SLB (SLB) — Q1 2020 Earnings Call Transcript

Good morning, good afternoon, good evening, and welcome to the Schlumberger Limited 2020 earnings call. Today's call is being hosted from Houston following the Schlumberger Limited Board meeting held earlier this week. Joining us on the call are Olivier Le Peuch, Chief Executive Officer; and Stephane Biguet, Chief Financial Officer. For today's agenda, Olivier will start the call with his perspectives on the quarter and our updated view of the industry macro. After which, Stephane will give more details on our financial results. Then, we will open up to questions. As always, before we begin, I would 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 our other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our first-quarter press release, which is on our website. Now, I'll turn the call over to Olivier.

Thank you, Simon, and good morning, ladies and gentlemen. I hope everyone is safe and well. This morning I'm going to comment on three topics: our Q1 performance; how we are managing in today’s increasingly difficult operating environment; and how we see the outlook for the second quarter. Before I do that, I would first like to thank the Schlumberger people around the world who are demonstrating great resilience and adaptability. I’m very proud of our team and of what they have achieved in the first quarter. Despite the complications from the COVID-19 outbreak, they delivered strong organizational performance throughout the quarter. We kept very close to our customers as the crisis developed, and we were able to maintain well-site operations with only minimal disruption across a few countries. The feedback I’ve received from our customers has been both positive and appreciative of our operational performance. Despite the difficulty of the situation and the duress under which our people have been working, Q1 was one of the best quarters in terms of service quality and actually the best quarter ever in safety performance. Let’s start with the perspective on our first-quarter results. The resilience of our performance, given the COVID-19 related disruption and the early impact of the oil price collapse, delivered earnings of $0.25 per share; only marginally short of our original expectation. The quarter was characterized by the usual combination of seasonal impacts in the Northern Hemisphere and the sequential decline of product and software sales. However, toward the end of the quarter, activity started to decline in several basins due to the unprecedented drop in oil prices and the increasing challenges posed by COVID-19. The most severe impact was in North America land, where customers were quick to react with a sharp 17% cut in rig count. In our business segments, Reservoir Characterization revenue closed the quarter sequentially down 20%, partly due to seasonal effects but also as a consequence of customers curtailing their discretionary and exploration spending in the latter part of the quarter. The margins declined due to the absence of significant multi-client software license sales, weak exploration mix, and lower contributions from discretionary software sales. Drilling revenue declined sequentially on seasonal effects and the collapse in North America late in the quarter but displayed resilience with margins flat sequentially due to our operational execution, focus on underperforming business units, as well as continued success in our technology access strategy. Production revenue declined due to lower activity in international markets and weaker Asset Performance Solutions (APS) results. While Production margin declined by 100 basis points driven by weaker international activity, the success of our OneStim® scale-to-fit strategy in North America matched resources to market needs and optimized our operational footprint. Cameron revenue was seasonally lower and suffered from the exposure of the short-cycle business to North America. International Cameron revenue was also lower as we halted manufacturing in Italy and Malaysia in response to local restrictions to mitigate the spread of the COVID-19 virus. Despite these negative effects, Cameron margin increased sequentially, driven largely by this quarter’s favorable mix in the OneSubsea® portfolio. Looking at North America land in more detail, the timely acceleration of our NAL strategy protected margins from excessive sequential decline. We began the quarter having scaled our OneStim fleet to fit the market, which resulted in higher utilization and minimal frac calendar gaps. However, as oil prices began to collapse in March, customers rapidly dropped rigs and frac crews. Along with well construction and completion activity decreasing, the technology mix switched from driving performance to saving costs. We reacted rapidly by stacking frac fleets to protect our margins and had reduced capacity by more than 27% and reduced our CapEx plan by 60% by the end of the quarter. In contrast, our international revenue was close to 2% ahead year-on-year, or 4% when accounting for the 2019 business divestitures. Growth was resilient in key Schlumberger markets across Russia & Central Asia, Saudi Arabia & Bahrain, Far East Asia & Australia, Northern Middle East, Latin America North, and Norway & Denmark. Our first-quarter cash flow from operations more than doubled year-on-year to $784 million as a result of our heightened focus on collections and our resilience in key international markets. Let me now talk about what we are doing to protect the company, and how we have focused on cash, liquidity, and