FINAL TRANSCRIPT
SLB - Q3 2006 Schlumberger Earnings Conference Call
Event Date/Time: Oct. 20. 2006 / 9:00AM ET
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FINAL TRANSCRIPT
Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
CORPORATE PARTICIPANTS
Jean-Francois Poupeau
Schlumberger - VP of Communications and Investor Relations
Jean-Marc Perraud
Schlumberger - CFO
Andrew Gould
Schlumberger - Chairman and CEO
CONFERENCE CALL PARTICIPANTS
Daniel Henriques
Goldman Sachs - Analyst
Geoff Kieburtz
Citigroup - Analyst
Ole Slorer
Morgan Stanley - Analyst
Michael LaMotte
J.P.Morgan - Analyst
James Stone
UBS - Analyst
Bill Herbert
Simmons - Analyst
Dan Pickering
Pickering Energy Partners - Analyst
Alan Laws
Merrill Lynch - Analyst
Jim Wicklund
Banc of America - Analyst
Ken Sill
Credit Suisse - Analyst
Robin Shoemaker
Bear Stearns - Analyst
Rob MacKenzie
Friedman Billings Ramsey - Analyst
Brad Handler
Wachovia Securities - Analyst
Pierre Conner
Capital One - Analyst
Jim Crandell
Lehman Brothers - Analyst
PRESENTATION
Operator
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FINAL TRANSCRIPT
Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Ladies and gentlemen, thank you very much for standing by, and welcome to Schlumberger earnings conference call. At this
time all participation lines are in a listen-only mode. Later there will be an opportunity for questions and answers with instructions.
[OPERATOR INSTRUCTIONS]. As a reminder, today's conference call is being recorded for replay. We'll now turn the call over to
your host, Vice President of Communications and Investor Relations, Mr. Jean-Francois Poupeau. Please go ahead, sir.
Jean-Francois Poupeau - Schlumberger - VP of Communications and Investor Relations
Thank you, Rod. Welcome to today's third quarter 2006 conference call.
Before we begin today's call I'd like to review the logistics and the agenda. Some of the information in today's call may include
forward-looking statements as well as non-GAAP financial measures. A reconciliation of any non-GAAP measures we discuss
are contained in today's press release or will otherwise be posted on our Investor Relations website at www.SLB.com/IR. A
detailed disclaimer and other important information are included in the FAQ document on our website or upon request. Today's
agenda, Jean-Marc Perraud, Chief Financial Officer, will begin with commentary on the financial results. Then Andrew Gould,
our Chairman and Chief Executive Officer, will provide an overview of the third quarter activity and outlook. Finally, we'll take
questions from the audience.
And now Jean-Marc will discuss the financials.
Jean-Marc Perraud - Schlumberger - CFO
Thank you, Jean-Francois. Ladies and gentlemen, good morning and thank you for participating in this conference call.
Third quarter earnings from continuing operations before charges and credits were $1 billion or $0.81 per share, up $0.08
sequentially and $0.38 above same quarter last year, an 88% increase. Earnings from continuing operations after charges and
credit were also $0.81, up $0.12 sequentially and $0.37 above same quarter last year. Oilfield Services generated 1 billion 213
billion -- 1.213 billion in pretax operating income with a pretax margin of 28.2%, a 99 -- 99 basis points improvement sequentially.
By area, the highlights were as follows, North America pretax margin was up 81 basis points sequentially to 30.5%, due to the
rebounding activity in Canada after the spring break-up and the strong performance in U.S. land more than offsetting a drop
in Gulf Coast and Alaska. Latin America pretax margin was 20.6%, sequentially up 135 basis points, primarily reflecting improved
margin in Mexico, in spite of a revenue decline. For ECA, our Europe, Africa, CIS unit, the pretax margin was sequentially up 156
basis points to 26.4%. The main contributors were the Caspian, North Sea, and Russia. Middle East Asia pretax margin declined
46 basis points sequentially to 32.6% with sustained margin performance from all GeoMarkets except China which had a less
favorable revenue mix than last quarter. WesternGeco pretax margin was $242 million, and improved 482 basis points sequentially
to 36.8%, as a result of strong marine activity and a high level of sales of multi client service.
Getting back now to Schlumberger as a whole, the effective tax rate before charges and credit was 24.1%, broadly in line with
our expectation. We expect the effective tax rate to remain in the mid 20s next quarter. The earnings of the quarters included
30 million of expenses relating to stock based compensations, the sequential increase of $2 million and 20 million over same
quarter last year. We expect stock based compensation expense for the full year to be about $114 million. Also, the move of
our headquarters from New York to Houston resulted in exceptional expenses of 9.3 million during the quarter. The return on
capital employed by Schlumberger was 32.9% in Q3, versus 34.3% in the last quarter, reflecting the full impact of the WesternGeco
transaction on the capital base. At the end of September, the net debt was 3.2 billion, same level as last quarter. The stock buy
back of $482 million and CapEx of 653 million were offset by strong cash flow from operations. CapEx for the quarter included
50 million of multi client service capitalized. The total CapEx for the year will reach approximately $2.5 billion. During the quarter,
we bought back 8.1 million shares for 482 million, at an average price of $59, a spot of the new 40 million shares buy back
program approved by the Board of Directors last April. Since April, the cumulative number of shares bought back amounts to
11.7 million shares for $494 million.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
And now I will turn the conference over to Andrew.
Andrew Gould - Schlumberger - Chairman and CEO
Thank you, Jean-Marc. Good morning, everybody.
