SLB (SLB) — Q4 2017 Earnings Call Transcript

Good morning, good afternoon, and welcome to the Schlumberger Limited Full Year and Fourth Quarter 2017 Earnings Call. Today’s call is being hosted in Houston, following the Schlumberger Limited board meeting. Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer; Simon Ayat, Chief Financial Officer; and Patrick Schorn, Executive Vice President, New Ventures. We will, as usual, first go through our prepared remarks, after which, we will open up for questions. For today’s agenda, Simon will first present comments on our fourth quarter financial performance before Patrick reviews our results by geography. Paal will close our remarks with a discussion of our technology portfolio and our updated view of the industry macro. However, before we begin, 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 also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our full and fourth quarter press release, which is on our website. Finally, after our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A in order to allow more time for others who may be in the queue. Now, I hand the call over to Simon Ayat.

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Fourth quarter earnings per share, excluding charges and credits, was $0.48. This represents an increase of $0.06 sequentially and $0.21 when compared to the same quarter of last year. During the quarter, we recorded $2.01 of impairment and restructuring charges and $0.05 of Cameron and OneStim merger and integration charges. We also recorded a $0.05 charge relating to the enactment of U.S. tax reform. Of the $3 billion of pre-tax charges, approximately two-thirds related to our exit from the seismic acquisition business and the write-down of our investment in Venezuela. Paal will discuss the background and rationale behind the exit of seismic acquisition business. As a result of the recent political and economic events in Venezuela, we wrote down our investment in Venezuela. Importantly, we will continue to maintain our presence in Venezuela, and we will continue to work to collect all amounts owed to us. However, from an accounting standpoint, we believe taking the write-down at this time is the right thing to do. As it relates to merger and integration charges, this will be the last quarter we call out this item separately. Further details regarding all of the Q4 charges can be found in the FAQ at the back of our earnings press release. Our fourth quarter revenue of $8.2 billion increased 3.5% sequentially. Pre-tax operating margins increased 99 basis points to 10.2%. Highlights by product group were as follows: Fourth quarter Reservoir Characterization revenue of $1.6 billion decreased 7.5% sequentially as a result of a change in estimate on a long-term project accounted for under the percentage of completion, offset in part by higher software and multi-client sales. Margins expanded 441 basis points to 22%, primarily due to increased contribution from software and multi-client sales as well as the impact of the accounting from the previously mentioned project. Drilling Group revenue of $2.2 billion increased by 3% sequentially, while margin increased 43 basis points to 14.6% due to strong M-I SWACO sales in Mexico and North America land. Production Group revenue of $3.1 billion increased 7% sequentially, while margin increased 39 basis points to 10.2%. These results were driven by strong pressure pumping activity in North America land and internationally in Russia, Saudi Arabia and Argentina. Cameron Group revenue of $1.4 billion increased 9% sequentially, driven by growth in all product lines, particularly OneSubsea. Although margins for the group decreased by 58 basis points, OneSubsea margins exceeded 20% for the sixth consecutive quarter. However, due to a decline in backlog, the OneSubsea margins are expected to be below 20% next quarter. The book-to-bill ratio for our long cycle business was 0.6 in Q4. The effective tax rate excluding charges and credits was 19% in the fourth quarter compared to 18.4% in the previous quarter. Let me now provide you some color on the impact of U.S. tax reform on Schlumberger. As a non-U.S. company, our tax result is primarily related to us paying taxes where we work and earn profits without having to incur an additional layer of taxes. Given the structure, the primary impact of U.S. reform on Schlumberger is that the lower federal tax rate of 20% will be applied to income earned by our U.S. business. Absent the impact of U.S. tax reform, our effective tax rate likely would increase by approximately 2 to 3 percentage points in 2018 as compared to our Q4 effective tax rate due to the higher profitability we expect in North America in 2018. However, the impact of U.S. tax reform is expected to largely offset this increase. As a result, we expect Schlumberger's full year 2019 effective tax rate will be more or less in line with Q4 2017 effective tax rate. During 2017, we returned $3.7 billion of capital to our shareholders through dividends and share buyback. As you know, our policy is to review dividend with our Board every January. Based on this review, we have decided to maintain our dividend at $0.50 per quarter. Paal will elaborate on this. We generated $5.7 billion of cash flow from operations for the full year 2017 and $2.3 billion during the fourth quarter. As a result, we achieved our cash flow generation target for the year. This is all despite making severance payments of approximately $455 million during 2017 and $108 million during the fourth quarter. I'm pleased to report that cash collection in Ecuador during the quarter was very strong. As a result, our receivable balance in the country at the end of 2017 was significantly lower than it was at this time last year. Our net debt increased by $900 million during the quarter to $13.1 billion. We ended the quarter with total cash and investment of $5.1 billion. During the quarter, we spent $101 million to repurchase 1.6 million shares at an average price of $64.82. For the full year 2017, we spent $969 million to repurchase 13.2 million shares at an average price of $73.11. And now, I will turn the conference call over to Patrick.

