SLB (SLB) — Q1 2017 Earnings Call Transcript

Thank you. Hello, and welcome to the Schlumberger Limited First Quarter 2017 Results Conference Call. Today’s call is being hosted from Dhahran, Saudi Arabia, following the Schlumberger Limited board meeting. Joining us on the call today are Paal Kibsgaard, Simon Ayat, and Patrick Schorn. We will, as usual, first go through our prepared remarks, after which we’ll open up for questions. However, before we begin with the opening remarks, I’d like to remind the participants that some of the statements we’ll 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 reconciliations to the most directly comparable GAAP financial measures can be found in our first quarter press release, which is on our website. With that, I hand the call over to Simon Ayat, who will present the first quarter corporate results and also review the results by group.

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. First quarter earnings per share, excluding charges and credits, was $0.25. This represents a decrease of $0.02 sequentially and $0.15 compared to the same quarter last year. During the current quarter, we recorded $0.05 of Cameron merger and integration charges. Our first quarter revenue of $6.9 billion decreased 3% sequentially, largely driven by the Cameron Group as a result of project completions and reduced product sales. Pretax operating margin only decreased by 42 basis points to 11%. Highlights by product group were as follows. First quarter Reservoir Characterization revenue of $1.6 billion decreased 3% sequentially, primarily due to project completions in Testing & Process systems and seasonally lower SIS software and multiclient license sales. These decreases were offset in part by progress on early production facility projects in the Middle East and the improved Wireline revenue in North America. Margin decreased 170 basis points to 17%, driven by the lower contribution from SIS software and multiclient sales. Drilling Group revenue of $2 billion decreased 1% sequentially, while margins were flat at 11.5%. Strong activity in North America was offset by lower activity and pricing pressure internationally across the group. Production Group revenue of $2.2 billion decreased 1% sequentially, and margins fell by 78 basis points to 5%. These results were primarily driven by strong pressure pumping activity and pricing recovery in North America land, which was offset by seasonally lower completion product sales and lower SPM revenue. The Cameron Group revenue of $1.2 billion decreased 9% sequentially, largely driven by OneSubsea due to declining project volumes. Reduced product sales in Surface System and the further drop in Drilling System also contributed to the decline. Margins decreased 80 basis points to 13%. Despite the revenue decline, OneSubsea margins still exceeded 20% for the third consecutive quarter as a result of strong project execution. The drilling backlog was essentially flat, while the OneSubsea backlog increase reflected the Mad Dog 2 award. The book-to-bill ratio for our long-cycle businesses increased to 1.1 in the first quarter. This marks the first time these businesses have been above 1 since the fourth quarter of 2013. Now turning to Schlumberger as a whole. The effective tax rate, excluding charges and credits, was 15.3% in the first quarter compared to 15.8% in the previous quarter. Looking forward, the ETR will be very sensitive to the geographic mix of earnings between North America and the rest of the world. With the continued recovery in North America, we anticipate that the ETR will increase next quarter and over the course of the year. We generated $656 million of cash flow from operations. This is despite the consumption of working capital that we typically experience during Q1, which is driven by the annual payments associated with employee compensation and the payment of $140 million in severance during the quarter. We also continue to experience payment delays from certain customers, primarily in Latin America. Our net debt increased $1.3 billion during the quarter to $11.4 billion. We ended the quarter with total cash and investments of $7.6 billion. During the quarter, we spent $372 million to repurchase 4.7 million shares at an average price of $78.97. Other significant liquidity events during the quarter included roughly $380 million on CapEx and investments of approximately $145 million in SPM projects and $115 million in multiclient. We also made $696 million of dividend payments and $221 million in Borr Drilling. Full year 2017 CapEx, excluding SPM and multiclient investments, is still expected to be approximately $2.2 billion. And now I will turn the conference over to Patrick.

