SLB (SLB) — Q2 2019 Earnings Call Transcript

Good morning, good afternoon, and welcome to the Schlumberger Limited second quarter 2019 earnings call. Today's call is being recorded from Paris, France following a Schlumberger Limited Board meeting. Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer; Simon Ayat, Chief Financial Officer; and Olivier Le Peuch, Chief Operating Officer. We will as usual first go through our prepared remarks, after which we'll open up for questions. For today's agenda, Simon will first present comments on our second quarter financial performance before Olivier 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 may also include non-GAAP financial measures. Additional details or reconciliation to the most directly comparable GAAP financial measure can be found in our second 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 period in order to allow more time for others who may be in the queue. Now I'll hand the call over to Simon Ayat.

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Second quarter earnings per share was $0.35. Excluding charges and credits, this represents an increase of $0.05 sequentially and a decrease of $0.08 when compared to the same quarter last year. There were no charges or credits recorded during the quarter. Our second quarter revenue of $8.3 billion increased 5% sequentially, largely driven by our international operations. Pretax segment operating margins increased by 17 basis points to 11.7%. Highlights by product group were as follows: Second quarter Reservoir Characterization revenue of $1.6 billion increased 7% sequentially due to activity increases beyond the normal seasonal improvements we typically experience in Q2. These increases were primarily driven by strong multiclient license sales and higher international Wireline activity. Margins increased 81 basis points to 19.8% due to the increased contributions from higher margin Wireline activity and multiclient. Drilling revenue of $2.4 billion increased 1% as a stronger activity in the International Areas was partially offset by lower drilling activity in North America land. Margins decreased 45 basis points to 12.4%. Production revenue of $3.1 billion increased 6.5% sequentially, primarily driven by higher international activity across all the product lines. Margins were essentially flat at 8% as the improvements in international margins from higher activity were offset by the effects of pricing pressure in North America land. Cameron revenue of $1.2 billion increased 5% sequentially. Margins increased 94 basis points to 12.6%. These increases were primarily driven by OneSubsea and Surface Systems. The book-to-bill ratio for the Cameron long-cycle businesses was 1.2 in the second quarter. The OneSubsea backlog increased to $2.2 billion at the end of the second quarter. Now turning to Schlumberger as a whole, the effective tax rate was 16.7% in the second quarter compared to 15.5% in the previous quarter. This increase was a result of the geographic mix of earnings. In terms of cash flow, we generated $1.1 billion from operations leading to $459 million of free cash flow. Good performance for the second quarter despite the temporary delays in receivable collection that we experienced in certain regions. Our net debt increased $335 million during the quarter to $14.7 billion. We ended the quarter with total cash and investment of $2.3 billion. During the quarter, we spent $101 million to repurchase 2.5 million shares at an average price of $40.12. Other significant liquidity events during the quarter included CapEx of approximately $404 million and capitalized cost relating to SPM projects of $181 million. During the quarter, we also made $693 million of dividend payments. Full year 2019 CapEx, excluding SPM and multiclient investment, is still expected to be approximately $1.5 billion to $1.7 billion. And now I will turn the conference call over to Olivier.