Thank you, Simon, and good morning, everyone. Let me walk you through our geographical performance of the fourth quarter. Looking at North America, revenue grew 8% sequentially, driven by a further increase in land activity as well as improved pricing. This despite a 1% decrease in the frac market stage count. The Production Group OneStim hydraulic fracturing operations benefited from a full quarter of activity for the fleets we activated in the third quarter as well as additional fleet redeployments in the fourth. Profitability also improved as pricing increased. Vertical integration continued to reduce supply chain costs and the impact of transitory and reactivation costs abated. The Drilling Group sales of directional drilling technologies and M-I SWACO products and services increased sequentially as customer demand for longer laterals remains strong. Cameron Surface and Drilling Systems products and services were also in higher demand throughout the quarter. At the end of December, we concluded the transaction with Weatherford, most as a joint venture, as originally envisaged, but as a straight purchase of 1 million hydraulic horsepower. This deal will further enable margin expansion of the Schlumberger OneStim business in North America, a business we started over 12 months ago focused on providing an integrated completion of fracturing offering in conventional markets. The acquisition of these assets broadens and strengthens the OneStim footprint in the U.S., and we see outside ownership as a positive, not only through the flexibility and independence it offers, but also the seamless integration opportunities it brings with other products of our offering such as coil tubing and the Cameron service and frac flow businesses. The progress of the OneStim business over the past year is marked by the success of new contract awards. For example, we have just signed an MOU with Oxy for a five-year service partnership in the Aventine project in New Mexico's Delaware basin. Our joint objective is to reduce the cost per barrel in the safest and most efficient way possible. Pending final contract negotiation, the agreement includes a minimum scope of 700 wells, exclusivity of services, and construction of a Schlumberger facility within the Oxy acreage. Offshore revenue in North America also increased as year-end sales of WesternGeco multi-client seismic licenses were stronger-than-expected. Activity in the U.S. Gulf of Mexico shifted to work over during the fourth quarter and will return to drilling in the first quarter of 2018, which includes activity on the Mad Dog 2 awards from BP for five to eight wells that we highlighted in this quarter's release. This award is in addition to the earlier awards to OneSubsea for the corresponding subsea installations. Internationally, fourth quarter revenue grew 2%. This was driven by strong growth in the Latin America area and sustained growth in the Middle East and Asia area. These positive effects were partially offset by seasonal weakness in the Europe, CIS, and Africa Area. In 2018, the international market will return to growth for the first time since 2014, and the projected activity growth is now leading us to start the reactivation of equipment to meet new contract start-ups. In addition to this, we're also starting to reposition equipment in the International Areas in general and to Russia in the Middle East, in particular, where activity is strongest and where we can secure the best returns. Both the reactivation and repositioning will result in increased short-term costs, which we expect to absorb in the first quarter of this year. In Latin America, revenue increased 9% sequentially, driven by Argentina and Colombia. In Argentina, the growth was driven by Production Group activity for unconventional resource development with increased stage count and profit sales. In addition, we also began the first well on the YPF Bandurria Sur project. Drilling & Measurements in Colombia benefited from stronger activity for Ecopetrol. Revenue in Mexico and Central America was lower despite the growth in land development drilling works for both PEMEX and a number of local operators due to the absence of the strong multi-client seismic license sales seen in the third quarter. SPM project revenue was essentially flat in Ecuador, where we collected the further payment during the quarter, bringing the total receipt to $720 million, inclusive of the $300 million in bonds received from Petroamazonas that we monetized in December. We expect further payments early in 2019. In the Middle East and Asia area, revenue increased 2% sequentially on strong IPS project work in Saudi Arabia. Much of this was the result of improved efficiency and unconventional resource developments, but performance also increased on conventional loan security projects. Looking forward a little, we were awarded two new lump-sum contracts for drilling, rigs, and services covering up to 146 gas wells and up to 128 oil wells. Project mobilization and startup will begin in the first quarter. Elsewhere in the Middle East, activity was higher for Drilling & Measurements in Qatar and Kuwait, where IDS efficiency delivered additional wells. Also, as already mentioned, RCT revenue declined from a long-term construction projects in the region. In Iraq, signs of increased activity are emerging in the north with at least one major IOC expected to resume activity during the first quarter. In the south of the country, we have made further market share gains with additional awards of IDS contracts. With the onset of winter, activity was lower in the Europe, CIS, and Africa with revenue declining a modest 2%. Seasonal effects were mainly seen in China, the North Sea GeoMarket and in Continental Europe, although these were partially offset by stronger SIS software sales and increased product sales from the drilling and production groups. Sub-Saharan Africa revenue declined with lower activity in Congo while in Libya, onshore drilling activity resumed as the security situation continues to improve. Weather in the Russia and Central Asia region mainly affected wireline, although this was partially offset by record highway stimulation operations as well as sales of SAS software and Artificial Lift products. Secondly, it was also lower as the summer campaign ended, but completions high-end product sales mitigated this effect. The Caspian and Kazakhstan declined, although new contracts begin early in the first quarter were awarded for operations in both Kazakhstan and Turkmenistan. Looking ahead, in other parts of the area, there have been a number of acreage acquisitions by international operators in Sub-Saharan Africa on the back of record low reserve additions with development acreage changing hands. This will translate to new activity in 2018, particularly in Tanzania and Gabon. Some of these new projects have already led to new project awards that favor our integrated service capability. For example, we have just been awarded a services contract for an offshore project in Gabon to oversee well construction services. At the same time, Borr Drilling has been awarded the rig contract. We see alignment of this type as being one of the next steps in being able to provide more efficient drilling operations. And with that, I pass the call to Paal.