Continuing strength in seismic activity and increased demand for drilling services and well placement technologies were the
highlights of the robust performance in the third quarter. The outstanding results at WesternGeco where revenues grew 17%
sequentially were due to significant strength in multi-client data sales and very high marine utilization. With more than 85% of
WesternGeco's acquisition activity now focused on exploration and appraisal operations, the industry's effort to replace and
increase reserves is clearly under way. Overall growth in the quarter was broad-based with significant strength in Canada
following the spring break-up and on land in the U.S. where pricing remains strong and pressure pumping backlogs were
unchanged. These improvements were supported by growth in the Caspian, the North Sea and Arabian GeoMarkets. Burgeoning
exploration activity in Vietnam and eastern Russia added further impetus to these results.
By technology, Drilling and Measurement's PowerDrive and Scope services saw further strong growth backed by strong technical
and operational performance. The range of both product lines is unmatched in the industry, and their combination enables
increasingly complex well profiles to be drilled. As a result these services continue to expand their range and reach as the
industry seeks to improve performance and mitigate risk. Other Schlumberger technology segments that benefited from the
quarter's overall activity pattern included Well Services, Completion Systems, and Data and Consulting Services.
In more detail, results in North America were driven by the Canada and U.S. land GeoMarkets which were both strong sequentially
as pricing held firm and activity intensified. Activity was particularly strong in Canada following the prolonged spring break-up
in the second quarter with significantly improved utilization of both personnel and equipment. Growth in U.S. land resulted
from sustained demand for Well Services, Drilling and Measurements, and Wireline Technologies. Activity was more tempered
in the Gulf of Mexico, where seasonal cautionary planning for the hurricane season resulted in a modest fall in activity that
nevertheless remained strongly ahead year-on-year.
In Latin America, weakness in Mexico led to a sequential decline in revenue in spite of the positive trends emerging in the
Venezuela, Trinidad, and Tobago and Peru, Columbia, and Ecuador GeoMarkets. This resulted from budget limits in PEMEX
being reach somewhat early, although the effect on sequential operating income was more than offset by improved margins
on integrated project management activity, primarily as a result of the reduced level of lower margin third party service. Overall
pretax operating margins in Latin America grew by 135 basis points which were underscored by increasing returns on Wireline
in the Latin America South GeoMarket and higher margins on Drilling and Measurements and Wireline Services in the Venezuela,
Trinidad, and Tobago GeoMarket. In Venezuela, discussions regarding new contracts for the drilling barges and the settlement
of certain outstanding receivables have progressed at the end of the quarter. Pending the finalization of these new contracts,
revenue recognition was deferred on certain work performed during the quarter.
Results in the Europe CIS and Africa were driven by higher activity in the Caspian and by strong demand for drilling and
measurement technologies in the North Sea with these services being delivered at premium pricing. Overall growth was seen
in the Russia GeoMarket as land drilling activity increased, and there was particular strength in the eastern Russia GeoMarket
in Sakhalin and the start of exploration drilling elsewhere. Pretax operating margins grew by 156 basis points on a more favorable
activity mix and pricing gains in the Caspian and North Sea GeoMarkets.
The Middle East and Asia area third quarter revenues passed the $1 billion mark, representing a 5% sequential increase. This
was driven by strong activity in the Arabian GeoMarket as rig count continued to increase in Saudi Arabia, where drilling has
now begun on all four of the gas joint ventures. Elsewhere, activity was strong in the Thailand and Vietnam GeoMarket as
exploration activity strengthened and drilling further increased in Australia. The slight sequential decline in margin was due to
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
a less favorable revenue mix, mobilization expenses for Q4 drilling campaigns, and the absence of a retroactive price increase
recorded in the second quarter.
Among Schlumberger technologies, the increasing range of Drilling and Measurement's new technology services made further
progress during the quarter. PowerDrive rotary steerable technology continued its worldwide expansion as a new member of
the family was commercialized. The new service, PowerDrive Xceed 900, responds to the need for point-the-bit capability in
larger hole sizes from 12.25 to 17.5 inches, and complements the existing range of services for smaller hole sizes. Total footage
drilled by Schlumberger rotary steerable technology continued to climb sharply and reached 2.4 million feet by the end of the
quarter. Operational performance of PowerDrive has been particularly strong with equipment reliability, which has doubled
since the end of 2005, becoming more and more critical as rig day rates climb. Drilling Services' reliability is also shared by the
expanding scope -- range of Scope MWD and LWD services. Scope technology has now been deployed to 20 of the GeoMarkets
with 10 of these already offering the full scope of TeleScope, Echoscope, StethoScope, and PeriScope services. The PeriScope
deep electromagnetic imaging-while-drilling service continues to enjoy rapid acceptance due to its ability to detect formation
changes sufficiently far ahead of the bit to enable correct steering decisions to be taken. During the quarter, PeriScope technology
was used on a number of jobs, from coalbed methane wells in Canada to wells off shore Nigeria and to heavy oil projects in
Latin America. You will see further expansion of this technology family in the future, as new capabilities become available.
WesternGeco reported another record quarter with pretax operating margins growing further to reach 37%. Strong marine
revenue, high vessel utilization, additional land crews and a further growth in Q-Technology sales all contributed to this
performance. The Q-Land crew count increased from 4 to 5 during the quarter as a new crew mobilized for operations in Libya.
A number of new contracts have been announced, including the first ever 3-D over-under multi-azimuth survey in the Norwegian
sector of the Barent Sea. The survey design made possible through the unique capabilities of Q-Marine extends the frequency
bandwidth to better image the complex sub-basalt geology in the area. Elsewhere as part of the growing uptake amongst the
client base, ONGC extended their Q-Marine contract by two years, and PETRONAS Carigali awarded a new contract for Q-Marine
work on various fields offshore Malaysia.
