SLB N.V. (SLB) Q3 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. And I would now like to turn the conference over to your host, Mr. Malcolm Theobald, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Keely. Good morning, and welcome to the Schlumberger Limited Third Quarter 2011 Results Conference Call. Today's call is being hosted from the Schlumberger-Doll Research Center in Cambridge, Massachusetts. Joining us on the call today are Andrew Gould, Chairman; Paal Kibsgaard, Chief Executive Officer; and Simon Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paul. Simon will first review the financial results and Paul will discuss the operational and technical highlights. However, before we begin with the opening remarks, I'd like to remind the participants that some of the information in today's call may include forward-looking statements as well as non-GAAP financial measures. A detailed disclaimer and other important information are included in the FAQ document, which is available on our website or upon request. We will welcome your questions after the prepared statements. And now, I'll turn the call over to Simon.

Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. Third quarter earnings per share from continuing operations, excluding charges, was $0.98 per share. This is an increase of $0.11 sequentially, and $0.28 compared to the same quarter of last year. During the quarter, we recorded $0.02 of charges relating to the continuing integration of Smith and Geoservices. Pretax operating income for Oilfield Services was $1.93 billion. This represents a $182 million sequential increase. Oilfield Services pretax operating income margin improved 77 basis points to 20.2%. Sequential revenue and pretax margin highlights by product group were as follows: Third quarter Reservoir Characterization revenue of $2.5 billion and pretax operating income of $610 million were both flat sequentially. Revenue increases in Wireline and Testing Services due to strong exploration activity were offset in large part by WesternGeco, which was significantly impacted by lower marine vessel utilization on account of seasonal transits and higher docking time, as well as the startup delays in land seismic activities in the Middle East and Asia. Pretax margins were also flat at 24.5%, as the improvements in Wireline and Testing Services due to an improved revenue mix were offset by the impact of the vessel transits and project delays in WesternGeco. Drilling Group third quarter revenue of $3.6 billion were 6% higher sequentially, while pretax operating income improved by almost 14% to $613 million. The revenue increase was led by M-I SWACO on higher activities in U.S. land unconventional plays combined with increases in deepwater activity in the Gulf of Mexico and Brazil for both M-I SWACO and Drilling & Measurements. Pathfinder revenue grew on U.S. land, while other technologies improved following last quarter's spring break-up in Canada. Drilling Group pretax margin improved sequentially by 111 basis points to 16.7% as a result of the higher-margin offshore activities, the seasonal rig count recovery in Canada and better pricing and operating efficiencies in IPM. Third quarter Reservoir Production revenue of $3.37 billion increased 10.2% sequentially, while pretax operating income improved by 15.5% to $707 million. Revenue increased sequentially, largely due to higher Well Services activities following the spring break-up in Canada. Well Services also had a strong performances on land in the U.S., as well as in Latin America and the Europe/CIS/Africa areas. Reservoir Production pretax margin improved 1 percentage point to 21%, primarily on Well Services increases in Canada and higher asset utilization in U.S. land. Revenue for the Distribution segment increased almost 10% sequentially to $698 million, and the business contributed $31 million of pretax operating income. Now turning to Schlumberger as a whole. It's worth noting that the results in our Europe/CIS/Africa area continue to be burdened by cost relating to the Libya geo market. These costs adversely impacted the quarter's results by just over $0.01 per share. In addition, we lost $0.02 per share on the revaluation of certain foreign currencies denominated assets and liabilities, as a result of the significant strengthening of U.S. dollar against many currencies at the very end of the quarter. The impact of the revaluation process typically does not have a significant impact on us. However, this quarter, the foreign exchange movements in September were quite extraordinary, so I wanted to highlight this to you. Schlumberger effective tax rate, excluding charges, was 23.7% as compared to 24.8% in the second quarter. The ETR for the full year is still expected to be in the mid-20s. We ended the quarter with $6.3 billion of cash and investments on hand and short-term debt of $2.7 billion. Net debt was $5.2 billion at the end of the quarter compared to $4.3 billion at the end of last quarter. During the quarter, we took advantage of the low interest rate environment to issue $1.1 billion of 5-year notes that bear interest at 1.95%, $1.6 billion of 10-year notes that bear interest at 3.3% and $300 million of 3-year floating rate notes. Other significant liquidity events during the quarter included capital expenditure of $1 billion, $811 million of stock repurchases, as well as the acquisition of the remaining equity interest in Framo engineering. During the quarter, we repurchased 9.9 million shares at an average price of $81.86. CapEx for the -- all of Schlumberger is still expected to approach $4.2 billion in 2011. And now, I turn the conference over to Paal.