Thank you, Patrick. 2017 marked the beginning of the oil market recovery, with supply and demand moving into balance and oil prices steadily increasing over the course of the year. Our revenue grew 9% and ended up just north of $30 billion, driven by strengthening land activity in North America and by the Cameron acquisition, where we exceeded the synergy target set at the close of the transaction in 2016. Our approach over the past three years during an unprecedented downturn has been to carefully navigate the difficult commercial landscape, seizing strategic M&A opportunities, continuing our commitment to our transformation program, and further broadening our extensive technology portfolio through organic R&D investments. Throughout this challenging period, we have continued to evaluate the effectiveness and competitiveness of all parts of the company and proactively restructure the elements we deemed necessary. In line with this, we took a further charge in the fourth quarter amounting to $3 billion, and I would now like to give you the rationale behind the largest element of this, which is our decision to exit the seismic acquisition business. Given our history and market position, this has not been an easy decision to make. However, following a careful evaluation of the current market trends, our customers' buying habits, and other current and projected financial returns, it is unfortunately an inevitable outcome. Geophysical measurements and seismic operations have been an essential part of Schlumberger and our R&D efforts for more than 30 years. Today, we remain the industry's seismic technology leader with a unique position in terms of intellectual property as well as engineering and manufacturing capabilities. Our IsoMetrix Marine acquisition system remains unrivaled and represents one of the biggest engineering achievements in the history of our company. Still, the downturn in the seismic data acquisition business now enters its sixth year. The present outlook provides no line of sight to a market recovery. It has also become clear to us that our customers are unwilling to pay a premium for our differentiated seismic measurement and surveys, and they believe that generic technology and performance is sufficient. This approach commoditizes the seismic data acquisition business and creates a very low technical barrier to entry for smaller players, who steadily add vessels and keep the market in a chronic state of overcapacity. We have therefore reached the conclusion that the seismic acquisition business cannot provide the full-cycle returns we require in terms of operating margins, free cash flow generation, and return on capital employed nor can it compete for our internal allocation of R&D funding for capital investments. This challenging commercial environment is today clearly reflected in the financial statements of all standalone seismic acquisition players, who are either at or close to bankruptcy, heavily burdened by weak cash flow and high debt. While standalone seismic acquisition players have no other choice than to stay in and fight on to avoid bankruptcy while hoping for a better future, we, at Schlumberger, do have a choice, and we choose to exit the commoditized land and marine acquisition business. Meanwhile, rapid advances in high-performance computing, data analytics, and machine learning have enhanced the value of seismic imaging and visualization, enabling us to extract significantly higher value from our previously acquired data. Going forward, WesternGeco will therefore adopt an asset-light model built on our strong multi-client, data processing, and interpretation businesses, further supported by our close partnerships with leading companies in cloud and high-performance computing. As a result, our reconstituted seismic business will, going forward, require half the capital investments and yield twice the free cash flow conversion, making it accretive to the cash returns of the company. In the coming quarters, we will, of course, honor all our existing land and marine acquisition contracts and customer commitments, but we have already stopped our participation in new bids. We are currently evaluating options for divesting our acquisition business and as we go through this process, we will call back our equipment as we complete our ongoing contractual commitments. Given the weak financial state of the other seismic acquisition players and the absence of a clear line of sight to a recovery in the seismic market, we are prepared for the divestiture process to take some time, and we may end up selling our acquisition business to a new market entrant. Next, let's turn to the oil market, where demand outlook continues to be strong, fueled by robust economic growth, with the latest forecast showing upward GDP revisions in both the U.S. and Europe, with India continuing to surprise to the upside. On the supply side, the OPEC and Russian production cuts were extended to the end of 2018, and more importantly, compliance remains at or above 100%. This is translating into higher-than-expected inventory growth, with U.S. stocks quickly approaching the five-year average and brent related inventories already well below that average. At the same time, floating storage has been more or less eliminated. All of this means that