Schlumberger NV Earnings Call Nuggets: North American Market and International Spending

Schlumberger NV (NYSE:SLB) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

North American Market

Kurt Hallead – RBC Capital Markets: Question, Paal for you on the North American market. You continue to show some differential performance on the margins front despite the fact that – and show improvement in terms of activity, revenue, and margins despite an anemic rate progression and a lot of discussion here about the well count and so on. So, I was just wondering if you can give us a little bit of additional color as to what product lines that you see will be benefiting from the shift in the type of drilling that’s taking place in the U.S. marketplace and what kind of technologies that Schlumberger has that will continue to enable Schlumberger to show differential margin performance going forward?

Paal Kibsgaard – CEO: Well, I think if you look at what enables us to show differentiated margins, I think it’s the – there’s several things. Firstly, our ability to, I think, execute very well on land, whether that is on drilling or on pressure pumping. But also the fact that we have a very well balanced portfolio in between drilling and production related activities on land as well as in between land and offshore. So, we obviously have a very strong offshore business, both rig-related as well as the seismic but what we have done in recent years, starting off in 2010 was to restructure the business on land which in previous years, I would say, had underperformed. Through that restructuring, I think we are performing on par with the best if not better in most of our product lines. So if you look at the trends of drilling in North America land market now going towards more and more horizontal wells, predominantly focused on liquids, all our drilling segments obviously benefit from that. At the same time, our pressure pumping business through new technology deployments such as HiWAY are also benefiting from this. We’re also introducing to the market our own multistage completion technology which has been a gap in our portfolio in recent years, which also should enjoy quite significant growth going forward. So I think it’s a good balance between land and offshore, good balance between drilling and production on land and overall very strong focus on execution.

Kurt Hallead – RBC Capital Markets: As a follow-up, Paal, on that, with respect to the overall margin performance of Schlumberger, especially in the international marketplace, are you getting in a sense that we’re starting to see a shift in the industry that will demonstrate Schlumberger’s relative product and services strength, whether its deepwater or otherwise? You think we’re at a kind of inflection point in the marketplace where we’re going to see the strengths of Schlumberger?

Paal Kibsgaard – CEO: Well, if you look at our margin performance in international over the past couple of years, I think we’ve been highly differentiated continuously, right. So, I think we have done well in our contract strategy, what contracts we’re prepared to take on and the ones that we see more as must-wins. We have continuously introduced new technology and we’re also leveraging very well, I think, our overall size and infrastructure. So, to your question, whether it’s an inflection, we don’t see any imminent inflection in bid pricing at this stage. We are seeing a continuous uptick in another pricing indicator that we track which is revenue per rig. That is continuing to grow and going upwards. And that, obviously, helps our profitability. And what drives that up is new technology sales. It is our integration capabilities where we do more and more services and products on each rig, and it is also down to the nature of the work that we take on. Typically, we take on the more complex and more intense work because it is more difficult to do. And if you perform well in that, that also is quite accretive to margins. So, bid pricing, we still don’t see any imminent inflection, but we continue to drive revenue per rig upwards through new technology, through integration, and this very solid execution.

 

International Spending

James West – Barclays Capital: You mentioned in your prepared comments the third-party service, which, of course, you’re well aware that we do a very large survey. And what we saw when we reran the numbers here in May and early June was that international spending was creeping up about 300 basis points to 400 basis points. So, curious, if you’re seeing the same things from your customers who you’re having the same, of course, conversations that we are with? And then secondarily, which markets – do you agree with what we showed as the biggest growth areas of kind of the Middle East, Eastern Hemisphere in general, and which seemed like markets that are kind of Schlumberger’s backyard essentially. Do you see this as the best growth markets for this year?

Paal Kibsgaard – CEO: So, to the first part of the question in terms of the spend, yeah, if you look at the average of the spend surveys – and we look at several – I think for the international it was about 9% early in the year, and it was generally all of them revised upwards lately to average about 13%. So, we generally agree with that upward revision. We see continued strong activity levels in the international market and those spend surveys are also, I would say, confirmed from the rig count outlook and also the rigless outlook in terms of activity that we have for the second half of the year. So, yes, we are in agreement that upward revision seems to be reasonable. Then the second part of your question was?

James West – Barclays Capital: On the specific regions where the spinning is increasing, particularly the Middle East?

Paal Kibsgaard – CEO: Yeah, so we highlighted going into the year five major growth regions, right. So we said that international would grow north of 10% this year. We would see growth in Latin America, but due to the kind of transitional nature both in Mexico and Brazil as we indicated early in the year, we weren’t expecting a lot of growth coming out of Latin America which is being confirmed and we said that the main growth markets would be Sub-Saharan Africa, Russia, Middle East, in particular, Saudi and Iraq, China and Australia, those were the five main drivers. So basically ECA and MEA were the main drivers of growth in international market.

James West – Barclays Capital: Then just a follow-up for me the market share gains that you also highlighted in your prepared remarks. Are those happening in those markets that are growing the most rapidly?

Paal Kibsgaard – CEO: I think, in general that’s fair. I would say in particular in MEA, we are gaining quite good market share

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