Finally, I'd like to make a few comments on the assumptions governing our outlook for future activity. High levels of natural gas
storage in North America with consequent volatility in the price of natural gas have recently begun to impact activity, particularly
in the areas of higher cost coalbed methane and shallow gas production in Canada. This has not yet materially impacted our
activity. However, if the coming winter fails to stimulate strong natural gas demand, there is a growing likelihood of excess
equipment capacity in the pressure pumping business at some point in 2007. Activity growth elsewhere for both oil and gas
will remain strong as our customers continue to fight decline curves and bring in new fields.
I'll now hand the call back to Jean-Francois.
Jean-Francois Poupeau - Schlumberger - VP of Communications and Investor Relations
Thank you, Andrew. We will now open the call for questions. Rod?
QUESTIONS AND ANSWERS
Operator
[OPERATOR INSTRUCTIONS]. Daniel Henriques, Goldman Sachs.
Andrew Gould - Schlumberger - Chairman and CEO
Hello?
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Daniel Henriques - Goldman Sachs - Analyst
Hello, can you hear me?
Andrew Gould - Schlumberger - Chairman and CEO
Yes.
Daniel Henriques - Goldman Sachs - Analyst
Good morning. My question -- I have two questions. First in North America, when you talk about -- when you look above the
winter and the risks of overcapacity in pressure pumping, do you think that a normal winter with normal temperatures, do you
think that scenario you would have overcapacity there, or are you referring to the risk of a warm winter?
Andrew Gould - Schlumberger - Chairman and CEO
Well, I don't -- I'm not really good at judging the exact effect of the particular degree of winter severity on overall drilling activity.
We haven't modeled that yet. I think that a normal winter would attenuate the effect. In other words, if it was a normal winter
with a sufficient draw down, it would -- any effect on pressure pumping would be lesser than if it's a warm winter, that's very
obvious. But what the actual degree of each -- each degree of winter temperature's effect on storage is, I don't really know.
Daniel Henriques - Goldman Sachs - Analyst
Okay. And in terms of incremental margins, your incremental margins remain very strong year-over-year in North America. Are
you seeing any impact on pricing yet in the third quarter or in the beginning of this quarter because of slowdown in the U.S.
specifically?
Andrew Gould - Schlumberger - Chairman and CEO
No.
Daniel Henriques - Goldman Sachs - Analyst
No.
Andrew Gould - Schlumberger - Chairman and CEO
We are seeing no effect on pricing so far.
Daniel Henriques - Goldman Sachs - Analyst
And last question. The multi-client, you continue to invest less than some of your peers, the sales remain strong, the outlook
remains strong, can you update us on how you think about multi-client investments for 2007?
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Andrew Gould - Schlumberger - Chairman and CEO
Well, we would actually like to invest more. The problem is vessel availability because the return we're getting on the vessels
in proprietary service is such that it's a big decision to pull them off and put them off on multi-client. Now, a lot of our success
in multi-client in the last quarter has been due to the reprocessing and conversion of time to debt of existing data that we
already had. So a lot of the success in multi-client is currently coming out of reprocessed existing data rather than new data.
Daniel Henriques - Goldman Sachs - Analyst
Okay. Thank you.
Operator
Geoff Kieburtz, Citigroup.
Geoff Kieburtz - Citigroup - Analyst
Good morning.
Andrew Gould - Schlumberger - Chairman and CEO
Good morning, Geoff.
Geoff Kieburtz - Citigroup - Analyst
I'm going to start off on the same subject, ask it a little bit differently. It looks like you have trimmed modestly your CapEx plan
for '06. Is that -- does that reflect any change in your capacity additions specifically in the North American pressure pumping
market?
Andrew Gould - Schlumberger - Chairman and CEO
Jean-marc, do you want to comment on the overall number?
Jean-Marc Perraud - Schlumberger - CFO
The overall number I think we were consistent, around 2.5.
Geoff Kieburtz - Citigroup - Analyst
Well, I just -- referencing the FAQ where it was 2.1 for oilfield last quarter. It's 2.0, as I said, modestly.
Andrew Gould - Schlumberger - Chairman and CEO
I think that has far more, Geoff, to do with the capability of our manufacturing organization to deliver the last 100,000 -- $100
million.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Geoff Kieburtz - Citigroup - Analyst
Okay. All right. Just wanted to clarify that.
Andrew Gould - Schlumberger - Chairman and CEO
There is no specific reduction that has taken place.
Geoff Kieburtz - Citigroup - Analyst
Okay. If you do see evidence of an excess in the North American pressure pumping market, what do you do?
Andrew Gould - Schlumberger - Chairman and CEO
Well, we do what we always do. We adjust the organization to the level of business that we have.
Geoff Kieburtz - Citigroup - Analyst
Okay. Does that mean you just cut or --
Andrew Gould - Schlumberger - Chairman and CEO
No, I don't think it necessarily means that you cut. Because we're still crimped for a lot of particularly specialist personnel all
over the world. So we can do a huge -- for people we can do a huge amount. I very much doubt that we'd consider that a
slowdown would be long enough to warrant us moving large amounts of equipment to other places in the world.
Geoff Kieburtz - Citigroup - Analyst
Okay. And --
Andrew Gould - Schlumberger - Chairman and CEO
The number one objective would be to preserve the skilled workforce.
Geoff Kieburtz - Citigroup - Analyst
Got you. And -- and you'd noted that there had already been some evidence of slowdown in the coalbed methane and some
shallow gas, but it hadn't really affected your business.