Thank you, Simon. Our overall third quarter results continue to show solid progress, reflecting the trends we indicated in previous quarters. In North America, we saw strong growth on land and offshore, supported by a sequential increase in rig count and with further pricing momentum building in our Wireline and Drilling-related product lines. In the international markets, deepwater and exploration activity continue to strengthen, coinciding with a number of high-profile discoveries in several of the key basins around the world. While the international rig count continued to grow, we also saw early signs of pricing traction in our Wireline and Drilling & Measurements product lines during the quarter. In North America, we had a strong quarter, with 15% sequential growth and with margins up 179 basis points. The results were driven by 3 things: first, strong seasonal growth in Canada, where the rig count currently is 31% higher than the same time last year; second, by solid growth in deepwater Gulf of Mexico, where we continue to lead the market in both share and technical performance; and third, by continued growth in liquids-rich shale basins on land in the U.S. The product line with the highest sequential revenue growth in North America was Wireline, driven by land and deepwater activity and further supported by continued pricing traction. Our Drilling product lines also saw strong revenue growth and pricing momentum during the quarter, driven by Pathfinder, Smith drill bits, M-I SWACO and Drilling & Measurements. In pressure pumping, our completed stage count grew by more than 20% during the quarter, as we added a number of new frac fleets to the market and continue to convert crews from 12- to 24-hour operations. During the quarter, pressure pumping pricing began flattening in the liquids-rich basins while we saw modest downwards pricing pressure in the gas basins. At WesternGeco, we continued shooting the Dual Coil survey in the Western Gulf of Mexico. We also started commercial trials of our new land seismic system, UniQ, in one of the U.S. shale basins. This was link to the Reservoir Characterization workflow we are introducing to the shale markets. Multiclient sales in North America remained at normal levels for the quarter. Following the strong second quarter performance in the international markets, we saw a sequential growth in revenue of 2% in the third quarter, while margins contracted by 56 basis points. This is in line with a comment made in our second quarter earnings call, where we stated that international growth would not follow a straight line. Our Q3 results were also impacted by the sequential performance of WesternGeco, particularly in the Middle East and Asia. In the Middle East and Asia area, revenue contracted by 4% sequentially, and margins were down 276 basis points. This was driven by WesternGeco, where we experienced significant start-up delays on several of our large land seismic projects. Multiclient sales were down sequentially, and marine revenue was also down in the region, due to dry docking of vessels and vessels transferring out of the regions as they completed their surveys. Excluding WesternGeco, we still saw a sequential revenue growth in MEA driven by Iraq, Saudi Arabia and East Asia. In Iraq, we continued our strong performance in both revenue growth and margins. During the quarter, we won 3 new significant contracts that we have already started to mobilize. We are also continuing to bring the Smith product lines into the country, as well as further building our presence in Kurdistan. In Saudi Arabia, the ramp-up plans for new rigs remain in place, with some limited slippage. In addition, rig-less activity in Saudi Arabia showed strong growth both in pressure pumping as well as in Wireline and intervention services. In East Asia, we saw strong growth in development activity in Malaysia, as well as higher exploration activity in Vietnam. Following the 14% sequential growth in Q2, Latin America posted 5% sequential growth in Q3, while margins contracted by 163 basis points due to changes in the revenue mix. During the quarter, Mexico posted the strongest growth, driven by higher IPM activity as well as higher offshore activity. Argentina also saw robust growth driven by shale gas activity, where they conducted a number of frac jobs during the quarter and where we continue to build infrastructure and service capacity. In Brazil, activity remained strong, driven by both land and offshore, and we secured the main share or the multi-year Petrobras Wireline contract which was awarded during the quarter. In Europe/CIS/Africa, we continue to show good progress with 5% sequential revenue growth and margins up 236 basis points, driven by increased demand for our high-end exploration services and further supported by good cost management. During the quarter, Russia reached a new oil production record in the post-Soviet era, and activity levels in Western Siberia and Sakhalin continue