Thank you, Simon, and good morning, everyone. Starting off with North America. Our first quarter revenue increased 6% sequentially as growth in U.S. land and Western Canada was partially offset by further activity reductions in the U.S. Gulf of Mexico and Eastern Canada. As expected, the North America land market continued to strengthen during the first quarter in terms of both activity and pricing, leading us to start full-scale deployment of idle capacity for most product lines. Revenue growth was led by hydraulic fracturing and drilling services, but also increasingly supported by Artificial Lift, Surface Systems, and Valves & Measurements. In spite of our capacity reactivation being heavily back-end loaded as we continue to adhere to our profitable growth strategy, we still generated 16% sequential revenue growth in our hydraulic fracturing and directional drilling services in U.S. land. More importantly, we delivered incremental margins of 66% for these services combined in U.S. land, driven by productive customer engagements around pricing recovery and operational efficiency, together with timely resource additions, new technology sales, and proactive supply chain management. In the U.S. Gulf of Mexico, the first quarter revenue declined again sequentially as the deepwater rig count dropped 15 at the end of March, which represents a reduction of 74% compared to the peak activity level of 2014. In addition to the low drilling activity, we also saw a further sequential drop in seismic multiclient sales, leaving offshore revenues at unprecedented low levels. In parallel with these record low activity levels, product and services pricing, as in several recent cases, fell into levels that make it impossible for us to uphold our operating standards and, at the same time, turn a profit in this extremely challenging operating environment. We are, therefore, in the process of redeploying both service capacity and technical support resources from the U.S. Gulf of Mexico to other more viable markets. Internationally, the first quarter revenue fell 7% sequentially, driven by a stronger-than-expected seasonal decline in activity and product sales, particularly in the North Sea, Russia land, and China, as well as lower sequential activity in key parts of the Middle East. On a positive note, revenues in Latin America were flat sequentially, confirming that this region has indeed reached the bottom of the cycle. The results were driven by solid activity in Brazil, further supported by multiclient seismic sales and strong OneSubsea and Cameron Drilling Systems activity. This was offset by a range of activity challenges impacting our hydraulic fracturing operations in Argentina, which has now been resolved, as well as production constraints imposed on our Shushufindi SPM project in Ecuador. Revenue in Europe, CIS, and Africa decreased 10% sequentially, driven primarily by the completion of a large OneSubsea project, lower Cameron Surface Systems sales, reduced SIS software license sales, and a more severe seasonal reduction in drilling-related activity throughout Russia, Kazakhstan, and the North Sea. Still, the activity in the Northern parts of ECA is expected to recover in the second quarter, and we maintain a constructive outlook for the year for both Russia and the North Sea. In Africa, revenue was flat sequentially, indicating that this region has also reached the bottom of the cycle. In North Africa, activity remained stable in Algeria during the first quarter, and we also started preparations for reentering Libya, expecting to start a small-scale land operation in the second quarter after having been shut down on land for the past three years. Sub-Sahara Africa revenue was also flat sequentially, with early termination of ongoing drilling activity in Angola and Gabon offset by the start-up of two new deepwater projects in Congo and Senegal, and strong growth in land activity in Chad, Congo, and Ethiopia. In the Middle East and Asia, revenue decreased 7% sequentially, driven by lower product sales from the Cameron Surface and Drilling Systems product lines and by lower activity and service pricing pressures throughout the Middle East, particularly impacting the Production Group. In Asia, revenues in China and Australia were lower sequentially due to lower offshore drilling activity and severe seasonal weather impacting our land operation in both countries. The first quarter revenue in Malaysia and Indonesia was flat sequentially, confirming that we have reached the bottom of the cycle here as well, but with no clear signs yet of any significant activity recovery in this region. With that, I will hand the call over to Paal.