after a full year of waiting, the oil market is now substantially rebalanced. This is also reflected in the oil market sentiment, where we are currently witnessing a gradual shift from an oversupply discount towards the restoration of a market tightness premium, with any geopolitical or operational disruption creating further upward movement in the oil price. In North America, shale oil production has responded as expected in 2017, with strong growth seen in the fourth quarter following the ramp-up of drilling and completion activity earlier in the year. Looking forward to 2018, some of the U.S. E&Ps are still indicating that they will invest within cash flow in the coming year. However, with positive oil market sentiments and the increased availability of cash, we expect another year of robust growth in North America shale oil production, which will be required to maintain the balance in the global oil market. The reason for this is that the aging production base in Latin America, Africa, and Asia continues to show underlying production decline after three years of unprecedented underinvestment. In 2018, this trend will again be marked by close to 2 million barrels of long-cycle production additions from investments made in the previous up cycle. These production tailwinds are expected to drop by around 1 million barrels per day in 2019, which means that the affected decline in the rest of the growth will see a significant acceleration in 2019 and beyond, even if investment levels start increasing in 2018. These positive oil market sentiments are also reflected in the E&P outlook, where third-party surveys predict another 15% to 20% increase in North America investments in 2018, while the international market is poised for growth for the first time in four years with a forecast of a 5% increase in E&P spending. From the Schlumberger side, we expect 2018 to be another year of strong growth in North America land, driven by further market share gains in both hydraulic fracturing and drilling as we deploy another 1 million horsepower and continue the capacity ramp-up of our currently sold-out rotary steerables and drillbit technologies. In the international market, we expect growth in all regions in 2018 for the first time since 2014, spearheaded by solid underlying activity increases and market share gains in the Middle East, Russia, Asia, and the North Sea, while we expect more nominal growth rates in Latin America and Africa. The return to broad-based growth in the international market represents a significant boost to our earnings power due to our unrivaled leadership position in all parts of this market in terms of both market share and profitability. The significance of this is best illustrated by the fact that we generate four to five times higher earnings for each incremental customer dollar spent in the international market compared to the incremental customer dollars spent in North America. So after three very tough years, it is now clear that the tide is clearly turning in favor of Schlumberger. Moving closer to the first quarter, this will be a transitory quarter for us, where we expect the sequential decline in EPS to be $0.02 to $0.03 more than the normal seasonal growth. This is driven by the increased relative signs of our businesses in Russia and the North Sea, the need to absorb exceptional cost-related to the reactivation of idle capacity due to recent contract wins, as well as noticeable equipment repositioning costs as we shift more of our international capacity towards the Middle East and Russia. We expect to absorb the majority of these exceptional costs in the first quarter, and we are already seeing a strong acceleration in operating income growth in the second quarter. Turning next to capital allocations. We plan to tackle the 2018 activity growth without an increase in CapEx from the $2 billion levels seen in 2016 and 2017, as we again start to benefit from improved asset utilization on the back of our transformation program. These investments will be lower in 2018 as we focus on monetizing the strong library we have bid. For SPM, we have reached the end of our countercyclical business development program, and we are now shifting our full attention towards project execution. This means that capital investment levels will be down in 2018 and that our SPM business will generate positive free cash flow in the coming year. In terms of capital allocations over its M&A activity, the only major transaction we are currently pursuing is regarding the EDC transaction in Russia. We remain optimistic that we will ultimately receive the needed regulatory approvals. As for dividends, we decided, based on the current payout ratio, to maintain our dividend at the current level for another year and instead return excess cash to our shareholders in the coming year through our existing buyback program. As we eagerly enter the first year of growth in all parts of our global operations since 2014, our entire organization remains committed to delivering market-leading products and services to our customers and superior returns to our investors, driven by our ability to win our customers' work and deliver strong incremental margins and free cash flow. That concludes our prepared remarks. We will now open up for questions. Thank you.