to see strong growth as overall investment sentiment in our customer base remains positive. We continued to strengthen our position in the Russian market with the award of all the services for the first project in the Russian Arctic, while the integration of the new services from the Eurasia transaction continued to progress on plan. In the North sea, we saw strong growth, driven by high-exploration activity in the U.K. and Greenland, partly offset by lower activity in Norway due to annual platform maintenance. In Poland, we performed several multistage frac jobs as part of the ongoing shale gas exploration and appraisal progress, and we continue to build infrastructure and service capacity in the country. Angola saw strong growth in both pre-sold exploration activity and development activity in the main projects. Activity in North Africa, East Africa and the Gulf of Guinea remained flat during the quarter, but are currently expected to resume the growth trends in the fourth quarter. Libya activity remained shut down for the quarter, but we currently have people on the ground and expect to resume some activity during the fourth quarter. Let me now turn to some of the technology highlights of the quarter. In Reservoir Characterization, we have, over the past quarters, seen the start of a new exploration cycle through the demand for high-end Wireline and well testing services. Given the complexity and costs of these exploration campaigns, the need to de-risk potential prospects is becoming ever more important. While seismic technology advances have made significant contributions to better evaluate structural risks, almost 3/4 of the dry exploration wells are due to lack of understanding of seal and charge risks. These risks can be better addressed through petroleum system modeling, which looks at the formation and movement of hydrocarbons over time. We are the only provider of a fully software-enabled workflow built on Petrel that cover seismic and petrophysical interpretation, as well as petroleum system modeling. The sale of this workflow is showing very good growth as it allows us to better help our customers reevaluate the exploration potential of mature basins and also further de-risk prospects of frontier areas. In the Drilling Group, the Smith integration continues to progress well, and cost and revenue synergies are set to exceed even our revised targets for the year. The combination of Schlumberger and Smith drilling technologies continue to drive drilling performance for our customers, as you can see from the press release. The Smith transaction also continued to be accretive on an earnings per share basis in the third quarter. Drilling & Measurements continue to penetrate the market with their latest technologies, including the PowerDrive Archer high build rate rotary steerable system, the Scope service and the latest MicroScope formation imager. During the quarter, a number of high-profile jobs were conducted successfully with these technologies for customers throughout the world. In the Reservoir Production group, deployment of HiWAY technology in the pressure pumping market continues to grow. In North America, the number of customers using HiWAY had grown from 2 only a year ago to more than 20 today, and we completed over 800 stages during the quarter in this market alone. HiWAY continues to deliver higher gas and liquid production, while using significantly less water and proppant compared to conventional fracturing systems. This provides us with significant pricing and cost leverage versus our competitors, a factor that will become even more important when the North America pressure pumping market eventually become saturated with hydraulic horsepower. I would also add that HiWAY is starting to gain momentum in the international markets, including Russia, North Africa and the Middle East. Turning now to the outlook. The current financial turmoil has already resulted in a lower outlook for oil demand growth in 2012, although demand growth is still expected to exceed that of 2011. However, recent production data, as well as forward projections, indicate that there is a tight cushion of excess oil supply that will continue to support activity. Therefore, while the financial turmoil introduces some uncertainty over near-term activity, it has yet to have an impact on the actual activity of our customers. We also remain confident that any potential reductions will be short-lived and that the outlook for the service industry remains very positive. We further believe that our customers' drive to renew reserves, as evidenced by the recent string of exploration successes, particularly in deepwater offshore areas, favors our broad international footprint. In addition, the balance between our Reservoir Characterization, Drilling and production technologies both in North America and overseas will enable us to weather any activity fluctuations. Thank you very much. I would now hand the call over for the Q&A session.