Thank you, Simon, and good morning, everyone. Our second quarter revenue increased 5% sequentially, driven by international activity. Our international business grew 8%, outperforming international rig count growth of 6%, while North America revenue grew 2% sequentially. I am pleased with the progress made and proud of our team performance, many of whom I met during the quarter on my visits to our global operations. My comments today will include the Cameron business. I will start with our North America operation. In North America, consolidated revenue was 2% higher sequentially with land revenue growing marginally, while offshore grew 10%. Production revenue increased 3% due to higher cementing revenue and improved OneStim hydraulic fracturing fleet utilization in response to market demand. These positive factors, however, were offset by the spring breakup in Canada and lower demand for drilling services as a result of the 5% decline in U.S. land rig count. North America land remains a challenging environment. Indeed, the E&P operator focus on cash flow has capped activity, and continued efficiency improvements have also reduced the number of active rigs and frac fleets, so far without major impact on oil production. In response, we continue our returns-focused approach, deploying new technology and working closely with the major independents and IOCs that are initializing the development of unconventional shale resources at increasing scale. Our competitive advantage in North America land operation continues to build on our differentiation in technology and efficiency. Surface efficiency is one area where we have made significant progress. One new technology is the MonoFlex, our new fracturing fluid delivery system, which significantly speeds up multiwell pad rig-up and reduces nonproductive time and safety risk. Reservoir efficiency is another key issue for our customers. We are seeing increasing take-up of technologies that help customers design and deploy completions that mitigate or avoid parent-child well interference. Two such technologies are BroadBand Shield and Fulcrum cement. BroadBand Shield, an innovative fracture control technology, limits the risk of communicating with or fracturing into nearby wells. By the end of June, BroadBand Shield services has been used on nearly double the number of stages when compared to all of 2019. Fulcrum cement improves stimulation efficiency by helping keep fracturing fluid in the target reservoir zone by improving the cement bond. In the second quarter, Fulcrum technology deployments tripled versus the previous quarter and doubled in the first half when compared to full year 2018. In our other North America land businesses, Surface System grew 5% sequentially and 6% year-over-year. This was driven by the frac tree rental business, benefiting from MonoFlex technology and integration with OneStim. Artificial Lift was strong with sequential ESP sales growth of 5% from new technology and fit-for-purpose pump systems that outpaced low-flow service revenue. Offshore North America, revenue increased 10% sequentially, primarily due to strong WesternGeco multiclient license sales. While offshore rig count has yet to increase significantly, customer interest is high, indicating stronger activity coming in the second half of the year. With the North America market remaining challenged in the coming months, we continue to protect our operating margin by focusing on our agile execution and operational efficiency. In the international markets, we continue to witness broad-based activity growth. More than half of the international GeoMarket posted high single-digit revenue growth or better year-over-year. This was mainly driven by rig activity, but our performance was also enhanced by key GeoMarket activity exceeding normal seasonal rebounds. The improving exploration trends of last quarter also continued. Wireline offshore exploration revenue grew by a third during the first half of the year with a sizable increase in new technology sales. As offshore momentum builds, shallow-water rig activity grew by 14% in the first half and deepwater activity is strengthening as new projects are sanctioned. Cameron international revenue grew significantly quarter-over-quarter, supported by the leverage of the GeoMarket structure. This is the fifth consecutive quarter where the total Cameron book-to-bill ratio was greater than one. This was also the first quarter since we acquired Cameron, where all four product lines, both long and short cycle grew revenue sequentially. Consolidated revenue in the Latin America area increased 12% sequentially from 21% revenue growth in Mexico & Central America GeoMarket. WesternGeco multi-client seismic sales had a strong quarter as exploration investment continued to gain strength offshore. In the Latin America North GeoMarket, revenue was driven by SPM activity in Ecuador, with the Shaya project continuing to improve from strong execution on water flooding recovery. Europe/CIS/Africa area consolidated revenue increased 11% over the previous quarter, on the back of seasonal activity recovery in the Northern Hemisphere and rig activity increase in Eastern Europe. In the U.K. & Continental Europe GeoMarket, revenue exceeded expectations by growing 28% sequentially, with all product lines experiencing growth. In the Russia & Central Asia GeoMarket, we experienced 12% revenue growth on seasonal recovery with the majority of product lines growing revenue high single-digits or better. Consolidated revenue in the Middle East & Asia area increased 5% sequentially with Far East Asia & Australia GeoMarket leading the way with 19% sequential revenue growth, mostly driven by offshore activity. Elsewhere in the area, the seasonal activity recovery in China was partially offset by lower activity in Malaysia and India. Iraq was lower on completion of IDS project, and in Saudi Arabia, revenue increased on sales of intelligent completions. In the Middle East, the four Cameron product lines delivered double-digit revenue growth driven by increased activity and share gains across the portfolio. As discussed in our last earnings call, we have initiated a systematic process to address underperforming business units and contracts in the international markets. I'm pleased to say that more than two-thirds of our product lines experienced sequential revenue growth in the international markets this quarter, and with each of them having expanded their margins. A few business units, however, continue to be highly dilutive to our international margins, and we are looking at their performance very closely. We continue to work with our customers to resolve underperforming contracts, exploring ways to eliminate waste through joint planning or execution or improving terms and conditions to avoid unnecessary costs or excessive risk. Most customers are very receptive to this, as they see the benefit of increased operational performance and are increasingly concerned about securing supply of technology and resources for future activity uptake. These focused efforts are already producing visible improvement in our international margins. As international activity increases, our deployment of CapEx is also prioritized towards business units with higher returns. This dynamic capital deployment is creating some tightness in the market, which is another catalyst for pricing improvements. To conclude, we continue to see high single-digit revenue growth internationally, excluding Cameron consistent with previous guidance. At the close of the first half of 2019, international revenue has increased 8% year-over-year, while North America land revenue has declined 12% year-over-year. These results are in line with our view of the normalization in global E&P spending. And with that, I will turn the call over to Paal.