Thank you, Patrick. Following the review of our first quarter results from Simon and Patrick, I will next provide you with an updated business outlook. But before I do that, I would like to say a few words about the Cameron Group as we just passed the one-year mark since the closing of the transaction. Over the past 12 months, we have successfully implemented the first phase of our integration plan, which included three main themes: first, the colocation of 1,700 employees into joint facilities around the world; second, combining Schlumberger and Cameron businesses to deliver enhanced offerings to our customers, such as our new Testing & Process systems product line; and third, bringing together Cameron and Schlumberger technologies, for instance, in hydraulic fracturing and OneDrill and by launching as many as 32 integrated R&D projects to further expand our integrated technology offering. At the same time, OneSubsea, now in its fifth year of existence, has firmly established a leadership position in the subsea market through the pore-to-pipeline approach, as seen by the higher rate of project awards in recent quarters as well as their industry-leading operating margins. Overall, the entire Cameron integration program has exceeded the ambitious first year synergy targets we set and delivered approximately $400 million in operating income synergies as well as $600 million in new orders. The first quarter results from the Cameron Group were again very solid. I would like to compliment the entire Cameron organization and the integration team on a job well done, ensuring that the largest transaction Schlumberger has done to date has turned out to be a great success. Turning next to the business outlook. We maintain our constructive view of the oil market, and we foresee further inventory growth in the second quarter, driven by the OPEC and non-OPEC production cuts put in place in January. Currently, the region in the world showing clear signs of increased E&P investments in 2017 is North America land, although investment levels in the Middle East and Russia are also expected to remain resilient this year. However, for the rest of the world, which still makes up more than 50 million barrels per day of oil production, we are heading towards a third year of significant underinvestment, increasing the likelihood of a medium-term supply deficit as produced reserves are not replaced in sufficient volume. In particular, the market continues to focus on headline decline numbers suggesting that production is holding up well, while a closer examination of the underlying data clearly shows that the depletion rate of proved undeveloped reserves is rapidly accelerating in several key non-OPEC countries. The current level of underinvestments is most visible in exploration, where record-low investments, including both drilling and seismic, led to a total amount of industry discoveries of less than 5 billion barrels in 2016 versus a produced volume of over 30 billion barrels, dropping the industry-wide reserves-to-replacement ratio to 32%. Presently, there are no clear signs of any general increase in exploration spend, with the one exception being Mexico, where we are seeing increasing interest in offshore multiclient surveys we have acquired over the past two years. Looking next at our business outlook by region. The recovery will clearly be led by North America land, where investment levels are expected to increase by 50% in 2017, leading to a strong increase in activity and an overdue correction to service and product pricing. Through organic and inorganic investments made in our North America land business over the past few years, we are well set up to take a leading position in serving our customers in the coming growth cycle. In drilling, we have built a market-leading position by expanding our offering through the Smith and M-I SWACO acquisitions and through a broad organic R&D program targeting the North America land market. As drilling complexity continues to increase with even longer laterals, our purpose-designed technologies are starting to have a significant impact on our customers’ drilling performance. One example of this is the strong uptake of our AxeBlade drillbit, which has demonstrated a record 35% increase in rate of penetration for Matador in the Permian. Furthermore, our PowerDrive Orbit rotary steerable technology continues to be sold out for a third successive quarter and in an 80-well campaign for Parsley Energy in the Midland and Delaware basins. This technology has contributed to a 17% reduction in average drilling time per well and a 30% reduction in the drilling cost per lateral foot. Both of these examples show the performance potential that new technologies hold in the North America land market and demonstrate the growth opportunities for our drilling offering as we continue to prepare for the introduction of our OneDrill platform in the second half of this year. We are also starting to see strong growth momentum in North America land for our market-leading Artificial Lift offering, where we recently acquired a 49.9% stake in the HEAL technology from Production Plus Energy Services based in Calgary. HEAL, which can be used in wells together with our ESP plunger lift and rod lift offerings, reduces fluid slugging, depresses form generation, contains solids, and separates gas, improving production and reducing the need for workovers. We are presently at the introduction stage of this exciting new technology, which, over the first 140 installations, has delivered an average production increase of 45%. Within our hydraulic fracturing and completions offering, we have also made significant investments in recent years, including the development of a fully automated surface delivery system, acquiring our own sand mines, and the associated vertically integrated distribution system, which will greatly improve our full-cycle returns. In terms of well productivity, the market offtake of our geoengineered completions continues to grow, and the offering is delivering significant value for our customers, as seen by the 18-well program we recently completed for Lonestar Resources in the Eagle Ford Shale. Here, we optimized drilling, stimulation, and completion plans across the long laterals, supported by our drillbit formation BroadBand Sequence diversion technology. As a result, the wells produced up to 86% more hydrocarbon per 1,000 feet of lateral compared to offset wells in two other fields. With proppant prices and distribution costs now starting to rapidly increase, we also expect to see a recovery in the use of our HiWAY technology, which reduces proppant use by 40% and water use by 25%. Building on this broad technology platform, the pending OneStim JV with Weatherford will give us the required scale in terms of both hydraulic horsepower and multistage completions technologies to drive efficiency and market penetration in all unconventional basins in North America land. At this stage, the regulatory filings have been completed, and as we await the required approvals to close the OneStim transaction, the integration teams are making all the necessary preparations for a successful Day 1 of the new company. Looking next at Latin America, the flat sequential revenue in the first quarter was a long-awaited positive confirmation that this market has indeed reached the bottom of the cycle. Going forward, there are emerging positive signs for our business in the region, including opportunities for new commercial models in Brazil as Petrobras continues its assets divestment program and as a new focus is brought to mature land basins. In Argentina, new plans to bring stability to natural gas prices should lead to higher investment levels. We are also excited about our recent agreement with YPF for joint development in the Vaca Muerta Shale. In Europe, CIS, and Africa, we see strengthening activity in the North Sea, Russia, and the Caspian region in the coming quarters as the winter season ends and new projects start up. In Africa, we expect some activity improvement in the North, as we start up a small-scale land operation in Libya after being shut down for the past three years. While we see a slow but steady improvement in Sub-Saharan Africa over the coming quarters, driven by a mix of land activity in Chad, Congo, and Ethiopia and a limited number of deepwater start-ups in Congo, Guinea, and Ivory Coast. In the Middle East, activity will continue to be driven by the GCC countries. However, we do not expect significant sequential growth from this region over the coming quarters. While in Asia, we will see the normal seasonal recovery in China. Overall, it’s clear that activity in the international market has reached bottom in all regions. But even though we see positive signs in many countries, we expect only moderate sequential activity growth in the coming quarters. This slower recovery, along with lingering pricing pressure, means that we will likely face another challenging year in the international markets while we expect an acceleration of activity growth towards the back end of 2017 and into 2018. With this market backdrop, we continue to actively position Schlumberger at the forefront of an industry that needs to evolve. We do this by proactively managing our base business and responding to ongoing pressures of commoditization by tailoring our offerings, resources, and service performance to changing market conditions. In parallel, we constantly look to expand our opportunity set in a period where the industry, in many ways, lacks overall direction. This includes driving a broad and very active M&A program, engaging with existing and new customers to establish closer collaboration and more aligned business models and also expanding our offering from technical support to now also taking a financial position alongside our customers in applicable projects, all with the aim of generating more activity for our 19 product lines. As we carefully navigate the current industry landscape, we remain confident and optimistic about the future of Schlumberger, knowing very well that beyond the current market challenges lies a wealth of opportunity for industry players that are ready to think and act differently. Thank you. With that, we will open up for questions.