Andrew Gould - Schlumberger - Chairman and CEO
No.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Geoff Kieburtz - Citigroup - Analyst
Is it going to, or are you trying to say that that --
Andrew Gould - Schlumberger - Chairman and CEO
No, I'm saying that the only -- actually one other point we wanted to make, Geoff, is that we've only seen this slowdown so far
in Canada, not in the U.S., right? And our market share in coalbed methane and shallow gas is not such that it had any material
impact on our activity so far. And that's the situation for Canada. In the U.S. we've not seen any effect so far.
Geoff Kieburtz - Citigroup - Analyst
Okay. And last question. On Mexico, were your comments intended to communicate that we kind of have to wait until the next
budget year to find out whether Mexico is going to rebound or what's sort of the dynamic --
Andrew Gould - Schlumberger - Chairman and CEO
Personally, I don't have any doubt whatsoever that Mexico will rebound.
Geoff Kieburtz - Citigroup - Analyst
Okay.
Andrew Gould - Schlumberger - Chairman and CEO
But you're quite right to point out that I don't think it will be until 2007.
Geoff Kieburtz - Citigroup - Analyst
Great. Thanks very much.
Operator
Ole Slorer, Morgan Stanley.
Ole Slorer - Morgan Stanley - Analyst
Thank you very much. I wonder whether we could just turn to Russia a little bit. There was a big debate on the second quarter
conference call, I remember, where the whole nationalistic kind of movements being debated to what extent it would affect
your outlook. And actually I attended the Lukoil strategic review in New York on Wednesday, and they just -- one customer
highlighted very much that they've been moving more towards an outsourced approach and highlighted Schlumberger as one
of the key partners in hydromodeling, et cetera, but stated that there was still only about 60% of the weight where they wanted
to become in terms of the mix of in-house and outsourced approach. So I was wondering whether you can update. I don't
expect you to comment on any particular customer, but whether you can give us a little bit of more color on how you are reading
Russia from your latest kind of data points?
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Andrew Gould - Schlumberger - Chairman and CEO
Well, I think that the -- the Russian state and the Russian oil companies do want to significantly increase their participation, and
my personal interpretation is that a lot of what's happening is revisiting deals that were made 10 to 15 years ago when the oil
price was very different. And, frankly, that's not very different from what happens in other places around the world. Now, in
terms of Schlumberger, as I pointed out in our investor conference, we are not dependent anymore on any one group of
customers, be they international or the Russian domestic companies. Our fastest growing group of customers is undoubtedly
the Russian domestic companies and it's -- Lukoil is an excellent customer. And the move by the Russian oil companies to
outsource their -- some of the internal service companies that they previously used to perform, I consider is still ongoing and,
therefore, I think still provides huge opportunities for the service industry generally in Russia, and that as we're sort of quite
well established, for Schlumberger in particular.
Ole Slorer - Morgan Stanley - Analyst
So what do you -- do you think that Lukoil is fairly typical of the established companies in terms of where they are and where
they're going?
Andrew Gould - Schlumberger - Chairman and CEO
I wouldn't want to comment on Lukoil.
Ole Slorer - Morgan Stanley - Analyst
So sorry, but that type of a -- that type of -- how big is --
Andrew Gould - Schlumberger - Chairman and CEO
I'm not surprised that Lukoil would make a comment that they -- they are increasing their efficiency of operation by continuing
to outsource some of the activities they did previously themselves.
Ole Slorer - Morgan Stanley - Analyst
Yes. And for Russia as a market if you just look at it across everything, where do you think they are now as an opportunity, what's
available to you now out of the total market and how do you expect that to develop over the next few years?
Andrew Gould - Schlumberger - Chairman and CEO
Well, I think it will go on increasing. There are one or two companies -- very large Russia companies who have still not moved
to the outsourcing model. Whether they do or not is going to have a huge influence on the size of the service market. And as
we pointed out in Sugar Land, the trend that is really helping at the moment is the trend towards new field developments,
which as it's not classic western Siberia, have a much higher technology content than what was classic western Siberia. And
the move towards exploration in eastern Siberia, not just in Sakhalin, but also in all the sort of non-basins, or it will become in
all the non-basins along the pipeline route to China.
Ole Slorer - Morgan Stanley - Analyst
Thanks a lot, Andrew.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Operator
Michael LaMotte, J.P. Morgan.
Michael LaMotte - J.P.Morgan - Analyst
Thanks, good morning.
Andrew Gould - Schlumberger - Chairman and CEO
Good morning.
Michael LaMotte - J.P.Morgan - Analyst
Andrew, I want to follow up on this issue of adjusting the North American pumping market and see if I can't get you to be a
little bit more specific in terms of what that looks like with respect to equipment. Is it lowered CapEx, retirement acceleration?
Can you give a little bit more detail and color there?
Andrew Gould - Schlumberger - Chairman and CEO
I think that -- I don't -- actually, to be frank, I haven't looked at the plan, but I would imagine that the first -- if it's necessary, the
first reaction to equipment will be to retire some of the very old and tired pieces that are out there. CapEx, I don't think we're
going to fundamentally adjust what we had planned for this year or next year.
Michael LaMotte - J.P.Morgan - Analyst
Okay. And then -- and that would lead us to believe that the market's really not that out of balance, perhaps.
Andrew Gould - Schlumberger - Chairman and CEO
No. Michael, let me be clear. For the market to -- you all know that I've been saying for a long time that the market would add
capacity to the point where it creates an excess, which is -- there's nothing new in this. It's always been before. I mean, we all
remember NASCO and Fracmaster and all these other companies that get swallowed up in the first downturn. So what's
happening in North America is there is no -- there's nothing new in this. So I think that what -- all I'm saying is that should gas
storage levels result after next winter in an adjustment in the level of drilling, and I have -- don't -- please don't ask me whether
it's going to be because I have no idea.