the strength of our balance sheet in a period of high uncertainty as the depth and extent of the coronavirus impact on global oil demand remains unknown. First, after an in-depth review of the possible outcomes of the new oil order we are facing, we made the very difficult but necessary decision to reduce our dividend by 75%. This will protect our cash and liquidity in the current environment while giving us greater flexibility going forward. We will continue to exercise stringent capital stewardship while retaining the ability to balance any capital return to shareholders as operational conditions evolve. Second, we have reduced our capital investment program by more than 30% across CapEx, APS, and multi-client. We’re also reducing our research and engineering investment by more than 20% in the second quarter to reflect the necessary adjustment to our 2020 commercialization program. Further, we have accelerated and increased our structural cost reduction in North America in alignment with the scale-to-fit strategy initiated during the fourth quarter adjusted for the new environment. As a result, we unfortunately had to reduce our workforce in North America by close to 1,500 people during the first quarter. We will continue to decisively implement structural change during the second quarter both in North America and internationally to align our cost base with the anticipated short-term and second-half activity outlook, with full understanding that the pace and scale of decline is still uncertain but will be more abrupt than during any recent downturn. Finally, we have also taken exceptional temporary measures to conserve cash by implementing furloughs across many parts of the organization, both in North America and internationally, and by reducing compensation for the executive team and the Board of Directors. The result of these actions represents a significant step towards protecting the company’s cash and liquidity in the face of the significant uncertainties. I believe that our response so far has been swift and effective, as demonstrated by our margin and cash flow performance during the first quarter, while providing service to all our customers with unique resilience and performance across all basins. Stephane will discuss the strength of our balance sheet, our access to liquidity, and our capital investment program in more detail in a few minutes. Before that, let me give you our perspective for the second quarter. Despite the recent agreement by the world’s largest oil producers to cut production, Q2 is likely to be the most uncertain and disruptive quarter that the industry has ever seen. We are therefore not in a position to provide guidance for the next quarter as we face two degrees of uncertainty beyond the severe impact of oil demand contraction and the level of commodity oil price. First, it is very difficult to model or predict the frequency or magnitude of the COVID-19 disruption on field operations. Second, it is too early to judge the impact of the recent OPEC+ decision on the level of international activity, as well as its repercussions on storage levels globally and the related risks of production shutdowns. Let me, however, share our view on the key activity trends, starting with North America. We anticipate both rig activity and frac completion activity to continue to decline sharply during the second quarter to reach a sequential decline of 40% to 60%, which matches the full-year budget adjustment guidance shared by most operators in North America land. This would represent the most severe decline in drilling and completion activity in a single quarter in several decades. Internationally, we see a less severe sequential decline as some long-cycle offshore and land development markets should remain relatively resilient and will partially offset the exploration activity drop, as well as the expected activity adjustments that would result from the OPEC+ decision. Directionally, at this time, and excluding the seasonal rebound of rig activity in Russia and China, the international rig count is expected to decline by low to mid-teens sequentially. However, this will vary greatly by basin and per customer. We have been successful during the first quarter in providing the market with resilience and performance. We anticipate building on this success, and will fully leverage our unique international franchise to retain optimum activity mix going forward. As the quarter develops and we get more clarity on the timing and shape of demand recovery and better understand the OPEC+ deal’s implementation and compliance, we will be able to discuss our outlook for the second half of the year with you. Let me conclude by reinforcing the enormity of the task ahead. It will require levels of response and depth of resilience that are yet to be fully realized. The actions we have taken so far have been focused on those things we can control in protecting our business with a clear priority on cash and liquidity in an uncertain industry and global environment. We’ll continue to take the steps necessary to protect the safety and health of our people and pursue our ambition to be the performance partner of choice for our customers. The future of our industry poses difficult challenges for people and for the environment but continues to offer a unique opportunity. I believe that the resilience and performance of our people, our technology leadership, and our financial strength will clearly position us for success as the industry rebounds from this unprecedented downturn. On to you, Stephane.