Thank you Olivier and good morning everyone. I will start by adding a few comments to complement the geographical review of the quarter provided by Olivier and highlight how the current market developments are favorably impacting the opportunity set for Schlumberger. Let me begin with the macro environment where the market sentiments remain balanced. On the demand side, the 2019 agency forecasts have been reduced slightly on global trade fears and current geopolitical tensions, but we do not anticipate any change to the structural demand outlook for the mid-term. On the supply side, we continue to see U.S. shale oil as the only near to medium-term source of global production growth. However, the consolidation among North American E&P companies is further strengthening the shift away from growth focus towards financial discipline, while at the same time driving increased focus on HSE, technology adaptation, more collaborative business models, and it will also potentially dampen the large variations in investment levels throughout the cycle. These effects combined with the recent decision by OPEC and Russia to extend production cuts through the first quarter of 2020 are likely to keep oil prices range-bound around present levels. Although the markets are well-supplied from projects sanctioned and partly funded prior to 2015, this source of supply additions will start to fade in 2020, thereby further exposing the accelerating decline rates from the mature production basins around the world. In addition, while the number of new FID approvals in 2019 are likely to increase again for the fourth consecutive year, their size and number account for supply additions far below the required production replacement rates. We, therefore, maintain our view that international E&P investment will grow by 7% to 8% in 2019, a figure confirmed by the increasing international rig count and the growth seen in our international business in the first half of this year. In contrast, the cash flow focus amongst the E&P operators confirms our expectations of a 10% decline in North America land investments in 2019. This means the welcome return of a familiar opportunity set for Schlumberger. For the first time since 2012 and 2013, we see high single-digit growth in the international markets, signaling the start of an overdue and much-needed multi-year international growth cycle. This growth is taking place in our backyard, where our technology performance and longstanding presence is highly valued and where our market share and profitability give us an earnings potential up to four times that of our closest competitor. Our leading international market position is built on our scale, footprint, and extensive technology portfolio, and further strengthened by the significant efforts we have made to evolve the company over the past five years along the following three directions. The first is our internal transformation program that has modernized our workflows and our organizational structure by creating stronger and more professional support functions with cutting-edge planning, execution, and collaboration tools. This has allowed us to significantly improve the utilization of our asset base and reduce our operating costs through improved planning, distribution, and maintenance. At the same time, we have been able to deploy our people and expertise more effectively. All of this has created structurally lower capital intensity of our traditional product lines and lower working capital throughout our technology offering. This will together improve our ability to generate incremental margins and free cash flow as international activity continues to increase and pricing headwinds gradually become tailwinds. The second major direction we have been pursuing is our digital strategy, which is built on the pillars of a cloud-based applications platform, an open data ecosystem, and a broad range of edge architecture solutions. Altogether, this represents a complete platform ready to support our customers in accelerating the digital transformation of our industry. After years of R&D investments in line with this strategy, we are now introducing several applications to the market, with more to follow in the coming years. Within Reservoir Characterization, we recently introduced the GAIA platform at the EAGE conference in London. GAIA uses the power of DELFI to enable explorationists to discover, visualize, and interact with all available data in a basin without compromising resolution or scale. In Drilling, our OneDrill platform is the first digital drilling system that is fully designed for integration and automation. It spans our drilling software applications, the automation-ready Rig of the Future, and a range of new downhole hardware that together will redefine the efficiency of land drilling operations. And spanning Production and Cameron, our recently announced Sensia joint venture with Rockwell will, upon closure, be the first fully integrated oilfield automation provider focused on production measurement solutions, domain expertise, and automation. The third of our focus areas in recent years has been to reduce the capital intensity of our business after we invested actively to build out the company in the early part of this extended downturn. Our efforts to reduce capital intensity began with our decision to exit the marine seismic business in late 2017, after our advanced geophysical measurement technology failed to deliver the needed financial returns over a number of business cycles and with no improvements in sight. Another recent example is the divestiture of our land drilling rig business in Kuwait, Oman, Iraq, and Pakistan to the Arabian Drilling Company, a minority joint venture we have had with our Saudi Arabian partner TAQA for more than 50 years. Through this transaction, we will eliminate the need for capital investments into this rig fleet, while maintaining access to the rigs for our integrated drilling operations in the Middle East. We will also follow a similar capital structure, but with other partners, for the deployment of the Rig of the Future, where we now have introduced the first rigs into U.S. land. We have also announced our plans to exit the businesses related to Fishing & Remedial services, DRILCO, and Thomas Tools that came with the Smith acquisition in 2010, as these business lines are capital intensive, generate a lower return on capital, and are not core to our drilling operations. Beyond our recently announced transactions, which will produce approximately $1 billion of gross proceeds in 2019, we have also stated our intentions to monetize partly or fully our two SPM projects in Argentina and Canada, to demonstrate our ability to generate value from the assets we take under management. And while we have decided not to undertake new SPM projects that involve any period of negative cash flow, we still see a significant opportunity to deploy the technical and commercial expertise we have developed within SPM through less capital-intensive contractual models. On this basis, we have signed an MOU to work on a large integrated project in the OML 11 block offshore Nigeria, where we will act as the technical and project execution partner, with funding provided by a third party. This SPM-lite project, which involves no Schlumberger capital investment, is our preferred SPM business model going forward. We have also recently entered into a similar SPM-lite project to manage the Awali Field in Bahrain. In addition to the divestitures and the new SPM-lite model, we have also structurally lowered the capital intensity of our core business over the past five years, where we today run our operations with a CapEx requirement of around 5% of revenue compared to historic levels of 10% to 15%. In addition to the major directions I've just described, our day-to-day execution focus continues to be on further improving the quality of service we provide to our customers, optimizing the deployment of our resources, as we start to see shortages in several basins, and to address our underperforming contracts and business units around the world. Altogether, this should enable us to restore profitability to our target levels and also to drive incremental margins and free cash flow going forward. Let me conclude my remarks with a few comments as we transition to a new Chairman and new CEO of Schlumberger. Earlier today, we announced the appointment of Mark Papa as our new Chairman and Olivier Le Peuch as our new CEO. I have spent the past decade as COO, CEO, and more recently as Chairman of Schlumberger, and while it has not necessarily been the friendliest of decades in terms of the business environment, it has been a fantastic journey and a great honor to be trusted with the responsibility to lead this amazing company, which is made up of the best people in our industry. One of the most important duties of a sitting Chairman and CEO is to ensure an orderly succession process to the next leader, which in my mind involves several key responsibilities. The first of these is to pick the right time to step down. After a decade at the top of the company, with the deepest and most challenging downturn in our history behind us, and with the international upturn starting to take shape, I therefore asked our Board to start the succession process exactly 12 months ago. The second responsibility is to fully support the Board as they run the search and selection process for the leadership succession. In this respect, I have provided input to the board on a broad range of topics, including candidate assessments. The third is to support and guide the incoming CEO as he or she gradually takes over as the new leader of the company, and it has been a pleasure managing side-by-side with Olivier over the past six months. And the last responsibility is, in my mind, to walk off the stage as soon as the successor is ready to take over. This provides the needed freedom and space for the new CEO to drive the changes he or she sees fit, which is the overarching goal of any change in leadership. This is why I recommended to the Board that I do not stay on as Chairman. I will still be attached to the company for a period, ready to be an advisor to Mark and Olivier as required, but beyond that I will step completely into the background. In closing, I would like to thank the entire investment community for the enjoyable and constructive working relationship we have had over the past decade. I would also like to thank my management team you are all amazing and also the Board of Directors, our entire organization, our customers, and our partners for their support. I will in many ways miss being a part of all of this, but it is now time to move on to the next chapter. Thank you, we will now open up for questions.