Michael LaMotte - J.P.Morgan - Analyst
[Laughter] That was my next question.
Andrew Gould - Schlumberger - Chairman and CEO
Then the excess in pumping equipment will come quicker.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Michael LaMotte - J.P.Morgan - Analyst
Okay. I won't beat that dead horse anymore. Let me just ask quickly what the impact of the deferrals in Venezuela were in the
quarter.
Andrew Gould - Schlumberger - Chairman and CEO
Somewhere close to $20 million.
Michael LaMotte - J.P.Morgan - Analyst
Okay. Great, thank you.
Jean-Marc Perraud - Schlumberger - CFO
Michael?
Michael LaMotte - J.P.Morgan - Analyst
Yes, Jean-Marc?
Jean-Marc Perraud - Schlumberger - CFO
We also deferred the costs associated with that revenue.
Michael LaMotte - J.P.Morgan - Analyst
Okay.
Jean-Marc Perraud - Schlumberger - CFO
So it's not all 20 million income.
Michael LaMotte - J.P.Morgan - Analyst
Okay. Thank you.
Operator
James Stone, UBS.
James Stone - UBS - Analyst
Good morning, guys. I just wanted to talk a little bit on the seismic side, first of all, Andrew, can you give us a sense of what the
ramifications are in terms of your outlook for offshore drilling demand from some of these enhanced seismic surveys like the
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E-Dog that you talked about in the press release and should we anticipate similar projects like this in other basins outside the
Gulf of Mexico?
Andrew Gould - Schlumberger - Chairman and CEO
Actually, I think that the likelihood of us doing an E-Dog-type project outside the Gulf of Mexico with a possible exception of
parts of Norway, is very unlikely. What makes E-Dog so powerful in the Gulf of Mexico is because it is revealing horizons that
people knew existed, but really didn't have enough confidence to drill. So to the extent -- I mean, what -- it joins what I said in
the investor meeting, James, very much that the Gulf of Mexico has a long way to go. And what new -- these new seismic
techniques are doing, be it wide azimuth, multi-azimuth, Q and all of the rest of it, is opening up or increasing the confidence
or mitigating the risk associated with drilling in the Gulf of Mexico. So in the long-term, yes, I actually think that it will increase
the -- particularly the semi-submersible offshore rig count in the Gulf of Mexico. It'll take a few years, but that's where it's going
because it is revealing new horizons.
James Stone - UBS - Analyst
Okay. And then my follow-up to that is, I mean, the seismic margin's at 36 and almost 37% in the quarter, just extraordinary. I
mean, I'm trying to get a sense as to how much more upside you guys see in the margin front on seismic, or should we look at
this as being very heavily influenced by strong multi-client sales in the quarter that are probably not a repeatable event as we
-- at that magnitude as we move forward.
Andrew Gould - Schlumberger - Chairman and CEO
I think -- I think acquisition margins for marine, land, still have some -- there's still some room to expand those. Multi-client is
like the film business. If you make the Titanic, the margin is absolutely huge, right? But if you make a film that's bad, you get
zero. So I actually -- to the extent that we go on producing very solid multi-client projects, we'll go on having very solid sales.
But we can't -- it's impossible to plan sustaining a margin in a businesslike that. So it can -- it can either -- you can have a positive
surprise, you can have a negative surprise. But I would agree with you that the current multi-client margin is probably at the
top end of the range.
James Stone - UBS - Analyst
Great. That's very helpful.
Operator
Bill Herbert, Simmons.
Bill Herbert - Simmons - Analyst
Hi, good morning.
Andrew Gould - Schlumberger - Chairman and CEO
Good morning.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Bill Herbert - Simmons - Analyst
Sticking to seismic for two seconds here, significant improvement in margins, up almost 500 basis points. How much of that
was driven by multi-client? You said the preponderance of it, but was virtually all of it driven by that?
Andrew Gould - Schlumberger - Chairman and CEO
Jean-Marc?
Jean-Marc Perraud - Schlumberger - CFO
No, actually when I commented, I put in order, I said marine activity first and then multi-client.
Bill Herbert - Simmons - Analyst
I missed that. Thank you. And then secondly, with respect to the multi-client mix, you were up about $54 million in terms of
revenues from multi-client sales quarter [technical difficulties]; correct?
Jean-Marc Perraud - Schlumberger - CFO
Correct. Yes, we did 147 million last quarter, 201 million this quarter.
Bill Herbert - Simmons - Analyst
Yes. So what I'm trying to understand is the incremental increase in revenues, how much of that was driven by essentially older
data surveys, sales of older data surveys or almost --
Jean-Marc Perraud - Schlumberger - CFO
A very significant part, if not all.
Bill Herbert - Simmons - Analyst
Okay. That's good. Thanks. Last question, I know it's early days and you gave some loose parameters at the analysts conference,
but do you have any sense with regard to capital spending budget for 2007?
Andrew Gould - Schlumberger - Chairman and CEO
No, we're in -- we're still in -- we're in the process of finalizing that at the moment. But it's not -- it's not final to the point where
we want to make a comment yet, Bill.
Bill Herbert - Simmons - Analyst
Yes, I guess what I'm trying to get at is how locked in is that budget as we speak right now, given the fact that equipment and
tool deliveries are extending and not contracting, so essentially you would have had to order?