Hey, good afternoon, Paal.

Good afternoon. Given that you are holding your call from the Kingdom, the board meeting was held in the Kingdom as well, I’d love to hear kind of what – as you and the board talk about strategic focus over the next several quarters but also several years and the implementation of those strategies, what are the key kind of top 1, 2, 3 items that you or Schlumberger is most focused on in the near-term, especially given your broad international focus? I think we understand where you stand in North America. Well, if you are asking about particular operations in Saudi Arabia, let me first say that the board has spent a full week in Saudi Arabia, between Jeddah, Riyadh, Shaybah, and Dhahran. We visited KAUST University and various government institutions focused on science, technology, and innovation. Of course, we spent a lot of time with our largest customer, Saudi Aramco, both at their headquarters in Dhahran and in their field operations in Shaybah. The board had a particular interest in broadening its understanding of both the Vision 2030 for the country and the In-Kingdom Total Value Add program, which is very important, particularly regarding how Schlumberger continues to actively support these programs and strengthen our position in the kingdom. As part of our visit, we had the privilege of meeting His Excellency, Khalid Al-Falih, to discuss the state of the oil market, which was also very useful for our board to do. Everywhere we went, we were met by exceptional hospitality, and the board was impressed with everything that we saw and everything that is going on in the kingdom. This has served as a further extension of our understanding of all the details in the country and has helped both the board and the senior management team to adjust and accelerate our plans of investment in the country.