Hey, good morning, guys.

Good morning, James.

And Paal congratulations on a 22-year run at Schlumberger including 10 years at the top and the modernization and the transformation of the company, well done, and Olivier congratulations on your appointment as CEO.

Thank you.

Thank you.

So Olivier, I guess you're up now. So as you take over here from Paal – and Paal I wanted to remember the initiatives that have been underway over his tenure and specifically the last several years during the downturn. Could you perhaps give us somewhat of an outlook or some guidance on how you see your strategy unfolding over the next several years, what are the kind of key points, or at least some preview of your strategy? I know you're going to outline that more detail later on this year, but if we can get a preview that'd be great?

James, I think you'll understand that my short-term project is clearly to complete first the transition with Paal, and to focus on execution during the upcoming weeks and months as we want to freely reach the opportunity set that this new market outlook presents to us. I will gradually indeed communicate the level of the strategy during the next few months and quarters as we mature and deploy initially with the leadership team going into 2020. I don't think it's appropriate for me to deploy until at least – prefer to postpone that in a setting and a setup that would be more appropriate. So that could develop and then expose all of you to the right priority range going forward.

Okay. Understood. And then maybe a follow-up, a lot of the recent adjustments within Schlumberger have been to move to a more capital-light structure to drive returns higher. I know Paal outlined several of these recent transactions. Should we expect more of this in the future? Or has the asset base with the business mix and portfolio been cold enough at this point? Or is there more to come?

I think for the first I think this is nothing really new. We have started that two or three years ago, and I think we initiated this in larger scale with the WesternGeco transaction about a year or year and half ago. I think we had as part of the management team agreed that we need to look critically at every business we own and look at the return on assets and return on capital and then use a productive approach to anticipate and use every opportunity that exists in the market to either separate or do and run it differently. And I would associate it very closely to two of them the rig deal with ADC in Middle East and – and Sensia as I believe that here it was not necessarily for the asset, but it was more for creating the unique joint venture that would change the market. Why won't we start there? I think it will depend upon the market condition for one; and two, upon the results of some amount of the strategy. But clearly, we will continue to look at every way we can improve our return on the capital return on equity, and improve ROIC for the company. So that's trust – trust me and trust us on this for the future.

Very good. Thanks Olivier.

Good morning, good afternoon, guys.

Good morning, Angie.

Hi. So I echo James' remarks certainly. Congratulations Paal on entering the next chapter of your career and we really enjoyed very much working with you. And your willingness to meet with investors in the Street regularly is appreciated.

Thank you, Angie.