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Andrew Gould - Schlumberger - Chairman and CEO
So all the long leadtime items and critical path items were ordered in the early part of the summer.
Bill Herbert - Simmons - Analyst
Okay. That's all I have. Thank you.
Andrew Gould - Schlumberger - Chairman and CEO
Thank you, Bill.
Operator
Dan Pickering, Pickering Energy Partners.
Dan Pickering - Pickering Energy Partners - Analyst
Good morning.
Andrew Gould - Schlumberger - Chairman and CEO
Good morning, Dan.
Dan Pickering - Pickering Energy Partners - Analyst
I want to -- I guess I want to ask a little bit about the message behind the message, Andrew, on the pressure pumping side. I
understand how Schlumberger plans to react in terms of capacity [technical difficulty], but essentially I hear the message which
is industry guys stop adding capacity, but you're not changing your CapEx plans. Are you hoping that others will? Are we
eventually going to move to a pricing methodology to get people to stop adding capacity? I mean, what's the -- how's this play
out?
Andrew Gould - Schlumberger - Chairman and CEO
So actually I think, Dan, that the -- the amount of capacity that's been added in the poorer quality resource, so shale gas, et
cetera, is such that it shows that today in producing that resource, there is very little technical differentiation. And the long-term
name of the game has to be improving the production index in shale gas wells, which means that we have to bring technology
to change that market from a market that is purely a commodity of how much slick water can you pump, to a market where
between the -- between the stimulation and the completion, you actually improve the productive index of those wells. So the
long-term game for me is still technology in that market.
Dan Pickering - Pickering Energy Partners - Analyst
Okay. That's helpful. And then as we look into the fourth quarter, given kind of the things that you see at this point, would you
expect that any of your four main GeoMarkets would be softer on the top line or any of your specific PSLs that would be softer,
quarter-to-quarter?
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Andrew Gould - Schlumberger - Chairman and CEO
The four main areas?
Dan Pickering - Pickering Energy Partners - Analyst
Correct.
Andrew Gould - Schlumberger - Chairman and CEO
No, I don't think so.
Dan Pickering - Pickering Energy Partners - Analyst
Okay. Thank you.
Andrew Gould - Schlumberger - Chairman and CEO
Sorry. Do you -- Jean-Marc wanted to add something.
Jean-Marc Perraud - Schlumberger - CFO
You were talking about GeoMarkets or areas?
Andrew Gould - Schlumberger - Chairman and CEO
Areas.
Jean-Marc Perraud - Schlumberger - CFO
Areas. Okay.
Andrew Gould - Schlumberger - Chairman and CEO
Okay.
Dan Pickering - Pickering Energy Partners - Analyst
Thank you.
Operator
Alan Laws, Merrill Lynch.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Alan Laws - Merrill Lynch - Analyst
Good morning. A couple quick questions. First one's high level. Do OPEC cuts and Saudi's recent comments on defending price
give you any pause for concern or factor into the secular growth backdrop that you see for the balance of the decade?
Andrew Gould - Schlumberger - Chairman and CEO
No. I mean, actually, well, my view is that the whole -- the whole position of the oil price and the pessimism that surrounds it
has been completely overplayed. I mean, it's true that U.S. crude and product inventories are high, but if you look across the
world, they are not very high. And more importantly, as we've always said, if you look at demand, there is no -- I think, no
significant sign or no major sign of significant weakness in demand. So I think that -- I think OPEC is defending the price, but I
don't think there is a huge danger of a price collapse and as we've always said we don't need $65 oil for our customer's spending
plans to be maintained. They will maintain them at a much lower price because the basic issue of renewing supply has not really
changed very much.
Alan Laws - Merrill Lynch - Analyst
Great. Thanks for that answer. The other one was on the gas side. For quite a while, your comments on North America have
included sort of pricing and demand growth verbiage and this quarter pricing was pretty much dropped and demand was
characterized as sustained. Other than, say, pressure pumping, what does your -- I guess, your longer-term crystal ball reveal
about North American growth potential for other services over the balance of the decade?
Andrew Gould - Schlumberger - Chairman and CEO
Apart from pressure pumping? Well, actually, I think that then you have to look at, again, what I just said to Dan Pickering and
that is technology in the non-conventional resource is going to evolve. And there are a lot of questions around how you actually
exploit this resource that have not been answered. So for example, there is the old age debate -- the old debate that's always
existed of is fracking more efficient than horizontal? Are there ways that we can drill these wells better and cheaper, more
productive? And so over time, if you assume that sustaining the gas production base is going to be -- get tougher and tougher,
then we still -- I'm still in the longer term very optimistic about North America.
Alan Laws - Merrill Lynch - Analyst
Is there a potential secular demand growth story for other services within that, other than pressure pumping, then? Reservoir
characterization and things like that?
Andrew Gould - Schlumberger - Chairman and CEO
Well, I -- yes, I don't really want to discuss our strategy in detail on the conference call. But sure, yes, there are other -- lots of
other ideas floating around, yes.
Alan Laws - Merrill Lynch - Analyst
Okay. I'll leave it at that. Thank you for the answers.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Operator
Jim Wicklund, Banc of America.
Jim Wicklund - Banc of America - Analyst
Good morning, guys.
Andrew Gould - Schlumberger - Chairman and CEO
Hi, Jim.
Jim Wicklund - Banc of America - Analyst
Andrew, what is the impact to you guys into the oilfield service industry from Gazprom's announcement that it's going to
develop Stockman by itself? Is that a positive for you guys?