Okay, that’s great. It’s very helpful, Paal. And maybe just a quick follow-up for me. You recently announced the new special venture fund, and you made some quick moves there with that fund. Could you elaborate a little bit on the mandate here for the fund and what you see as the opportunity set?

Yes. Just to clarify what the fund is, this is a new avenue for project investments alongside our customers. This aims to enable closer collaboration and alignment with our customers, facilitating and supporting additional E&P investments, and importantly, securing preferred supplier agreements for our products and services for these investments. This is the overall driver behind it. We understand that many of our customers do not see a need for this, but some do, and the key principle is that this fund and these investment opportunities are open to all customers. The main goal is to enable growth in our base business. The scope of the fund is relatively open. We will evaluate each project based on its standalone merits. We haven't set limits for the size of the fund yet, but we are open to co-invest with third parties. The fund will be subject to the same governance and risk management processes that we have for the base business, and ultimately, investment decisions will be approved by our CFO. This is in place to facilitate further growth for our base business.

Okay, great. Thanks, Paal.

Thank you, James.

Thanks. Good morning. Good afternoon, guys as well.

Good morning.

So Paal, could we go back to the U.S. a little bit? Obviously, the OneStim JV is a surprising joint venture and interesting to see. Can you talk a little bit about your strategy for redeploying the frac fleet into the U.S. market, and if you could even have a target horsepower as you exit 2017 and some details about the logistics of the JV?

Yes. We need to separate the JV from our current hydraulic fracturing business in North America land. The JV will include all that business once closed. As of now, we continue to manage our business as a stand-alone operation while preparing to close the JV as soon as possible. I will briefly comment on our plans for activating capacity for the base business today, and then I’ll have Patrick provide insights on the OneStim JV post-closure. Regarding our fracking business, we have stated that as soon as we have a clear path towards profitability, we will actively reactivate our idle capacity. This milestone actually passed in the first quarter; we began actively reactivating our idle capacity. This process will accelerate in Q2 and continue into H2. Based on our current plan, we aim to deploy our entire idle capacity from the Schlumberger side by the fourth quarter of this year. This is our current reactivation strategy. We are gaining significant traction on pricing, actively hiring people for wellsite operations and the vertical integration part, including the transportation side. Our balance between insourcing of our vertical supply chain and maintaining close relationships with our suppliers is important. We are not looking to fully vertically integrate; we will have a portion of our capacity vertically integrated and will work closely with our suppliers for sand, transportation, and distribution. Therefore, in the coming quarters, we will continue to actively redeploy, and upon closing the OneStim JV, these resources and businesses will all combine under OneStim to continue this process.

Regarding the OneStim joint venture, which is a 70-30 joint venture with Weatherford for North America land for hydraulic fracturing and completion, it creates a new industry leader in terms of hydraulic horsepower and multistage completions. Through its scale, it will offer a cost-effective and competitive service delivery platform, which is clearly positioned to provide customers with leading operational efficiencies and best-in-class hydraulic fracturing and completion technologies. Importantly, it will improve reliable equipment availability for our customers, significantly enhancing the full-cycle shareholder returns from this particular market. In this case, Weatherford is contributing its leading multistage completions portfolio, around 1 million horsepower in pumping equipment, and the pump down perforating business. The result will be a very capital-efficient structure that pulls hydraulic horsepower to gain economies of scale, which will be crucial in the current market recovery.

Okay, thank you. That’s very helpful color. As an unrelated follow-up, could you give a little insight on Cameron and what your outlook is for subsea overall with regards to large projects and pricing, and any updates on the rig of the future?

Firstly, we exceeded our first year synergy targets, realizing approximately $400 million in savings. We have already secured around $600 million in new synergy orders. From that perspective, the transaction is working well, and integration is going extremely smoothly. In Cameron, we focus on creating a fully integrated drilling and production system, combining our leading well and subsurface offering with Cameron’s leading service technology, leveraging instrumentation and software control and optimization capabilities. During Q1, overall revenue was seasonally down, mainly due to OneSubsea and Surface Systems as Surface and V&M posted double digits in U.S. land and a step change in bookings. The booking to bill ratio is starting to exceed 1, which is significant. Margin declined somewhat, but through robust execution and cost control, we limited the margin decline to approximately 88 basis points.