So I think the first question for me is to Olivier or Paal or either one of you both is I think it's really interesting to see that the announcement with Mark Papa as Chairman of the Board. I'm not sure, but is this the first time that a non-exec has been named Chairman for Schlumberger? And it would be helpful to hear the rationale around the decision. Is it corporate governance? Is it a focus on U.S. land markets or the general strength of Papa? And is this a long-term position? Or is this an interim position?

Well, I wouldn't read too much into the details of this. I think the Board is following pretty much the same recipe as when I took over. There was a split of the office Chairman and CEO also when I took over. My predecessor as CEO stayed on a bit longer, but also we had another Nonexecutive Chairman, Tony Isaac staying on for a couple of years after that as the Chairman as well. So the selection is basically down to what the Board has decided. And the split of the office at this stage is the same as what we did when I took over. And what the Board decides to do going forward, I think will be up to the Board.

Okay, okay. That's very helpful. And then maybe for Simon, there's been a lot of discussion on free cash flow and the dividend. I'm sure you heard this as well. Maybe you can give us color around the outlook for free cash flow into the second half of 2019. Is it reasonable to think that it could be similar to 2018 levels in the second half or $2.5 billion $2.9 billion I think it was last year and in that context the importance of the dividend and the dividend coverage which is roughly 1.25 time?

Okay. Thanks, Angie. Let me just elaborate a bit on the cash. As you noticed in the second quarter, we performed better than last year. We – although, we expected better actually, we were some delays in collection in certain geographical regions. But that put us at six months level at better than last year. We expect the second half to even be better than last year as well. As you know, we always perform during the second – we consume liquidity during the first half, because of working capital, and we improve it during H2 of every year. This year is not going to be an exception. We will continue the trend and you will see that this thing we're very confident on it. Our plans show that the cash flow in the second half will be quite healthy. And this takes me to this issue of the dividend coverage and return of capital. We obviously haven't been producing enough cash to cover the return on capital but we know that this is a priority. This is an objective and we're comfortable that this level of cash flow free cash flow we will be reached and we will be able to cover our commitment to the return of capital to the shareholders.

Okay. And then if I could slip one more in. I mean with Paal's announcement on his resignation it's only natural to think about the CFO succession. While we clearly love you Simon we'd love to hear if there's any background on a heir apparent and just general timing.

Well, I would make the bold statement and say that Simon and I will most likely retire at some stage. A date hasn't been set yet and I think the date will be set in between Olivier, Simon, and the Board. And the succession will be carefully planned and we will inform the market when we are ready.

Great. Thanks. I'll turn it over.

Yes, good afternoon to you and I'll reiterate the dual congrats to both of you Paal and to you Olivier.

Thank you.

Thank you, Scott.

And Olivier I realize it's early days but just following up on James' strategy question a question we often get from investors is on OneStim. Is this considered a core for Schlumberger? And how do you think about that business going forward within the portfolio within the context of trying to reduce the capital intensity of the overall portfolio?

Yes, that's a good question, Scott. First and foremost, participating in the North American land market is too significant to overlook. I believe our ability to create value for our customers by overcoming technical challenges and driving efficiency in the industry is vital. This is why we have remained invested in the market and in technology that delivers high value and meets customer expectations. Moving forward, we will reassess how we operate this business and explore different approaches. For now, our focus is on optimizing our operations. We have made improvements in efficiency and are collaborating more with international operators and large independents in the basin, who recognize the efficiency we bring and the impact we can have. The future will determine our position in the market, and we will make informed decisions while managing our capital allocation wisely.

Got it. And a follow-up on IDS, I was a bit surprised to hear some weakness in the IDS portfolio during the quarter. Can you just discuss what happened in the segment during the quarter? Was this just a speed bump? Is there something more to be concerned about here? And then given the outlook for IDS in the second half how do we think about the outlook for the drilling segment in the second half of the year? I think the original expectation was for overall revenue growth in drilling for the year of around 10% and incrementals of 20% to 25%. How should we think about those two items for the rest of the year?

Yes. Let me first come back onto the Q2 drilling performance as I think two or three things played at the same time. Actually internationally actually LSTK contract with IDS the product line performed very well and had growth internationally and improved their margin. Unfortunately this was offset by the significant activity drop in North America both coming from the breakup and coming from lower rig activity by 5% into the land. Combined with this indeed the total IDS second show was actually lower than in Q1 and this is due to three things; first, Iraq we completed a project. Next, India has an activity that is linked to the project. And last, we had only a flat revenue or flat activity quarter-on-quarter in Saudi. So, Saudi is I think four LSTK contract and we are not necessarily pleased where we are on the performance. But as any project we are focusing on improving quarter-on-quarter performance picking on earnings and trying to improve from this to accelerate the learning curve. This particular commission in Saudi we had geological well condition and operational issue that both combine to create the setback for execution. But I spend quite some time within the team. I've been with the team on the ground and I'm pretty confident that actually the team has understood the gaps both technology and operational execution and that we'll gradually see improvement of our performance in the LSTK contract in Saudi. And in fact converge into the ambition we had which is to reach and be accretive from this execution to the Drilling Group margins.