Thank you, Olivier. Good morning, ladies and gentlemen, and thank you for participating in this conference call. First quarter earnings per share excluding charges and credits was $0.25. This represents a decrease of $0.14 sequentially and $0.05 when compared to the same quarter of last year. During the quarter, we recorded $8.5 billion of pre-tax charges driven by current market conditions and valuations. These charges primarily relate to goodwill, intangible assets, and other long-lived assets. As such, this charge is almost entirely non-cash. You can find details of its components in the FAQs at the end of our earnings press release. These impairments were all recorded as of the end of March. Therefore, the first quarter results did not include any benefit from reduced depreciation and amortization expense as a result of these charges. However, going forward, depreciation and amortization expense will be reduced by approximately $95 million on a quarterly basis. Approximately $45 million of this will be reflected in the Production segment. The remaining $50 million will be reflected in the Corporate and other line item. The quarterly after-tax impact of these reductions is approximately $0.06 in EPS terms. I will now summarize the main drivers of our first-quarter results. I will not go into much detail as Olivier already provided some key highlights, but I will spend more time updating you on our liquidity position. Overall, our first quarter revenue of $7.5 billion decreased 9% sequentially. Pre-tax segment operating margins decreased 181 basis points to 10.4%. First quarter Reservoir Characterization revenue of $1.3 billion decreased 20% sequentially, while margins decreased 839 basis points to 14%. The sequential drop was a combination of seasonal effects and early signs of customer curtailing discretionary expenditures. Drilling revenue of $2.3 billion decreased 6%, while margins were flat at 12.4%. Approximately half of that revenue decline was due to the divestiture of our Fishing & Remedial Tools business at the end of the fourth quarter. Production revenue of $2.7 billion decreased 6% sequentially, and margins declined 98 basis points to 7.8%. Cameron revenue of $1.3 billion decreased 10%, while margins slightly increased by 57 basis points to 9.7%. Our effective tax rate, excluding charges and credits, was 17% in the first quarter as compared to 16% in the previous quarter. Please note that it is going to be challenging to provide guidance around our effective tax rate going forward, as discussed in further detail in the FAQ at the end of our earnings release. Let me now turn to our liquidity. During the first quarter, we generated $784 million of cash flow from operations. As Olivier mentioned, this is more than double what we generated during the same quarter last year. We spent $407 million on CapEx and invested $163 million in Asset Performance Solutions or APS projects. We completed the sale of our interest in the Bandurria Sur Block in Argentina during the quarter. The net proceeds from this transaction combined with the proceeds we received from the divestiture of a smaller APS project amounted to about $300 million. Looking forward, after considering the Argentina divestiture and reduction in the rest of our project portfolio, our APS investments for the full year will not exceed $500 million. With this, as well as the significant reduction of our operating CapEx engaged during the quarter, our total capital spend for 2020, including APS and multi-client, will now be approximately $1.8 billion. This represents close to a 35% decrease compared to 2019. On the balance sheet side, we took a series of steps during the first quarter to reinforce our liquidity position. First, we ended the quarter with total cash and investments of $3.3 billion. While this cash balance is higher than what we generally like to carry, this was a conscious decision and I am very comfortable with it considering the current situation. Our net debt increased by only $171 million during the quarter, closing at $13.3 billion, which is more than $1 billion lower than the level we were at a year ago. During the first quarter, we issued EUR400 million of notes due in 2027 and another EUR400 million of notes due in 2031. These notes carry a weighted average interest rate of 2% after being swapped into U.S. dollars. We also renewed during the quarter our revolving credit facilities. These committed facilities amount to a total of $6.25 billion and do not mature until between February 2023 and February 2025. We ended the quarter with $2.7 billion of commercial paper borrowings outstanding. Therefore, after considering the $3.3 billion of cash on hand, we had $6.8 billion of liquidity available to us at the end of the quarter. In addition, we entered last week into another committed revolving credit facility for EUR1.2 billion. This is a one-year facility that can be extended at our option for up to another year. We can also upsize the facility for syndication. To date, we have not drawn on this facility. Finally, our short-term credit ratings, which are critical to maintaining our privileged access to the commercial paper markets, were just recently reaffirmed by both Standard & Poor’s and Moody’s. In light of our available liquidity and the various actions undertaken during the quarter, our debt maturity profile over the next 12 months is quite manageable. We only have $500 million of bonds coming due in the fourth quarter of this year and another $600 million coming due in the first quarter of 2021. Our preference is to refinance these obligations with new bonds, markets permitting. To close, let me come back to what is probably the most important decision of the quarter as it relates to capital allocation. In this environment, our strategic priority is obviously on conserving cash and further protecting our balance sheet. To this end, we have taken the prudent decision to reduce our quarterly dividend by 75%. The revised dividend still supports our shareholder value proposition by maintaining both a healthy yield and a reasonable payout ratio as we navigate these uncertain times. It also allows for prudent organic investment while maintaining the self-discipline required under the capital stewardship program that we have committed to. Finally, it gives us flexibility to adjust our capital return policy in the future, whether through increased dividends or stock buybacks when operating and business conditions improve. I will now turn the conference call back to Olivier.