Hi. Good morning, Paal.

Good morning, James.

Great to hear your confidence about the international recovery and that getting underway. It looks we've already seen a little bit of that so far. I know Patrick outlined just a slew of contract wins that have already happened and I know that there's a lot of tenders out there, more are coming. It seems to be a global nature. And you highlighted some transitory parts of 1Q, but how should we think about the rollout of international revenue or the contracts coming in and starting up as we go through 2018 and 2019? And kind of where do we see the inflection point for international?

Well, I think if you look at the progression of 2019, I think I'll limit my comments to that. Like I said, the first quarter will be – we will see a lot of the start-up of these new contract wins. So in terms of revenue, we will have an impact of seasonality given the relatively higher share of Northern Hemisphere business at this stage. Then it will be startup costs and mobilizations that we're going to focus on in the coming quarters. In terms of revenue progression, I think you will see the first quarter of significant acceleration in revenue in the second quarter, followed again by very strong growth also into the third quarter. So the year will have a somewhat slow start with seasonality with startup costs and mobilizations in the first and then followed by strong growth in the subsequent quarters.

Okay. That's very helpful. And then with respect to the first quarter, normally, there's about a 10% decline or so for Schlumberger's earnings, yet that's in the normalized year-over-year, you have a lot of back and forth quarter sales and see the drop-off there. Should we think about something in that range? Or will it be maybe more of a pronounced decline at 1Q and then more of a jump in 2Q because of these staging and the preparation?

Yeah, I think from an overall activity standpoint, I mean, we – I think about a 10% reduction in EPS is a good benchmark for that. On top of that, we will have, I would say, two three additional cents of one-time costs related to the reactivation as well as repositioning of equipment. But I think the 10% number is a good guide for the traditional seasonality with a couple of extra cents on additional costs.

Thanks. Good morning, Paal.

Good morning, Angie.

So a little bit of color maybe on the evolution of OneStim in regards to Completions and started up how you'd like to build that business out over time, have a vertically-integrated business. What product lines are you missing? And what's the timeframe do you think you could see for that business to be built out to a way that you would like it well-rounded full product suite, etc?

Yes. So for the multi-stage completion business for U.S. land, we do have a more or less complete offering. There are a few small pieces that we're missing that we are working on organically. But in terms of overall, we have the products that we need in the market. We have a presence in the market, although it is not very high. So what we are in full swing of doing now is to step up both supply chain and manufacturing as well as sales of this offering. We will now tie it very closely to the deployment of additional horsepower. We have obviously ramped up significantly already in 2017. So we have a very aggressive growth plan for the multi-stage completion offering that we already have in-house, and we will look to penetrate significantly into the OneStim frac fleet that we already have in operation as well as the additional fleets that we will put into play in 2018.

Okay, okay, fair enough. And then the reference to SPM being potentially done. I mean, previously, you were commenting there could be as many as two to four projects announced in the next one to two quarters. Now that oil prices have moved higher, transaction costs have also moved higher. Do you still expect two to four more projects to be announced or are you done at least for 2018?

