at the levels that we currently see. I’m very pleased with how the North America team has managed and navigated in the past year, and 7.1% in Q4, I think is excellent. It’s going to be tough to continue to keep it at these levels. But with the energy and the focus our team on the ground in North America has, I’m optimistic that we will continue to significantly outperform the rest of the field there. Now if you look at the international margins, they are actually holding up recently well. We’re now six quarters into the downturn internationally, and we’re all at 253 basis points down which is basically half what we saw in 2009 in the last downturn. But it’s a very dynamic environment, and there’s always going to be quarterly variations driven by unplanned events. And if you look at LAM for an example, we had a big drop in Q3; yes we managed to close that back in Q4. Some of the actions that we put in place in the third quarter took full effect. Now in Q4 we did see a significant impact on our MEA margins and part of this is pricing and part of it is permanent activity reduction. But there is also a significant part which is temporary which is down to delays and stoppages. If you look at the team we have on the ground, they have a long list of actions in place to address what they can in order to offset some of these margin headwinds. So I can't promise you that we’re going to get all the margins back in MEA, but I would say that the MEA team is clearly unhappy having been surpassed by the LAM team at the most profitable area. So I really look forward to the internal competition between these two.

That’s great color. Thanks a lot, Paal.

Okay.

Great. Thank you. Good morning, guys.

Good morning.

Good morning.

Paal, you mentioned a couple of times the three-year transformation plan, and I imagine you’ll go into more detail in April. But can you just broad stroke the key categories that were identified as new areas of opportunity in the three-year plan?

Yes. There is no new areas that we have identified. What we’re doing with the three-year plan is that, in the past couple of years there’s been a lot of work done in the central team to formulate the detailed concepts and principles of how we want to change how we operate our business. These initiatives and concepts are all now fully mature and they come together with a change management process that we have also put a lot of effort into designing. What we’re doing with the three-year plan is basically formalizing how each of these initiatives will now be translated into actions and results throughout the global organization. So in the past couple of years we have been pursuing the low hanging fruit. We are now going into the structural changes of our business that would also provide an additional step of savings and improvements in the years to come. But the focus is around asset and inventory management, its maintenance and repairs, transportation, distribution, supply chain, back office, quality assurance. It’s all the things that we’ve talked about in previous years, but it’s now being formalized and itemized down to the business unit levels. We have around 600 business units down to the country level and they all now have specific actions and targets on each of these line items to implement the changes that we have been preparing centrally for the past few years.

Okay. And as we think about the financial impact, is the order of magnitude similar to the low hanging fruit, it’s just the timing in terms of the flow through, the impact may take a little longer? How do we think about the implications on the financials?

Well, I’d say the impact of the transformation going forward will at least be as big as it’s been in previous years and probably even higher in the years to come as we really start changing fundamental parts of how we conduct business. So this is not decreasing I would say, it’s stable to increasing in terms of impact going forward.

Okay. So low hanging fruit doesn’t mean expect less going forward?

No, absolutely not.

Great. All right. Thanks. I’ll turn it back.

Thank you.

Good morning, guys.

Good morning, Jim.

The Cameron, Schlumberger OneSubsea joint venture has been very successful, leading to significant collaboration. Now you are working on a memorandum of understanding with Golar and exploring gas monetization solutions. Can you elaborate on the extent of this development and how the Schlumberger Octopus will expand your business? What are your expectations for this initiative and the reasons behind it?

We have had productive discussions regarding a Memorandum of Understanding, focusing on how we can integrate our capabilities with those of Golar. This is an initiative we intend to pursue further in the future. It represents an intriguing partnership that we aim to establish and develop moving forward. I don't have many additional comments at this point other than reaffirming our intent to grow this collaboration.

Okay. And just again, breadth. You’ve got now subsea, you’ve got equipment, you’re doing gas monetization. Kurt and James asked about the SPM business. You had said before in previous conference calls that you'd embrace a number of different business models. Is this the fruition of those kind of statements?

I would say it is. But we don’t know this, it doesn’t change the fact that the main part of our business is, I would say oilfield services and products and equipment. We will continue to focus on leading each individual market that we continue, that we participate in for individual products and services. But with the integration capabilities and with the ability we have to pursue different types of business models, we are also looking to combine all of these things like you indicate Jim, to create more business opportunities for the company. So we are not pursuing only these. We have a huge focus on making sure that we stand out and we continue to drive performance in the base business. But when you combine all of these things, there is a broad range of opportunities for us that we’re also pursuing.