All right. Next question.

Thank you very much. I’m wondering, Paal or Simon, whether you could elaborate a little on the increased participation in customer projects under SPM. You highlighted in the prepared remarks that payments from certain Latin American customers have slowed down. How do you see the evolution, the impact on return on capital, and how significant the committed capital becomes? I think that’s a line of questioning I suspect in every single investor meeting when the topic of Schlumberger comes up.

The fund itself is there to facilitate growth in the base business. The way we view the fund is that when we make investments alongside our customers, these investments will need to meet our overall return criteria and the criteria for the base businesses we associate with the projects. Through preferred supplier agreements, we also need to meet the same return criteria. The way to look at the fund is that we have a strong balance sheet, robust cash flows, and ample cash on hand. Selectively, we are looking for investment opportunities that facilitate growth in the base business. Our revenues are around 50% of what they were eight or nine quarters ago, and we are actively trying to secure baseline growth not just in North America land but globally. Given our capabilities around subsurface understanding, drilling, and completions, we see this as a good way to drive short and medium-term activity, generating long-term contracts that can last 10 to 20 years, which will provide a solid baseline of activity and earnings throughout the coming cycles.

Okay, thank you. And on the revenue synergies with Cameron, $600 million, it’s tough for us to see where that would come from with or without the joint venture. Can you elaborate a little on what type of business you’ve signed up that you don’t think either Schlumberger or Cameron would have achieved on a standalone basis? And can you also comment on your rationale for investing in Borr?

Some of the examples of revenue synergies include expanding Cameron’s geographical reach and using Schlumberger’s existing footprint to access a far larger customer base. This also accelerates the implementation of the OneSubsea vision and plans as the cooperation between the companies is much closer today. One of the first points we had brought up when we started discussing these opportunities was addressing significant industry NPT issues related to BOPs, linked with monitoring and optimizing their use. We are really focused on creating an integrated drilling system that encompasses all the service components we offer and can optimize the drilling process in a manner neither company could achieve independently. These are the main examples of revenue synergies.

So Ole, let me quickly comment on Borr. We made a $221 million investment to take a 20% stake in this new company. There are several drivers behind this investment, but the main is creating a platform where we can collaborate closely with Borr to offer performance drilling offshore in shallow water. We see significant opportunity in this collaboration as Borr will provide a large market for Cameron drilling, both in terms of BOP, sand, and drilling packages. Moreover, we anticipate this will be a strong financial investment.

Thank you.

Thank you, Ole.

Thanks. Good morning. A question regarding the increments you generated in Lower 48 for frac and directional 66% for Q1. Patrick and Paal, given the reactivation slate ahead of you, do you expect to generate either that level of profit improvement throughout the year or something within that region as you reactivate assets? The rest of the industry seems to have trouble correlating revenue growth with profit improvement, but in your case, it looks like the profit improvement was considerable. I’m curious about the relationship between reactivation growth and margin improvement in that regard.

That’s a good question. I would split it into two. Regarding the one-time costs of reactivating, yes, we will feel that impact in the coming quarters. However, we aim to achieve the underlying incrementals at a similar level. We will experience additional activation costs, I suspect in the second and third quarters, slightly lowering our incrementals during those periods. Nonetheless, we expect customer price increases and improved efficiency through scale as we reactivate while managing our supply chain. We aim for incrementals around those levels. Still, we will face some headwinds concerning one-time reactivation costs in the upcoming period, though our longer-term outlook remains strong.

Okay, thank you. Regarding the Shushufindi, can you provide an update on the challenges reported recently with Ecuador and the project’s forward path?

Yes, I can. To clarify, we have several SPM projects in Ecuador. The issues we’re discussing pertain specifically to Shushufindi. To provide some background, we have been operating successfully there for five years. Between us and Petroamazonas, we have maintained a solid governance model with annual budgets and production targets. Over these years, we have exceeded all production targets. However, with lower oil prices, Petroamazonas faced cash flow challenges, falling behind on payments as they sell our produced oil. Their proposal to address payment concerns is unsatisfactory, and the situation has become aggravated by production constraints imposed on the output from Shushufindi. Bottom line, we find this treatment of a partner who has made significant investments in the country somewhat disappointing. However, we are confident these issues will resolve either amicably or through dispute resolution provisions in the contract. We are ready to continue discussions, expecting a resolution as soon as the production constraints are lifted.