Yes. So I think in general, Angie, SPM continues to be a growth engine for the company in the coming years. But at this stage, we have reached the end of what we call our countercyclical business development program, and we are really shifting our attention to project execution. Going forward, SPM will generate positive cash flow, and therefore, we'll be able to fund future investments and potential expansion. So I would really characterize this as a very disciplined growth moving forward.

Good morning.

Good morning.

Paal, with SPM being deemphasized to a degree with higher crude prices and you guys have made very good progress on the transformation, we started to receive a few questions from investors regarding what is Schlumberger's main growth strategy from here, what are the main initiatives to execute on that growth strategy? I have an answer, but given rising investor interest in Schlumberger and probably more people tuning into this call, I think it would be useful to if you just for a minute or two, from a higher level, if you could briefly discuss the overarching strategy of the company going forward and the key initiatives to execute on that strategy.

Well, I would say that if you look at what we've done over the past three years in the down cycle, we have done two acquisitions, in particular, Cameron, and through the combination, I would say a number of small acquisitions within land drilling and organic investments, we have increased our addressable market by around 50%. So we have now a very complete portfolio within Reservoir Characterization, within all aspects of drilling, and within all aspects of production, with an increased presence in U.S. land as well, and we’ve added Cameron to the lineup in 2016. Our strategy going forward is very clear; we want to now increase our market share, to increase our participation in all aspects of the global business. We have a fantastic presence in the international market, which is now just returning to growth. As I indicated in my prepared remarks, our earnings power internationally is four to five times higher than what it is in the North America land. So our strategy is very clear, it hasn't changed. We will continue to participate in all the major markets around the world, and we are very excited about the growth opportunities now that international is providing us, and again, the earnings power we have in these markets.

Got it. That's helpful. And then just with regard to the 5% market growth rate expectation in 2018, given the past investments in the SPM projects coming online, how do you think your international revenues trend relative to that market growth rate?

I think overall, our objective is to outgrow the overall market in any part of the growth, right? So I would say that if the international E&P spend growth ends up being 5%, our goal is to outperform it.

Good morning guys. Paal, it's all positive in terms of the outlook. We all know that you guys and everybody else has said that international drilling activity had kind of bottomed mid-last year, but we're warned that pricing pressure continued. Has the pricing pressure abated any? And where is pricing today versus 2014 broadly in the international sector? And I guess, it matters most in Russia, Saudi and the North Sea. Can you talk about pricing internationally since spending is going to up in the rig count bottom that seems to be the most critical issue right now?

It's a fair question, Jim. Obviously, we have a very clear view on pricing, and we have a very good handle on pricing. At this stage, I don't really want to go into what we think about pricing or how we're going to play pricing. This is very sensitive and very close to how we are running the business. So I'd rather keep those views to myself. Other than that, we have a very clear view on what they are doing and we are going to do going forward.

Has it quick going down at least generally per industry?

I'm not going to stick to what is said. I think overall in any part of the world remains competitive at any stage of the cycle. The question is are you pushing pricing up, are you looking for market share? I'm not saying that we are doing either of those two things other than what we have a very good handle on what to do with pricing, and we view this as a competitive advantage through how we are going to perform in the market going forward.

Good morning. Paal, if you could speak to the expected cadence of deployment and reactivation of the Weatherford frac fleet over the 2018 timeframe and then more over, if you could also speak to what you expect the total reactivation cost of the fleet to be as well and whether you expect all 20 of these fleets to be working by the culmination at the end of this year?

Yes. If you look at what we did in 2017, we basically reactivated around 1 million horsepower or slightly north of 20 fleets in 2017 of our own capacity. We are now more or less fully deployed, and we had challenges early on with the reactivation and getting everything out. There is a lot of hiring, there's a lot of new things to take on as to massively ramp up as we did. But at least, we have gotten the hang of it. Our plan is to do exactly the same in 2018. We would be deploying the additional 1 million horsepower over the course of 2018, and although it's not going to be a completely straight line, I think fairly close to a straight line over the course of the year is a good assumption.

Got it. And do you have sort of gas I mean, I'm sure you've done work, but do you want to reveal it in terms of what you expect the reactivation cost to be?