Thank you, Stephane. Thank you for this clarification. So ladies and gentlemen, I think we will open the floor for Q&A at this point.

Good morning, Olivier and Stephane. So Olivier, in terms of capital allocation strategy going forward, I know we had the dividend cut today, which is clearly a prudent move in light of the current environment, although we're going to stabilize and figure out how this market unfolds here in the next quarter or so. So how do you think about capital allocation through this downturn? Previously you guys were counter-cyclical, and getting into the SPM, you've obviously disbanded that, so I doubt that’s an area of capital. But how are you thinking about the allocation of capital?

So, James, as you know, we have reaffirmed our capital stewardship program, which is a strategic step, and under that umbrella, we reiterated our priorities for capital allocation. Our free cash flow from operations will typically be directed towards three main areas. The first is to maintain and support our ongoing operations, which is part of our essential focus under strict capital allocation for CapEx. The second is to uphold the strength of our balance sheet and manage our debt levels to maintain the appropriate ratios. Finally, there's the dividend. Any excess cash beyond that will likely be used for business opportunities that provide a strong return on our capital under the new capital stewardship program or returned to shareholders through buybacks or increased dividends. That's how we will continue to use this framework. Stephane, would you like to add anything?

You’ve covered all. Thank you.

So maybe just to follow on to that. So good to hear the updated thoughts around capital allocation. Can we then maybe just dovetail into thinking about sources and uses of cash? The balance sheet has a pretty front-loaded maturity cadence over the next couple of years. So the $4 billion that you'll keep on the balance sheet from the reduction in dividend, that certainly will help you close the Bandurria Sur ...?

Operator, we lost Sean.

So the main question is about sources and uses of cash. The balance sheet maturity cadence is pretty front-loaded through 2023. And so it would be great to hear about how you think about sources and uses over the next couple of years to address that part of the balance sheet? Thank you.

For the upcoming maturities, at least in the next 12 months, as I said, we are pretty well spaced and the amounts are quite reasonable. So really what we will do is our objective is to refinance the maturities with new bonds, or if cash permits, we will pay down some of that debt to maintain the credit rating that we are targeting. And what we are targeting is really to ensure that we keep a strong investment grade credit in this cyclical environment. So, this will really be the way we will deal with the upcoming maturities, if that answers your question.

Sean, we have been continuously using bonds to refinance upcoming maturities. As you heard from Stephane today, we issued two new bonds in euros during the first quarter, which were swapped back to dollars. This has been part of our program, and it was reviewed by the finance committee. An envelope was agreed upon and approved by the board to refinance a large amount and access the bond market for this purpose. We are confident that with our current investment grade, we will be successful in tapping into those markets.

So for Olivier or Stephane, maybe you could talk a little bit further about the cost cutting and even give us some parameters potentially around the dollar size of the cost cutting and the degree that it is fixed versus variable, if certain segments are impacted more so than others? And beyond Q2, if we look into Q3 and Q4, thoughts around decremental margins?

Good morning, Angie. I'll keep my statement quite general on purpose, as there is significant uncertainty regarding the activity outlook for the second half of the year. We're beginning to gauge where we stand this quarter in North America, and we're taking steps to adjust and right-size the organization, which I mentioned could be in the range of 40% to 60%. Consequently, the organization will be adjusted accordingly, impacting nearly all product lines. OneStim will definitely be right-sized at the higher end of that spectrum. We need to expedite our strategy of right-sizing or scale-to-fit, focusing on fixed structure costs. Our efforts will prioritize the restructure and the hub concentration for OneStim over the next few months, in conjunction with the actions we're taking on variable costs. North America is relatively straightforward as we have a clear understanding of activity levels and declines. Internationally, there’s considerable variation by geography, with ongoing uncertainty partly due to national companies' decisions on cutting back. Therefore, we’re adopting a more cautious approach internationally while still executing both fixed and variable adjustments in the upcoming weeks. I can't provide an exact figure, but we anticipate that cost reductions will likely exceed $1 billion annually for compensation purposes, and this figure may evolve over time. Overall, we continue to monitor the situation closely, although this year's changes are more pronounced and happening quickly. We are addressing both fixed and variable costs as we have in past downturns.