Andrew Gould - Schlumberger - Chairman and CEO
I really don't -- I think that the most likely scenario is that Stockman will be -- not be the first new gas field that Gazprom develops,
and I have no inside knowledge, this is purely my personal speculation. I think there will be other sources of gas that they
develop in Russia first. And, therefore, I don't think it has any short or medium term impact on the oilfield service industry.
Jim Wicklund - Banc of America - Analyst
Does Gazprom, having the idea of going it alone, if you would, without the participation of IOCs, is that a positive or a negative
for the industry or does it matter?
Andrew Gould - Schlumberger - Chairman and CEO
I don't think it matters at this stage of the game, Jim.
Jim Wicklund - Banc of America - Analyst
Okay. Okay. Thanks, guys. Good quarter.
Jean-Marc Perraud - Schlumberger - CFO
Thank you.
Operator
Ken Sill, Credit Suisse.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Ken Sill - Credit Suisse - Analyst
Good morning, Andrew.
Andrew Gould - Schlumberger - Chairman and CEO
Hey, Ken.
Ken Sill - Credit Suisse - Analyst
One question as you look out -- I mean, Q4 looks like it's going to be pretty good, so looking out into '07, your long-term guidance
has been for kind of 20% top line growth at good incremental margins. So the incrementals look better than you maybe have
been guiding to. But if -- if you do have a slowdown in North American activity, what does that do to that kind of 20% -- high
teens to 20% growth rate on the top line basis for kind of '07- '08? Does it have a big impact on your growth -- long-term outlook
--?
Andrew Gould - Schlumberger - Chairman and CEO
Not a huge one. The answer is -- the best answer I can give you today is it does not have a huge impact.
Ken Sill - Credit Suisse - Analyst
Okay. And then looking -- so parsing that out and looking internationally. I mean, trying to -- your rate of change in the rig count,
kind of regardless of what happens has to kind of slow down.
Andrew Gould - Schlumberger - Chairman and CEO
Yes.
Ken Sill - Credit Suisse - Analyst
So how much of the growth is pricing versus kind of activity growth on the rig count and then I guess a third component would
be non-rig-related activity which is just the fact that you're having to work harder to maintain reservoirs --
Andrew Gould - Schlumberger - Chairman and CEO
Well, I think -- I think we would not -- compared to this year, obviously the rate of offshore rig count growth has to slow down
because of the very high level of utilization and the fact that the new builds are not really going to hit the market until 2008. I
would disagree with you on land. I suspect that the land rig count overseas is going to increase at the same rate or maybe even
slightly faster, outside Saudi Arabia in 2007, compared to 2006. So I don't think you're looking at a huge activity delta. And
rigless work -- there's always actually scope to -- for that to increase. So I don't -- I don't see anything today that would make
me change the statements I made on top line growth through the end of the decade.
Ken Sill - Credit Suisse - Analyst
And the implication there is your pricing power is still pretty good then?
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Andrew Gould - Schlumberger - Chairman and CEO
I think that -- yes, overseas it's fine, yes.
Ken Sill - Credit Suisse - Analyst
Okay. Thank you.
Operator
Robin Shoemaker, Bear, Stearns.
Robin Shoemaker - Bear Stearns - Analyst
Yes, Andrew, you mentioned in your comments that you saw a slowdown in the Gulf Coast region in anticipation or during the
hurricane season. I wonder if -- it's now over to the extent that there was one, if you see a change for the better or if that area
continues to be soft or unchanged from the level of the hurricane season?
Andrew Gould - Schlumberger - Chairman and CEO
No, I think -- we think we see a moderate sequential improvement in the fourth quarter, if that's what you're asking, Robin.
Robin Shoemaker - Bear Stearns - Analyst
Yes, yes. And you mean we're talking principally offshore, right?
Andrew Gould - Schlumberger - Chairman and CEO
Yes, I mean, what we're talking about in the third quarter is the fact that the operator did not want to be caught by any -- take
any risk of being caught by a hurricane. So there was some down-manning that took place, even though there was in fact no
storm. So the actual number of days that we were able to operate decreased in the third quarter, and it will go back up again
automatically in the fourth quarter.
Robin Shoemaker - Bear Stearns - Analyst
Yes. Okay. Just, my second question then is there's been a lot of discussion about cost pressures in the industry going back a
couple years now, and I wonder if this kind of plateauing of activity or -- in North America specifically, or if you see any lessening
of cost pressures either on wages or other major components of cost?
Andrew Gould - Schlumberger - Chairman and CEO
I think the answer has to be not yet, no.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Robin Shoemaker - Bear Stearns - Analyst
No?
Andrew Gould - Schlumberger - Chairman and CEO
No.
Robin Shoemaker - Bear Stearns - Analyst
Okay. All right. Thank you.
Andrew Gould - Schlumberger - Chairman and CEO
Anymore questions out there?
Operator
Rob MacKenzie, FBR.
Rob MacKenzie - Friedman Billings Ramsey - Analyst
Good morning, Andrew.
Andrew Gould - Schlumberger - Chairman and CEO
Good morning, Rob.
Rob MacKenzie - Friedman Billings Ramsey - Analyst
My question is around your comments about the penetration of Analysis Behind Casing in China, and how that's growing there.
I wanted to get a feel for any penetration for that product line outside of China, any progress you're making on deploying that
more broadly.
Andrew Gould - Schlumberger - Chairman and CEO
No, it's doing pretty well all over the world. I mean, to be quite honest, some of the issues we have today is finding enough
engineers to run very complex services, which they are. But generally, the growth in ABC has been pretty solid everywhere. I
think we pointed out China because it's one more sign of the need the Chinese have to recover as much of their domestic
resource as they possibly can. And they do have a very large stock of oil wells that they can go back and revisit and see whether
they have any bypassed oil or possibilities of increasing the production from their existing pack of wells. But generally it's been
pretty good.