Yes. So for the horsepower that we bought from Weatherford, we expect the total reactivation cost to be in the range of $100 million, which is factored into our CapEx guidance.

Hi, good morning. Thank you for all that color.

Good morning.

Interesting stuff going on here especially on the international front for sure. So Paal, a lot of focus and attention on a very near-term numbers on the quarter. I don't want to read too much into your commentary, but it sounds to me like the benefit you're going to get from the startups post first quarter should more than offset the greater than seasonal drop in the first quarter. So on a full year basis, I'd have to assume that the street consensus numbers look pretty solid where they are right now. Can you provide some commentary on that?

We generally don't give annual guidance, so I'm not going to step into that. I would just reiterate my commentary that Q1 is transitory. We are not suggesting anything else than that. We have normal seasonal decline, we have some additional costs related to repositioning and reactivation, and we expect very strong growth in earnings, both in Q2 and Q3 coming after.

Okay, that's fair enough. I appreciate that. So on the international front, you're mentioning that the earnings contribute 4 to 5x more than that in North America. Is that a true cycle number, Paal? Or are you kind of comparing what was transpiring during the kind of peak activity levels for international and North America?

No, this is the full cycle comparison of our North American operations versus our international operations, full cycle.

Okay, great, awesome. That’s it for me. Thank you.

Thank you.

Hi, good morning. Paal, so you said in the past that doing nothing is not a strategy with the write-down in marine and seismic acquisition. So another move where you address your strategy on the business not meeting acceptable returns SPM is the other obvious example. I was wondering if you could just kind of help us understand kind of bigger picture where you think Schlumberger's normalized returns should end up say compared to last cycle? Kind of excluding a big ramp-up in pricing with your new kind of more asset-light model, can you get back to those levels? Are you targeting it back to high teens returns maybe just kind of talk about just in general how you're thinking about that?

Yeah, we are for sure targeting that. I think our goal is to beat the margins we had in the previous cycle and obviously peak higher and then whenever the inevitable next cycle starts, that we also profit from it. So we have very clear plans in place for how we're going to do that both when it comes operating margins, when it comes to free cash flow generation as well as a return on capital employed.

And then one other thing if I could just go back to another comment you made in the past about not getting paid for technology in certain markets and therefore you pulled back until those customers come back to you. Has your mindset changed at all on that? Have you seen a shift from customers on how they're viewing technology today? I'm just kind of wondering how you’re thinking about R&D spending over the next few years. Obviously, came down quite a bit this year. How should we think about where that number goes for the next few years?

Well, we haven’t changed our position in terms of wanting to get paid for our technology and in the markets where we are not going to get paid for our differentiated technology, we will provide market performance in those markets. Right? But I would say that the conversation is starting to shift in many of the markets around the world now towards technology, towards differentiated technologies and towards overall service and product performance. This, obviously, is something that favors us. I think even in North American land, as we go into 2019, there is a growing focus from the customer base on both drilling and hydraulic fracturing efficiencies. We want basically more well spots per rig per year, and we want more stages per fleet per month, right? So all of these elements favor differentiated technologies, individual technologies, as well as our integrated offering, both when it comes to drilling and stimulation. So in terms of R&D spend, we have taken the R&D spend down gradually over the course of this downturn. We don't have plans for 2018 to increase it significantly, but we have plans in place in the following years as to what we would direct the spending towards when the market permits those to increase spending.

Good morning.

Good morning.

So I remember early in the downturn when you were first giving international price concessions, you had mentioned that these concessions have mechanisms of reversing when oil price trigger points were hit. I know you don't want to provide details on pricing itself, but could we assume that with oil in the high 60s that some of those mechanisms are being triggered?

Yeah. I think generally for those mechanisms, if you look at the bidding activity that we've gone through, say, over the past year and are still ongoing at this stage, most of the contracts that those mechanisms were tagged on to are now being replaced by new bids. So I don't expect there to be a significant number of contracts where we still have those mechanisms in place, they generally replaced by new contracts that have been competitively bid over the past year and are still being awarded as we speak.

Great. And how should we think about modeling the impact of your exit from the seismic acquisition business on 2018 results relative to what that business earned in 2017?