That’s very helpful. And my follow-up, if I could. Are we willing to take the chance and say that 2016 could be the bottom of the cycle or do you guys think today that 2017 will be worse than 2016?

I think it's too early to determine that, but I don't currently believe that 2017 will be worse. However, I'm not yet prepared to say that we have reached the bottom in 2016. I will be focusing on executing on a quarterly basis. I remain optimistic and hope that 2016 is indeed the lowest point, but I'm not ready to make a definitive statement on that yet.

We'll keep our fingers crossed as well. Thanks sir, very much.

Thank you.

Thank you. Good morning. Back to SPM, I’m curious with regard to the projects that you’re seeing. Is there any change regarding the kind of projects that you’re seeing now on a leading edge basis, more offshore versus onshore? And then moreover, with regard to how you evaluate these projects, recognizing that there are fee per barrel on the one hand, there must be an embedded oil price assumed as you’re looking at these projects in terms of a threshold oil price that is required for the NSC to make capital if it is an NSC partner on these. So can you talk about the mix of projects, how it has changed and embedded oil prices associated with the capital allocation?

Right. So, on the projects there is no shift in what the projects are. I mean, we’re looking at a certain set of projects. These are relatively small compared to what our customers would be interested in. They are generally late life fields where we can come in and try to change the decline curve and add reserves and production to the field in late life. We are generally focused on LAM, and the only thing I would say is that the opportunity set has increased. There are more customers that are coming to us now that have these types of fields and they’re interested in doing these types of business models with us. So there’s not a dramatic shift in the type of assets that we’re looking at, but generally there’s more of them. And for the fields that we enter into a contract zone, obviously we will have to look at the total economics of the field for the lifetime of the contract, which is generally, I would say at least 15 years. So in that it’s obviously important that the total project is economical. And then the way we set up our contract is today generally on a fee-per-barrel where we are I would say insulated against variations in oil price. That being said, if it goes down, we don’t get hit at all. But again we are leaving the upside to our customers if oil prices are higher than what is in the assumption. So we have a very, I would say solid process on evaluating this. Like I said earlier in the call we’re actively pursuing these types of contracts where we can get the terms that we want contractually, and where we are satisfied that the reservoir holds the upside both in production and reserves.

Okay. And another question from me, sort of an extension of Jim's question in terms of testing the boundaries as to how broad, how plausibly broad your business model extends to; and that is; are you contemplating or evaluating anything on the clean technology front?

No, not at this stage. We are focused on minimizing our environmental impact and reducing our carbon footprint. We have several programs in place regarding how we conduct business and develop new technologies. However, we do not have any plans to venture outside of our current space within oil services at this time.

Okay. Thank you.

Thank you.

Thank you for your question regarding our Middle East and Asia Pacific business. We've seen a notable decline in margins this quarter, with various factors at play. You mentioned disruptions in the Middle East and pricing challenges. The Asia Pacific region is also likely to experience significant impacts. Could you clarify some of these factors and how much you think is a one-time effect for this quarter?

I put in a lot of effort to address that earlier, David. Yes, MEA margins fell significantly in Q4, but there are variations in operations that will lead to changes in margins moving forward. I shared the LaMotte example. There is considerable pricing pressure and reduced activity in parts of MEA, but some of what happened in the quarter was temporary, with delays on major projects that required resources to be on standby. Additionally, some customers ceased activity during the quarter because they had exhausted their annual budgets. These budgets will be replenished in January, allowing us to maintain the costs for resources. While I can't guarantee that we will recover all the Q4 margin losses, we have many initiatives in place aimed at replicating what we accomplished in LAM throughout 2015.

Those operational disruptions, do you think a lot of those are going to come back in the first quarter?

Some of them will. We know which ones require additional resources, and those will be prioritized. For the others, we are aware of which they are, and we have been reducing resources allocated to them.

And then on the pricing concessions, Paal you’ve been talking about and you talked about it last quarter as well. Is this on kind of new work that's being tendered or is this kind of pricing concessions on existing contracts?

It’s a combination. When you tender for new work you will need to assess what the going rate in the market is, and in some cases you’ll get the opportunity to hang on to the existing contracts or even extend them provided there are some concessions given. So this is a combination.

Okay. And would the transformation do you think offset pricing over time largely?