Do you think that margin convergence can happen by the end of the year?

I think we will review the progress during the third quarter. I'm planning to stand back and be with the team some time later this quarter to review progress. And then we'll at that time review which or action we take if we are short.

Got it. Appreciate the color. Thank you and congrats again.

Thank you.

Hi good afternoon in Paris and Paal I'll go the same path. I really appreciate your accessibility. I know you've done the absolute best you could in a very, very difficult environment. So, kudos to you and look forward to what your next gig is going to be. And Olivier welcome aboard and I look forward to get to know you and work with you. So, kudos on both fronts.

Thank you.

Yes. So, I guess my line of questioning here would maybe focus on some of the operational dynamics. And I was wondering whether Paal or Olivier either one can you speak to the progress that you've made so far on improving the margins on the underperforming international contracts?

As I mentioned in my prepared remarks, we started some important initiatives earlier this year to address both the contract and the specific underperforming business unit. We are not just reviewing these areas; we are also taking action to modify contracts and collaborate with customers to drive improvements. We have made progress. Some business units or contracts that were negatively impacting our performance have shifted to neutral or even positive outcomes this quarter. This change is noticeable. More than two-thirds of our product line has seen growth internationally during the quarter, with all of them reporting improved margins from one quarter to the next, which I believe is a first for many quarters. This improvement is attributed to our increased focus on the underperforming business units. However, our work is not finished. We still have some business units, contracts, and operational areas where we are not satisfied, and we recognize this challenge. We are actively monitoring these issues and working with our team to enhance performance through collaboration with customers, which will help us gradually improve margins moving forward.

Okay. Appreciate that color. Thank you for that. And then my follow-up question would be, can you give us some general insights on what you see in terms of pricing trends for your drilling-related business lines and frac business lines in the U.S. as well as what you've been experiencing lately for pricing outside North America?

So first, starting with North America, I think the pricing is still a little bit depressed environment, both due to the rig activity decline that we have experienced for the last few months combined with the excess capacity that still sits into the North America business. Now this being said, with the right technology, with the right value creation, with the right efficiency, we are capturing either to perform or to technology setup the pricing mix that I think is favorable and we have seen that in our RSS technology in North America. We have seen that as a motion in Surface MonoFlex. We have seen this into some very specific dedicated fleet contract that we have with OneStim and this helps us mitigate the exposure to the spot price market that keeps going down in the market. Now by contrast internationally, while the market is not uplifting the price on the large tender for sure and we still see very much, very highly competitive environment across the globe, we see that in some spot geography with offshore or in more remote geography with the right technology, be it in exploration or be it in drilling for difficult wells and difficult conditions, we are starting to obtain updates and upgrades on our pricing commission or simply getting the mix that is more favorable to our margins. And as such, as I've commented before, several product lines internationally have had a quite robust pull-through in the last quarter.

Thank you. Appreciate that.

Good morning. You expressed basically that you expect the market to remain balanced. When one can make a case, which is shared by I think both EIA and OPEC that non-OPEC supply in certainly 2020 is going to significantly outpace global demand growth. Call on OPEC is going lower and the only thing keeping oil prices where they are is the combination of rational guardianship on the part of Saudi and GCC on the one hand and embargo and quarantined oil in the form of Iran and Venezuela. So walk me through your thesis as to why you think the market stays balanced?

Let me address that. Overall, we believe the balance between demand and supply currently will not change significantly as we move into 2020. The primary concern regarding oil prices today is the negative impact of trade and its implications for the medium to long-term. We anticipate some form of resolution to this issue, and we do not expect a structural shift in the global demand outlook. On the supply side, as mentioned in my prepared remarks, we expect a gradual decline in supply from projects that were approved and funded before 2015, which will highlight the accelerating decline in more mature production regions. In countries like Norway, the U.K., Nigeria, Indonesia, and Mexico, we are witnessing significant declines, including in non-pre-salt areas of Brazil. Consequently, we do not expect a strong boost from non-OPEC production outside of the U.S. in 2020. Although U.S. production is projected to grow, the rate of growth will decelerate due to lower investment levels. Therefore, when we consider all these factors, we believe the current situation will largely persist into 2020.

Okay. Well time will tell and I hope you're right. And the second question is with regard to views on the third quarter, if you could talk about that your comfort level with Street estimates et cetera? Thank you.

Olivier?

Yes. I think just to give a little bit of light on this. So we do anticipate a similar earnings step up sequentially during the third quarter. And as such, we believe that the current Street estimates are achievable, however with no visible upside. Indeed, we expect the momentum in international growth and relative margin expansion to continue. That's what we have seen. And we do anticipate also the North America outlook to remain actually challenging as a result of again the sustained pricing pressure and limited or no activity increase partially for drilling. So that in all will result into the guidance I shared.