I want to touch on working capital. Given your end market forecast, how should we think about working capital? Is there any way to dimension the potential benefit to cash this year or a potential range of where days outstanding could land at the end of the year? And any lessons learned from the last cycle that can help the working capital this cycle?

Yes, we do expect to see our working capital decrease over the next few quarters as activity levels drop. The extent of this working capital is influenced by several factors, and likely the most important is the speed at which we collect cash from our customers. As soon as we noticed the environment shifting, we directed our entire organization towards improving cash collections, which you can see reflected in our cash flow performance in the first quarter. However, despite our efforts to mitigate it, we may experience some delays in payments in the coming quarters. We will monitor this situation closely. Additionally, we might encounter some negative impacts on working capital from restructuring cash costs as we continue to make adjustments. Nevertheless, we do expect to see a release in working capital trends overall.

Two questions related to operating cash flow. First, I'll hit the working capital one again. Typically, in downturns, your international customers are slow pay if not everybody. And if you looked at 2015, there was a consumer of cash of $500 million or close to it. Will it be a source of cash or a consumer of cash? And then secondly, your guidance with regard to depreciation. I think I heard you say down $95 million from what Q1 or Q4? Thank you.

Yes. Regarding working capital, you are correct. In the first year of the last downturn, we experienced a decline in receivables. We aim to prevent this and are aware of the potential issues. However, there are indeed situations where payment delays may occur. Concerning depreciation and amortization, I mentioned a figure of $95 million, which is pre-tax and compares to the first quarter of this year. Therefore, we anticipate a $95 million reduction in D&A going forward from the Q1 2020 reference.

I wanted to thank you for all the information provided so far in a challenging environment. I would like to follow up on a couple of specifics. First, regarding Reservoir Characterization, there was a noticeable decline in margins in the first quarter. I would like to understand what may have caused that and whether this indicates a new, sustained margin trend in Reservoir Characterization.

So Kurt, the margin decline we experienced can be attributed to two main factors. First, there was a significant 20% sequential drop in our top line, which is unusual and on the low end of our typical seasonal performance. This decline brought about decrementals. Secondly, we encountered some disruptions during the quarter that led to unrecouped costs. The most critical factor, however, was the operator's decision to limit spending toward the end of the quarter. This impacted our usual strong quarter performance, particularly in sales of multi-client licenses and discretionary software. Typically, the first quarter sees low margins in Reservoir Characterization due to seasonal effects, but this situation was exacerbated by the sharp cuts in spending over the last six weeks of the quarter, which affected end-of-quarter sales for software and multi-client licenses. We anticipate this trend may persist, although we expect some recovery in seasonal effects. However, our exploration budget is projected to be about 40% lower than last year based on our discussions with customers.

And then my follow-up question would be on Cameron? In that context, margins there were fairly strong. I think we can all expect that orders and FIDs and everything will wind up being pushed to the right. So I guess my question would be more along the lines of the projects that are in backlog. How should we think about the margin progression in Cameron as the rest of the year evolves?

There were two influencing factors in the quarter, one positive and one negative, and one of them will persist. The negative factor affected the Cameron margin due to a decline in short-cycle activity in North America that was greater than we had expected, and this decline will continue. We are implementing measures to manage this issue. The second factor was a favorable mix in the OneSubsea long-cycle business. We anticipate a slight decline in the second quarter as we expect further decreases in North America, as noted previously. The favorable mix from OneSubsea is unlikely to happen again at the same level next quarter. Nevertheless, we believe that the long-term backlog in OneSubsea, along with the new awards we received for long-lead drilling, will help to sustain the margin over the long term.