I think if you look at the impact in Q4, there is some D&A impact. And beyond that, I think, obviously, it will be less capital intensive moving forward. I would say lower CapEx, higher free cash conversion, and some positive impact from D&A. Beyond that, that's it.

Thank you. Paal, my question is regarding the OneSubsea segments. One of your competitors has come up with more compact systems that can sharply reduce customer costs. What's Schlumberger's answer to this new introduction of new systems into the subsea?

Well, from the OneSubsea side, we have, over the past three years, done a lot on reducing the overall cost space and the capital intensity, the size of the equipment that we provide. This is nothing new for us; we've already made significant investments into this. We are quite competitive when it comes to all aspects of this, right? So this has already been going on within OneSubsea for a number of years. If you look at some of the awards we've had in the past 12 months, that's coming out as a direct consequence of being very competitive when it comes to cost and also standardization of the equipment that we're providing our solutions to our customers. So there's nothing new for us; we've already been working on this and continue to work on it.

And what's your view on the outlook for offshore project FIDs with regards to primarily subsea orders, inventories or other subsea spending?

Well, I don't have a specific number to give you on the number of projected fee awards other than that it is set to be up in 2018. I think overall number of FIDs offshore is on the positive trend. So we are optimistic and excited about the offshore market as well as the overall international market going into 2018.

Thanks. Good morning.

Good morning.

A question on margins, Paal. With revenue growth probably all markets looks like they're going to be in the right direction next year. In the past, you've talked about generating – getting back to generating very high incremental margins in the 60-plus percent range. With revenue growth starting to turn the corner in most of your markets, is that still a reasonable expectation at some point in the future? And just in general, how should we think about incremental margins this year with the revenue growth probably going to happen from the spending that we see in your piece this year?

Yeah. So for 2019, we target to increasing incremental margins in all aspects of our business around the world. I’m not sure that 65% incrementals in 2018 is that realistic because we will require a fair bit of pricing to reach those levels, but I've always said that 65% is achievable with good pricing. We will have to see how the market pans out in terms of pricing. But absent pricing, I think it’s going to be tough to get to 65%. We will certainly improve on the incremental margins that we delivered in 2017.

Is that still a reasonable goal if we continue to see growth in 2019, I guess? And I know you don't want to give guidance out that far, but just trying to get a sense that you'd still be once things are on we can get past some activation cost and some of the transitory issues that the high incremental are something that you'd still be comfortable with a longer-term basis.

Yes, absolutely. We are for sure targeting the 65% incrementals when we got into steady growth and when we get a bit of pricing tailwind. That ambition has not changed, and we are going to work towards achieving it.

Hey, good morning all. Wanted to ask if you could follow up a little bit, please, on the SPM strategy. I appreciate that you're moving into harvest mode, that makes a lot of sense. But can you help us with characterizing perhaps what might be the right investments were redeploying any of that cash and how we would look at those opportunities going forward?

Yeah, it's maybe a little bit the same as what you already said. I think that we still believe that SPM is going to be a significant portion of our growth strategy going forward. But at the end, we want to make sure that we are very opportunistic in the deals that we bake. At this stage, we have really reached the end of our countercyclical business development program. Going forward, we will be growing in a very disciplined manner. What that means is that we want SPM to be generating its cash that can use for future investment and potential expansion and that's going to be the way on how we're going to be looking at projects going forward. So SPM is key to what we do, and we have a very strong view on how we want to be investing our capital going forward.

So thank you for that final question. This is Simon Ayat, by the way. I would now like to summarize the three most important points we have discussed this morning. First, the oil market is now balanced as a result of continued strong demand growth and the supply side characterized by production cuts, led by OPEC in Russia and the weakening global production base. So even with the robust growth from North America shale oil production in 2019, global supply responses will be increasingly needed to balance the market going forward, which again means the return to growth for all parts of our business. Second, the positive sentiment in the oil market is already reflected in the 2019 E&P spend forecast where the third-party surveys indicate growth of 15% to 20% in North America and 5% internationally. This is highly favorable to Schlumberger as our international earnings power is four to five times higher than what we see in North America. Last, our approach over the past three years has been to broaden our technology portfolio, leverage our transformation program, and restructure our organization to be ready for the inevitable market recovery. We are excited about the outlook, and we are ready to deliver the best products and services to our customers and superior returns to our shareholders. Thank you very much for participating in the call.