Okay. Thank you.

Thank you.

Hi. Good afternoon, everyone.

Good afternoon.

I wanted to circle back to the dividend. This is something that we discussed when you were at our conference in New York last month, but it seems worth addressing here in this forum, as it's a common investor question. So Olivier, could you maybe speak to your commitment to the dividend as you step into this seat? And Simon, if we could maybe look beyond 2019, could you walk through the levers that are at your disposal to cover the $2 dividend with earnings and cash flow, if we end up in a lower-for-longer scenario in terms of how the macro unfolds?

So let me first reiterate what I said indeed to the investor community back in New York is that we are committed and I'm personally committed to dividends. And I will not be the first CEO to step back on this commitment. So count on me and count on the team and the commitment we have into the operating margin improvement and working capital improvement to make it steady and a reality going forward.

Okay, let me just repeat a little bit what I said about the cash. Here with the performance that we have achieved the first six months and what we anticipate in the following six months, helped a bit by the divestitures that we have announced we're going to cover everything and overall reduce our net debt slightly but we will, which in other words we will reduce our net debt, which is borrowing and we will be able to cover all the commitment, the dividend and the continued buyback that we are performing on a quarterly basis to avoid the increase in the share count as a result of the stock-based compensation. Now I'm going to go and confirm on our expectations for next year. Next year 2020, our forecast today that the dividend will be covered through the generation of cash from operation. And we will be able to cover the again the dividend and we will continue with this small buy back. So the commitment to dividend as Olivier mentioned and historically there is no question about us maintaining the dividend. And I think given our forecast and what we see the way we're going to conduct the working capital and the investment in the projects we will have ample cash to cover it.

Very good. Thank you for that.

We haven't discussed Cameron yet, and I was hoping to get more insight on the outlook there, perhaps a confirmation that we've reached a low point in margins, possibly in the first quarter of the year. I noticed in the release there were several contract wins with Chevron and Shell. How do you assess your market share in subsea, and how are pricing and integrated projects impacting the demand mix?

Good question. Thank you. First, I want to highlight that Cameron Group has continued to perform strongly. The long-cycle business has seen an increase in backlog, now exceeding $2.7 billion, primarily driven by subsea projects. The short-cycle segment is also maintaining its market share in North America and gaining internationally. This combined performance in both cycles is contributing to our growth and improving margins. We believe the low point for margins is behind us, and I see steady growth ahead, supported by the backlog from the long cycle and continued international expansion. In Q2, we observed international growth across our core product lines, and we expect this trend to persist in the second half of the year, thanks to the leverage from GeoMarkets contracts. Specifically regarding subsea, I'm pleased with our engagement and alliance with Subsea 7. We have received the necessary anti-trust clearance, allowing us to enhance our alliance with a dedicated joint management structure that focuses on engineering, pursuing new opportunities, and executing projects efficiently. We have successfully secured integrated joint projects over the past few quarters, and feedback from our customers has been very positive regarding our execution. We present ourselves as one team while offering customers the flexibility to choose between our self-package and the SVF package. I am confident this integration will continue to succeed for both companies. Regarding OneSubsea, their leadership in tieback compression and execution goals place them at the forefront of subsea operations. They have a technological advantage in subsea processing, including compression. The recent major award from Shell for the Ormen Lange project in Norway further cements our leadership in reliable subsea processing systems that meet customer recovery needs. We are well-aligned, and I am optimistic about our future.

Very interesting. Thanks, Olivier.

Hi, good morning Olivier. I wanted to ask about the offshore segment. You mentioned earlier that your shallow water business increased by 40% in the first half of this year compared to last year. I'm particularly interested in the deepwater aspect. The floating rig count has risen by around 20 rigs at the start of this year, and there seems to be more FID exploration activity. Does this indicate a potential shift in the deepwater market, which is crucial for Schlumberger? Could this be expected in 2020, or is it too soon to say? Can you clarify how the deepwater market is shaping up for you?

Thank you for correcting the number. I may have misspoken, but it was 14% shallow water rig activity that continues to grow. Currently, deepwater rig activity is experiencing less growth, showing only single-digit increases. However, there are developments in final investment decisions expected in the third and fourth quarters of this year that should lead to further growth and acceleration in deepwater as we move into next year. Overall, offshore activity looks strong in shallow water both in the Middle East and Asia, while deepwater activity is bouncing back significantly in West Africa. I believe this combination is very positive. As I mentioned in my prepared remarks, offshore exploration has increased more than 30% year-over-year to date, which greatly benefits Wireline. The increase in deepwater activity is more of a later-cycle shift that we expect to see in the second half of the year and into next year.