Good morning, Olivier. I have two questions about international operations. You mentioned that spending has decreased by 15% this year, which is quite complex with many factors involved. I understand that you have limited visibility into customer actions, but could you discuss the different regions you are observing? Specifically, how do offshore, the Middle East, and Latin America compare, as they seem to be progressing at different speeds? Additionally, could you elaborate on the significance of the Middle East, Russia, and China in your business? I’m not looking for exact percentages, but I would appreciate a general idea, as I believe this area might provide more stability in your portfolio over the next 12 to 24 months.

As you mentioned, there are several factors at play. The rig projection we're using as a measure for future activity seems to keep shifting or declining. We’ve noticed this in recent weeks. I anticipate some stabilization in the second quarter as OPEC+ members make decisions, and the results of their commitments become clearer. However, excluding Russia and China, which typically have favorable seasonal effects in the second quarter, the decline in rig activity is in the low to mid-teens for the short term. There is considerable variability in this situation. Some regions like West Africa and Europe, and to a lesser extent the Gulf of Mexico, are more significantly impacted compared to land activities in the Middle East or offshore work in China, Australia, or Qatar, which may actually see increases. Overall, there are areas of resilience linked to long-term oil and gas development, both offshore and onshore. This includes regions like Guyana, Qatar's offshore gas, Deepwater Australia, or land activities in Russia. We aim to take advantage of these resilient markets, particularly in strong positions like Russia and Qatar offshore. In the second quarter, we will explore these opportunities and position ourselves to maximize the activity. So, we have varied pockets of performance that will continue to evolve. That’s what I can share with you at this time.

I appreciate that. I have a follow-up question regarding your APS portfolio. Previously, we encountered some issues related to unexpected oil price exposure. Can you elaborate on how much of that portfolio is currently linked to oil prices compared to fixed tariffs? Additionally, we have questions about payments. Could you also update us on the situation in Ecuador and when you anticipate operations might resume there? Thank you.

I will take that question, Dave. So on the oil price exposure, it's about half of our APS revenue is on fixed tariff on service fees, while the other half has some element of indexation to oil or gas prices. On that latter part, the good portion is already at the contractual minimum even with the oil prices we had in the first quarter. So the lower oil prices will not make it worse. All-in-all, when you take all of these into account, we are not talking about a significant direct impact on our earnings at the lower oil prices of today. So it's not a significant effect. On your second question regarding Ecuador, I don't think it's really appropriate for me to speculate on what specific customers will do from a payment standpoint. However, our total receivable balance in Ecuador was below 500 million at the end of March. And we received timely payments during the quarter. So we will be watching this very closely. But, so far, the quarter was in line.

Good morning, Olivier. So I just wanted to ask real quickly about COVID-19 and obviously the impacts it's having today. But if we think longer-term, how do you think that the COVID-19 will impact how you operate over the medium to longer term? I guess kind of what I'm asking here is, do you expect maybe to accelerate any remote operating or automation initiatives or think about how your supply chain if you try to have it less concentrated or maybe less reliant on China or anything like that? So just kind of structurally, do you see any changes over the medium to longer term as a result of what's happening for COVID-19?

Yes, very good question, Chase. So let me first comment on the way we did react and we did to act and support our operation, our customers during this period. So we actually put in place from mid-January a full crisis management team looking at all aspects. First and foremost, looking at the way we're protecting the health of our people and managing the support to logistics, supply chain, and manufacturing. We did that for the last three months now, going to full-scale across all organization. By doing that, we started to mitigate and understand the alternate path we have for logistics. We set up a second source and/or better understand the risk we were having toward some supply exposure, be it in China or elsewhere in the world. And actually, we have had no disruption. The disruption we had was related to shutdowns, states, or government-mandated in Malaysia or in Italy that we could not offset. But aside from this, we are actually showing extremely good resilience on the logistics, on the movement of people, as we have a lot of people that are in every country, local and we don't depend as much as some of our peers and/or some of the operators on flying teams or international commuters in most of the countries where we operate. So we had extremely good resilience. We did not let our customers down in any rig mobilization or in any product delivery at this point. So I think our resilience from a multiplicity of channels we have used for the second sourcing and the resilience of diversity and edge we have on our supply and manufacturing, I think has been helping us. Now going forward, you are totally right, and I think we have accelerated our remote operation and automation of some of our operations. In the month of March, we had more than 60% of our drilling operation that was using remote operation. So we have been exploiting with success the remote operation by reducing the footprint of people on the rig site, having a very positive impact on HSE, helping and supporting them remotely with an impact on service quality and providing efficiency and cost that benefit both the operator and ourselves. This will continue, will accelerate. We have an excellent platform internally and we have our DELFI platform externally, where our clients are starting to adopt drilling in particular remote operation and automation. This is accelerating as we speak. Another example, Chase, is as we were deploying DELFI, and you have now seen that in the earnings press release for Woodside, we were getting the request to accelerate due to the COVID-19 restriction, accelerate the deployment of the cloud-based infrastructure so that the asset team, the geoscientists of our customers could work from home and have full access to their data and to their powerful geoscience application. We're able to deploy and accelerate and with great satisfaction and success, and this has been used as an example going forward. So yes, it will be a differentiation that we’ll use going forward.