Okay, thank you.

Thanks. Paal, could you elaborate a bit on the weakness you observed in the Middle East this quarter? It was mentioned in the release, and while pricing pressure wasn’t surprising, the activity reduction stood out to me. Is there a specific country experiencing this issue, and do you think it will recover later in the year? Is it an adjustment to drilling programs?

I wouldn’t use the word weakness, David. We have a slight decline in overall activity and revenue in the Middle East. Declines in Asia weigh in on overall EMEA numbers. However, there’s nothing that should concern you. We’re not seeing significant growth in coming quarters, but slight sequential declines are primarily due to project mix and priorities. The underlying business in the Middle East is very resilient, and there's a solid plan in every country we operate in.

Okay, thanks. Just a follow-up regarding offshore. It seems that IOCs are hesitant to invest offshore. We haven’t seen much on the step-out and tieback front. Can you elaborate? We used to talk about 5 to 8 big projects maybe being announced later in the year. Have your views changed regarding the offshore environment? Will we see this more likely in 2018?

We share your view. Thus far, there have not been significant FIDs or plans discussed for offshore. While there is a slight rise in jack-up utilization, we anticipate early signs of light work coming our way as an industry. However, we haven't yet seen significant larger project announcements. The main factor appears to be that IOCs need a better medium-term view on oil prices. The increases we've observed recently are beneficial, but I expect that they are also contemplating the potential floor and the upcoming OPEC meeting in May, pondering whether production cuts will extend. I agree that offshore activity growth may be more pronounced in the latter half of the year, leading into 2018. With that, it's vital for us to secure work stemming from projects that are moving forward.

Great. Thank you, Paal.

Thank you.

Good morning, guys.

Good morning, Jim.

A lot of questions asked, so if I could drill down further on North America. Patrick, you made comments about the increased vertical participation in sand and additional sand mines. Can you tell us what you’ve done in recent quarters to ensure capacity, delivery, and profitability in North America in sand?

We initiated the vertical integration investment program in late 2014, and we have made several investments in sand mines which are coming into production now. Additionally, we have invested in owning railcars and transloading facilities. We are also establishing our own trucking fleet, currently hiring personnel to operate the trucks we have acquired and are acquiring. However, to clarify, we’re not pursuing full vertical integration—there will be a portion of our capacity that’s self-sourced, while still relying on our long-term suppliers through both upturns and downturns. The investments are significant, serving as insulation against the massive supply chain inflation we faced in the previous cycle. It will be a balance of vertical integration while leveraging supply chain capabilities in the open market.

Thank you. My follow-up concerns the completion capacity and what it will bring in relation to OneStim. Over 80% of completions in the U.S. are plug-and-perf, and sliding sleeves have been marginalized. I know Weatherford does both. What’s Schlumberger’s view going forward on these two technologies? Is everything going towards plug-and-perf in a few years? Any details about Weatherford’s stations and yours in that regard would be appreciated.

First, the multistage completion offering from Weatherford will cover both open-hole and cased-hole solutions. In the last few years, we’ve seen a gradual shift towards plug-and-perf with fewer open-hole completions and sliding sleeves, although there's still more of that kind in Canada compared to U.S. land. We are set up well for either direction the market takes—whether it continues towards plug-and-perf or sees a resurgence in open-hole. The decision will depend on well performance, productivity, and completion costs, and we maintain flexibility to adjust accordingly, Jim.

Thanks very much.

Thank you.

Hey, good afternoon. Thank you very much.

Thank you.

Fantastic information flow so far. I’d like to gauge how you feel about the progression of The Street numbers as we look out into the second quarter.