Rob MacKenzie - Friedman Billings Ramsey - Analyst
I mean, the same could be said about the United States in particular old oil wells, Russia, you name it. Have you --
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Andrew Gould - Schlumberger - Chairman and CEO
I think the -- I think it's one of the messages we tried to get across in our investor show. But the recharacterization of existing
reservoirs is going to be a very important part of our business. And as I know it's public, we currently have a Q-Land crew working
in west Texas with Dawson Geophysical, and the recharacterization of some very old fields in west Texas can reveal some very
interesting data. So, yes. You're quite right that the part of the improvement in the recovery factor will be using technology, be
be it seismic or Wireline or other technologies to -- testing, particularly, production testing -- to revisit very old fields.
Rob MacKenzie - Friedman Billings Ramsey - Analyst
Okay. And my follow up question is the Scope tools, the Scope family, can you give us a feel for how deep the penetration is
on percentage of wells, what the upside is left?
Andrew Gould - Schlumberger - Chairman and CEO
Oh, it's very small. I mean, the penetration we've achieved so far -- J.F., do you know --
Jean-Francois Poupeau - Schlumberger - VP of Communications and Investor Relations
20 GeoMarkets.
Andrew Gould - Schlumberger - Chairman and CEO
We've done 20 GeoMarkets, but the actual penetration into the overall LWD/MWD market is still very low.
Rob MacKenzie - Friedman Billings Ramsey - Analyst
Okay. Thank you.
Operator
Brad Handler, Wachovia Securities.
Brad Handler - Wachovia Securities - Analyst
Thanks. Good morning.
Andrew Gould - Schlumberger - Chairman and CEO
Good morning.
Brad Handler - Wachovia Securities - Analyst
Could I ask you, please, to speak to whether or not on the -- I guess on the CapEx side of your business, are you seeing any signs
of freeing up or lessening of costs for some component parts, perhaps as a function of sort of slowing growth in some other
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
industries, away from energy? So maybe Caterpillar is sort of a regrettable example on my part to have to mention, but perhaps
they don't have the demand of some other industries, so they're allowing -- there's a little bit more room that can --
Andrew Gould - Schlumberger - Chairman and CEO
Well, unfortunately, a lot of the basic component supplies that we use are the same as the mining industry. And you talk about
Caterpillar as an example. There could be several others. But -- and as a -- the mining industry is booming as much as the oilfield
services industry, and therefore, I very much doubt that we're going to see a reduction in lead times or any reduction in costs
for the basic components like that for some time yet. The only efforts that have been successful in cost, I think, that we can
point to, and that would not be for prime moving equipment like Caterpillars, is where we've diversified our sources of supply.
I think that everyone is trying to qualify new suppliers at the home moment, and that's basically the only way you can have any
significant or even any effect at all on cost.
Brad Handler - Wachovia Securities - Analyst
Okay. Thanks. That helps. And in an unrelated follow up, I guess, if you will, can you just speak to the sales of product into China?
There was some commentary made by some of your peers in prior quarter about kind of trying to cut back on that in favor of
use of proprietary tools and expanding the services. Have you taken a stand on that in one way or another? Should we perhaps
expect less sales into China going forward --?
Andrew Gould - Schlumberger - Chairman and CEO
We -- for the last 25 years, we have taken the position that we would never sell our equipment into China because we're in the
service business, not in the business of putting our -- putting other people into the service business. So we've never sold
equipment into China.
Brad Handler - Wachovia Securities - Analyst
So what we saw in the margins was simply a function of what services were provided?
Andrew Gould - Schlumberger - Chairman and CEO
Yes, exactly. No, the -- it's the service mix in China. We have never sold products into China, apart from things like ESP electrical
submersible pumps, which everybody sells as products. But we've never sold our Wireline equipment or D&M or pressure
pumping equipment into China.
Brad Handler - Wachovia Securities - Analyst
Okay. Thank you very much.
Operator
Pierre Conner, Capital One.
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
Pierre Conner - Capital One - Analyst
Good morning. Thank you.
Andrew Gould - Schlumberger - Chairman and CEO
Good morning.
Pierre Conner - Capital One - Analyst
Actually, similar question on mix relative to the North Sea. You mentioned gains there, and I wondered if those were discrete
or were you gaining some market share in higher technology that was contributing to those incremental margins there, Andrew?
Andrew Gould - Schlumberger - Chairman and CEO
Yes, I think we have some new contracts that are employing higher technology products that probably came on-line either in
the middle of the second quarter or the start of the third quarter, yes.
Pierre Conner - Capital One - Analyst
Okay. That's fine. The rest of my question's already answered on the margins at WesternGeco. Thank you.
Andrew Gould - Schlumberger - Chairman and CEO
Thank you, Pierre. Any more?
Operator
Jim Crandell, Lehman Brothers.
Jim Crandell - Lehman Brothers - Analyst
Yes. My question's been answered. Thank you.
Andrew Gould - Schlumberger - Chairman and CEO
Okay.
Jean-Francois Poupeau - Schlumberger - VP of Communications and Investor Relations
So Rod will be providing the closing comments. Thank you all for participating in today's call. Rod?
Operator
Ladies and gentlemen, this conference will be made available for replay beginning today at 2:15 pm Eastern Daylight Time
continuing through Friday the 3rd of November at midnight. To access the AT&T Executive Playback Service at any dial
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Oct. 20. 2006 / 9:00AM, SLB - Q3 2006 Schlumberger Earnings Conference Call
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