One quick follow-up. We're starting to see some producing wells being shut in globally, and this trend is likely to accelerate over the next month or two. As we consider these shut-in wells and their eventual return to production, could you discuss the impact on service activity and the potential revenue effects for your business as these wells are brought back online, possibly in the latter half of this year or early next year?

It's difficult to say, Chase. I think first, I think it's difficult to judge the magnitude of the number of shut-ins. It will depend on how fast and how much there will be an excess of supply going into topping the storage tanks. So I think it depends on the reservoir. It depends on the location. But generally speaking, yes, I think every well that is shut-in, when it’s put back, needs to get a bit of well management, scaling and stimulation activity. So that will favor the service activity at large whenever it comes back on the campaign of reservicing those wells and providing intervention and stimulation to make them back flowing at their maximum capacity. So that will indeed be a positive, if I may, effect as we exit this very difficult period and we start to recover the full capacity of the oil-producing fields.

Just wanted to start off on the offshore side. From an offshore perspective, shallow and deepwater rig count activity begins this downturn kind of at lower levels or well off prior cycle peak. So I wondered if you could provide any color on how we should think about Schlumberger's offshore exposure entering this downturn versus prior cycles, whether as a percentage of revenue, just some kind of ballpark way to think about offshore exposure for you all?

As you mentioned, we haven't recovered much from the level of activity we had in deepwater before the last downturn. The deepwater market, especially in the floating sector, has only seen a recovery of about 10% to 20% from its lowest point over the past three years. There has been some rebound in the shallow water market, although it has not fully recovered. This area is a significant part of our international portfolio and is crucial for the industry. Looking ahead, I believe that both deepwater and shallow water will see declines; however, I don't expect the deepwater decline to match the severity of the last downturn, as there are currently several large projects that are still operational. I anticipate that both shallow and deepwater will decline in the coming months, and the previously mentioned numbers indicating a double-digit to mid-teens decline sequentially apply to both sectors. We will manage through these challenges, but the decline in deepwater will not be as significant as before.

And then secondarily, just aside from now having Cameron in the fold and you guys sold the marine seismic vessels businesses and there's been a lot of changes and you guys have been doing kind of Yeoman's work to structurally change the business and become more fixed cost CapEx light. But what notable way should we think about the Schlumberger portfolio being different, i.e., more resilient entering this downturn versus prior down cycles?

I think a major part of it will come from our exposure in North America where we have made a decision to accelerate the new strategy, scale-to-fit, and also asset-light technology access. That's a major element of resilience in this downturn that will positively impact our way forward. And second, I would say is our digital strategy that I think we have invested into the last downturn to give us the benefit and certainly that will be leveraged with what has happened with remote operation automation. The combination of executing our asset-light, particularly in North America and any, I would say, high volume basins, and some of it will be in overseas and Middle East or in China or elsewhere where we will accelerate our technology access asset-light strategy and digital will complement this. So I believe that going forward we will gain better resilience from our exposure and support from digital and asset-light to technology access.

I wanted to ask about the international margin side. So if you look back to the last downturn, 2014 plus, margins held in quite well in the first year after the decline in activity. But then there was a pretty meaningful decline in 2016 as that year reflected more the new work that was awarded at lower prices and also cost absorption. Going into this one, if we assume a similar setup where most of the work that still happens in 2020 has been already awarded, but in 2021 it would be new work, I think it's a little bit different. In that, there's less pricing to give, but potentially less cost available to cut as well. Could you maybe walk through how the margin profile going forward might compare this time around compared to last time?