Well, here it comes. I would say that in the second quarter, we expect to see continued trends from the first quarter. If you break it down, for North America, solid top-line growth is expected in Q2, driven by increases in rig activity and additional pricing and market share gains in directional drilling. We will see accelerated activation of capacity in fracking. Underlying incremental margins should be solid, but there will be some one-time startup costs affecting Q2 and Q3, along with the seasonal costs of the Canadian breakup. Overall, I expect strong top-line growth and decent earnings growth in North America in Q2, with some headwinds from startup costs. Internationally, as I mentioned earlier, we believe we've reached the bottom in all markets. However, for Q2, we see only flat underlying activity growth. Future growth internationally will be limited to seasonal recoveries in the North Sea, Russia, and China. On the Cameron side, revenue should also remain flat, with solid growth in short-cycle businesses being offset by slowing declines in long-cycle businesses. We believe that a sequential EPS growth of around 15% to 20% between Q1 and Q2 is a reasonable expectation.

That’s fantastic. Given your comments on pricing pressures internationally, it seems safe to assume that Q1 will at least be the low point for earnings this year, with sequential growth throughout. Is that an accurate assessment?

Yes, in principle. As mentioned, while Q2 international activity doesn’t show signs of significant improvement, we will benefit from seasonal recoveries in key markets. We see continued pricing pressure on new tenders, but we are working to mitigate this by moving away from unsustainable contracts. We are pursuing price increases where necessary to ensure viable business propositions. Therefore, we expect Q1 to be the low point for international earnings this year, with limited growth in Q2 and more acceleration in the latter half.

Okay, great. Thank you. Quick follow-up on your investments alongside customers in your YPF deal and Borr Drilling. You've indicated past SPM investments have been margin and returns accretive in aggregate compared to your corporate average. As you engage in more investments this year, what criteria should we consider? For example, for a $200 million investment in Borr Drilling, how should we assess incremental revenue or profitability?

The investments in equity in Borr Drilling should bring returns on investment or capital employed, which should be accretive to the company—that’s why we made them. For future investments, we will maintain that focus on ensuring they are accretive to our return on capital employed. These investments will also align with revenue opportunities emerging from them. Specifically, we're honing in on Borr's jack-up fleet—this represents a significant market for Cameron drilling and an opportunity to introduce new performance contracts in the offshore space, which is common on land now. Finally, while this investment should serve as a strong financial investment, it will also create synergies and bring business opportunities along with revenue potential for the rest of Schlumberger.

Okay, that's great. Thank you.

Thank you.

Thank you for taking my question. My question relates to Cameron, regarding some of the recent projects you’ve entered into, like Mad Dog and others. How should we think about long-term margins for these new projects versus what OneSubsea has been generating before?

If you analyze the current commercial environment compared to what we had three years ago, we will likely find it challenging to achieve the same margins on the newest projects as those currently executed by OneSubsea. Regardless, we have clear return expectations in any bids we make—these margins will likely be lower than the existing margins OneSubsea realizes. However, each project we bid and secure presents potential margin upside down the line, especially if we successfully execute and improve our delivery processes. It’s a competitive market, but OneSubsea is navigating it effectively, ensuring high-quality project execution.

And as a follow-up on integration-related expenses, when do you believe you will stop reporting them?

As we stated earlier, we will continue to report these expenses separately for the current year. Typically, we eliminate these reports in the year following an acquisition. Thus, we will drop them starting next year.

Thank you very much.

Thank you, Waqar. Before closing this morning, I would like to summarize the three most significant points we’ve discussed. First, the only region showing clear signs of increased E&P investments in 2017 is North America land, where activity has grown for several quarters. In line with our profitable growth strategy, we have begun redeploying our idle capacity in pressure pumping and will accelerate this in Q2. Through both organic and inorganic investments made in North America land over the past seven years, we are poised to take the lead in serving customers as they expand their activity this year. Second, the performance of our international areas in Q1 confirmed our belief that activity has now reached bottom across all regions. Although we see positive signs in many countries, both on land and offshore, we expect only moderate sequential growth in the coming quarters. The slower speed of recovery, coupled with lingering pricing pressure, means that we anticipate another challenging year in international markets in 2017 before clearer activity acceleration in 2018. Lastly, as we navigate the current industry landscape carefully, we remain optimistic about Schlumberger's future, knowing very well that beyond the current market challenges lies a wealth of opportunity for industry players ready to think and act differently. Thank you for listening today.