Well if you look at internationally in 2015, we have managed to offset internationally quite a lot of it. Can we do all of it? That’s probably going to be tough. But it is a significant counter to the pricing pressure that we’re seeing, yes.

Thank you.

Thank you.

Thanks. Good morning. Paal, I was hoping before we ended the call that perhaps you could just speak generally about customer expectations internationally in terms of CapEx for ‘16. I mean, do you guys have a bottoms-up view yet at this point in terms of the size of the decline we could see as we try to think about calibrating overall top-line international revenue declines potentially for ‘16?

If we look at 2015, national spending decreased by about 20%. Various third-party surveys indicate an average or consensus suggesting more than a 10% reduction in international spending. Based on this information, it seems likely that next year will be another difficult one. It's also important to consider the downward trend we've seen in international exploration and production spending over the past five or six quarters, which has resulted in a significant drop in our revenue from the fourth quarter of 2014 compared to the fourth quarter of this year and into the first quarter of 2016. While year-over-year numbers for the full year are significant, we also need to look at our current quarter performance, which has seen substantial declines. For our Q1 revenue consensus, based on the work of analysts, we're already seeing a 17% decrease in overall revenue, indicating that current levels of activity and spending are already much lower for the year ahead.

Okay. Thanks for that. I guess Simon, one for you. Given the pending Cameron acquisition here in the first quarter, is there any blackout period on Schlumberger being able to buy back stock as we approach that close?

No, there are no restrictions. We will be able to return to the market after the blackout period ends in a couple of days, no restrictions at all, Bill.

Okay. I’ll turn it back. Thanks for the time.

Thank you.

Hi. Thanks, guys. I have a question for Simon, and more on the currency side continuing there. It looks like you’ve done a really good job so far this year of managing the currency risk. So, I would just like to understand how do you manage the currency risk in SPM projects, especially as you ramp those? And then if you could just help us, you quantified the revenue impact from currency this year. Can you help us with the international margin impact from how well you manage the currency?

Thank you for your question. Regarding the currency situation and our international operations, we have a natural hedge in place. This means that we align our revenue in local currencies with our local costs, although this can vary by region. In some areas, we may experience losses due to currency fluctuations, but these losses are typically offset by gains in other regions. In 2015, for example, currency issues accounted for almost 20% of the revenue decline from 2014 to 2015; however, this did not significantly affect our margins. While there is some impact from Canada, most of our operations are outside North America, and as I mentioned, we manage this through a natural hedge. We ensure that we do not accept more local currency than we need to cover our local expenses. Most of our SPM projects are dollar-based in terms of revenue, and those utilizing local currency adhere to the same approach of not exceeding local requirements for costs. Additionally, SPM projects tend to be larger, further reinforcing our natural hedge strategy.

Okay. Are you suggesting that your margins didn't improve from the currency? If your EBIT remained stable this year, you could have seen a few hundred basis points benefit in your margin. Is that correct?

No, the significant impact of the currency last year was primarily due to Venezuela, where we changed the currency rate. However, it did not affect our margins in other ways.

Okay. Thank you.

Turn it over to Paal, Matt.

Thank you, Simon. So before we close this morning, I’d just like to summarize the three most important points that we have discussed. First, the business environment in the oil industry worsened further in the fourth quarter leaving traditional reductions in both activity and pricing levels and making 2015 the worst industry downturn since 1986. In spite of this, we delivered strong full year performance compared to previous downturns generating $5 billion in free cash flow and returning $4.6 billion in cash to our shareholders through dividends and buybacks. In addition, we spent $500 million on technology acquisitions that further broadened our portfolio and yet we increased our net debt by only $160 million. Second, 2016 will be another challenging year during which we will aim to continue to deliver superior financial results empowered with proceeding and capitalizing on the broad opportunity set the current market environment presents. We remain constructive in our view on the market outlook for the medium term, and continue to believe that the underlying balance of supply and demand is tightening driven by growth in demand, weakening supply as the massive cuts in the E&P investments take further effect and by the size of the annual supply replacement challenge. Lastly, we look forward to closing our merger with Cameron International during the first quarter where the integration planning is largely complete for day one, and with anti-trust approvals all progressing on track. We are excited about what the combination of our two companies will bring. I look forward to joining forces with more than 20,000 Cameron employees. Overall we remain confident in our ability to continue to weather this downturn embedded in our surroundings through our global reach, the strength of our technology offering and the extent of our corporate transformation program. That concludes the call. Thank you very much for attending.