It's challenging to provide comments until we have more clarity on the exact mix of international adjustments for the second half, as well as when we can expect a steady exit from the COVID-19 crisis. This information will help us outline the outlook for 2021. However, as you've noted, there's considerably less pricing concession to make in this cycle, which will lead to a different profile of margin compression going forward. I believe we will handle margin compression better in this cycle compared to the previous one because we are less exposed to price declines, we have improved efficiency, including incorporating digital tools to enhance our operational flexibility, and we may see better resilience in some of the stronger markets we previously mentioned.

And if I could get in a quick follow-up. In the release, you commented on how many fleets have been reduced in North America through the end of March. I'm wondering if you can give any color on how much further you might have cut at this point? And there's a lot of speculation that fleet count in North America might go extremely low. Just curious if you can give any color on what you're seeing just at the leading edge there?

Yes. We are seeing the frac fleet going low, very low. But I think our trough, we anticipate will still be above 100 fleet we believe going forward. Now we will not recover from that going forward. We see some models arguing that the fleet count will go as low as 50 or 60 for the full market. We don't believe this will be the case, at least what we see and the indication we have. And we are aiming to maintain 10 to 15 or 10 to 12 fleets as a minimum operating in that environment and to have them active and deploying them to our fit strategy to the basins we favor and to the customers we believe are recognizing the performance we bring.

I'm wondering if you could help me reconcile. It seems like based on your sequential activity commentary and your full-year commentary that you expect the vast majority of the activity reductions to occur in the second quarter. Is that correct? And is that correct for both North America and international markets?

Yes. I think at the current assumption with the visibility we have, I think there is a sharp decline. As I said, this quarter is the worst in terms of decline rate that the industry I think possibly would have ever seen in North America clearly and internationally possibly. There will be further adjustments in the second half of the year in some international markets as well as maybe final rounding in North America. But I believe that the most decline is happening this quarter and will stabilize over the summer. So yes, I think the indication we gave I think are certainly helping us to be with lesser declines and a more stable environment from the exit rate of Q2 into the second half at this point.

Okay. That's fair. And in that context, it certainly seems like you guys have been proactive on cost management thus far. But relative to historical decrementals, should we think about the second quarter being a bit higher relative to usual, just given all that's going on, and maybe mitigating from there, or how would you think about the path?

I believe it's challenging to provide guidance on the second quarter's top line due to disruptions in international markets, which could range from 3% to 5% related to rig disruptions from COVID-19 restrictions, along with adjustments needed by some national companies in response to new OPEC+ voluntary cuts. This makes it difficult to predict revenue in the second quarter. As for the bottom line, while we may manage the abrupt changes better in North America, the international landscape presents challenges in reducing costs due to various factors. Therefore, the earnings in the next quarter will likely not be as favorable as in past downturns. Throughout the cycle, our goal is to perform better for the reasons previously mentioned. However, I anticipate the second quarter will be quite chaotic in terms of activity forecasts and our ability to adjust our cost structure or seize opportunities for upside when they arise, and I believe there will be opportunities for upside. Thank you. So I believe with this, I think we need to close. So let me conclude by reiterating some key takeaways from this call. Firstly, I believe that the company performed well during the first quarter despite a very challenging environment with excellent resilience and performance across operations, particularly in international markets and very respectable financial results, particularly in the cash flow from operations. I feel very proud of the Schlumberger team who have delivered this under such stressful conditions. Secondly, as we were presented with growing uncertainty on global economic outlook and a fast deteriorating commodity price, we acted swiftly, reducing our capital spend program significantly, accelerating our scale-to-fit strategy approach in North America and taking exceptional measures to protect our cash and liquidity for the second quarter and beyond. Thirdly, and after an in-depth review of forward-looking scenarios, we decided to adjust the dividend to a new level, as a prudent capital management decision, providing us with the liquidity and financial flexibility we need considering the significant uncertainty in the quarters to come. Finally, as we navigate this unprecedented industry downturn, we continue to prioritize key elements of our strategy, namely the capital stewardship initiative to protect the company's financial strength, the fit-for-basin strategy to increase the performance impact in key basins for our customers, and create sustainable differentiation. And finally, the acceleration of the industry’s digital transformation to support higher efficiency, efficiency gains in operation for our customers and for our own success. May everyone stay safe and healthy. Thank you for your attention.