Thank you. Switching topics, in North America, I'm sure you're aware of the ongoing discussions about exploration and production capital discipline. While I understand you can't predict the exact trajectory of the year, it seems that fourth quarter activity may resemble last year. Are you adjusting your business strategy to align with a similar spending pattern in North America? If so, does that imply you're ready to increase equipment inventory? How do you position your business for this type of market, especially considering potential downturns later in the year?

No, you are correct. That's the assumption that we're also taking. I think we do expect and anticipate that the combination of seasonal slowdown and budget exhaustion will create a trough in the fourth quarter as we have experienced last year, but will be followed most likely by our strengthening and rebound activity in Q1 across the area. So, we are prepared for this. We have done it last year. We'll be agile. We'll be certainly stacking some equipment. We'll be going and doing what is necessary to withstand this trough, but we are ready for it. I think agility is, one of the focus of the team, both in organization and into responding to the market trough and peak. So, we will do that again this year.

Great. Thank you, Olivier. We look forward to hearing from you later this year on your broader strategy. Thank you.

Thank you.

All right. Thanks and good afternoon to you guys. First of all Paal, it has been good working with you over the years and good luck on the next chapter for you. And Olivier, I'll tell you also congratulations to you as well.

Thank you.

Thank you.

Yes. My question I guess Olivier, just thinking a little bit bigger picture on North America, kind of given the outlook that looks like the U.S. market definitely needed to grow for maybe the next couple of years. How are you thinking about getting margins higher in that business? You kind of talked a little bit about OneStim a little while ago, but what about just North America more broadly? How do you drive better margins in that business and in this market where year-over-year you're maybe flat, but you're also having to navigate through pretty severe seasonal swings as well quarter-to-quarter?

That's a challenge we all face, and we are addressing it in two main ways. First, by focusing on our own quality control, efficiencies, and productivity. We have implemented various business system tools and technologies that enhance our surface efficiency, improving how we operate, deploy equipment, and conduct remote operations in North America. This has proven effective over time in helping us protect our margins. The second approach involves reservoir efficiency, tackling the technology gap that customers seek to bridge some technical challenges, particularly concerning parent-child interference and specific performance contracts that major clients are ready to engage with us on. We are focusing on enhancing productivity, efficiency, and modernization, which has already yielded significant results. We are aligning closely with key customers regarding technical challenges and performance-based contracts, similar to what we did with Oxy and Aventine in New Mexico, and leveraging our system performance to improve margins. These strategies will help us protect our cost structure while enhancing productivity, ultimately safeguarding and increasing our margins moving forward.

Okay. All right. I appreciate that. My follow-up is on the third quarter commentary. I think, I believe you said you're comfortable with where consensus is and I wonder just to understand a little bit better, does that envision like a recovery or a little bit better margin trajectory from the drilling business which stepped down this quarter, took the hit to third quarter consensus? Do you envision that your drilling margins are probably more in line with where you would've expected earlier in the year? Just help us think about margin progression and how you're feeling about that and the various segments?

Yes absolutely. I think the mix will be a little bit different, albeit similar trajectory for international. I will expect that some of the setback we had in the second quarter will resolve themselves and the activity mix will present itself opportunity for drilling to perform slightly better next quarter.

Okay. Great. Thanks. I'll go back.

Thank you all for joining us today. Before we conclude, I want to share a few final thoughts. First, I would like to express my gratitude to all Schlumberger employees who contributed to our success last quarter. Our second quarter performance was strong in terms of earnings and cash flow generation, supported by a broad recovery in international and offshore markets, though we faced ongoing challenges in the North American land market. We responded well to this familiar environment, leveraging our international presence, technological strengths, and efficient execution, with most product lines and regions seeing significant revenue growth from quarter to quarter. Our heightened focus on service quality, improving low-performing business units, and strict capital allocation prioritization have also led to improved margins internationally. Furthermore, we are collaborating closely with our customers to enhance performance on individual contracts and are planning jointly for upcoming activities in light of rising concerns about the future supply of resources and technology. Looking ahead, despite worries regarding global trade and geopolitical issues, current activity trends are expected to persist into the second half of the year, with the next quarter likely driven by increasing activity and international spending. In contrast, we foresee the North American land market continuing to experience pricing pressures and limited productivity. We believe these market conditions align well with our strengths, especially our capacity to generate differentiated earnings potential, and we expect the momentum we initiated in the second quarter to carry through the rest of the year. Lastly, I want to sincerely thank Paal for his support and guidance over the past six months and acknowledge his contributions to the company over the last decade. I have had the honor of working closely with Paal for most of the past ten years and have been consistently impressed by his exceptional leadership and his ability to guide the company through challenging times towards future success in a new international growth cycle. I am especially confident that the modernization platform and digital technology initiatives we have developed over the past few years will provide a strong foundation for our next chapter, with a renewed emphasis on cash and returns. I look forward to engaging with the investor community throughout the quarter and hope to see many of you at the energy conference in early September. Thank you for your attention and participation in this call.