[Operator Instructions] Our first question will come from the line of David Anderson with JPMorgan. John David Anderson - JP Morgan Chase & Co, Research Division: Thanks for the update on your outlook there, and this is what I want to touch a little bit more in depth. The service talks have hit really a rough patch over the last couple of months. Investors are clearly concerned about the timing. International is getting pushed out, and North America markets kind of roll. So I wonder if you could just kind of dig in a little bit more in terms of your outlook over the next 12 to 18 months. In particular, which regions or countries do you think are going to be big drivers? And I guess more specifically, kind of what's the tone been like with your NOC customers? Are you getting any sense of their concern? Are they just going to continue to move ahead with their projects? You mentioned a little slippage in Saudi, but it didn't sound like you were all that concerned there.

No. Just to answer the last part of your question first, the feedback we have from our NOC customers is that they are continuing with the programs that they already have in place. They are clearly long-term investors and the projects that they have is for the long term, so we have really seen no change to their plans whatsoever. Now if I look at the next 12 to 18 months, or 2012 in particular, firstly at the international market -- so provided that there is no major impact from the European debt crisis on our business and we haven't seen any impact yet, we basically maintain quite a positive outlook on the international markets, and this is really driven by our customers that have a long-term view in areas such as Saudi Arabia, Brazil, Russia, Iraq and West Africa. And this trend is also further supported by strong underlying trends in both exploration and deepwater. I think in exploration there's a clear need to have reserves for our customers after the investment levels over the past 2, 3 years have been severely cut. And I think they are generally encouraged by the string of exploration successes globally that we've seen in the past couple of quarters. And similarly on the deepwater side, 2011 is going to see the highest number of newbuild arrivals ever. The total number is going to be around 36, which obviously will have a positive impact on the deepwater activity in 2012. And we also see quite positive trends for contracts for these newbuild arrivals and also for overall utilization and rig rates. Now if we switch to North America, we see basically higher level of uncertainty around North America. Now in North America, we're quite positive on Canada and Gulf of Mexico. We think both of them are going to be quite strong for the next year, and we have obviously very good market positions in both these markets. So I would say that the main uncertainty we see in North America is around pressure pumping pricing. And this is linked really to the amount of new horsepower capacity that is coming into the market, and there's also some concern on the cost inflation that we are seeing currently. So I think that's basically a high-level outlook of how I see it. Andrew, do you want to add something on the overall macro view?

Yes. I think we've said before and I'll say again, that the thing our customers dislike most, just like financial markets, is uncertainty. And I think that you have to assume that before 2012 starts, the European Union will come to some sort of resolution on their sovereign debt crisis. And if you couple that with the fact that actually, the supply situation is probably the tightest it's been since 2006, it's certainly tighter now than it was in 2008. And if you look at the U.S. inventories yesterday, they went below the 5-year average both for products and crude for the first time since 2008. So absent a really deep cut in demand, which would basically mean the developing economies going into recession, there's no reason at this point in time to suppose that international activity is not going to remain pretty robust in the year to come. And I totally subscribe to everything that Paal just said about deepwater exploration. The rate of success over the last quarter -- 2 quarters and actually ongoing success is really quite remarkable, and that's only going to encourage more of it. John David Anderson - JP Morgan Chase & Co, Research Division: So, Paal, as a follow-up on the exploration side, you're talking about that picking up. Is that in your numbers yet in terms of the growth? I mean, is there a way to kind of help us understand how much of the growth internationally, say, over the last several quarter come from exploration? Or is that going to come in as we kind of go through 2012? Is that kind of the real kind of growth part that you're seeing?

Some of the exploration activity is obviously in our numbers and if you look at all the discoveries that we've seen, in particular over the past quarter. But I would say there is still significant growth potential in this. One discovery obviously creates a lot of additional activity around that discovery. And I think there's also a strong inventory of prospects that our customers are going to pursue. So I would say that while we have seen some increase in the high-end sales of services for both Wireline and testing and as well as in exploration software over the recent quarters, I think there is still significant upside in exploration going into next year.

And we'll go next to the line of Brad Handler at Crédit Suisse. Brad Handler - Crédit Suisse AG, Research Division: I guess I'd like to follow-up on the outlook, if I may, but the first question actually pertains a little bit more to Q4, if we could bring in the time horizon. I guess really the easy way to put it, there's some pretty -- what seems like some pretty aggressive revenue growth outlooks embedded within current consensus thinking on Q4. So maybe I could ask you to reach beyond what you would normally do with respect to sort of expectation setting and say, is it reasonable to expect sort of double-digit growth globally in Q4 on the revenue side?

Okay. So normally, we don't go into details of the coming quarter, right? So I wouldn't comment specifically on how I see revenue growth going up. But my general comment would be that there is -- provided there's no significant changes to the plans for Q4 that we see from our customers at this stage, we firstly expect Q4 to show continued progress in line with the underlying trends that we have kind of outlined throughout the year. Looking at the consensus for Q4, I would say though that the current estimates that we see, I would say are somewhat on the optimistic side. Brad Handler - Crédit Suisse AG, Research Division: Okay, I appreciate that. I guess as a somewhat related follow-up, but going back your commentary about the deepwater rigs coming in, the numbers are very impressive. You talk about floating rigs up. You're looking at deepwater floaters up 16% year-on-year in terms of supply in '12 by our count. Is that -- is it reasonable therefore for us to think about your offshore business in '12 as doing somewhat better than that? I mean, assuming you're keeping market share and exploration weighted activity helping your relative position. Is that how you're thinking about the '12 opportunity in the offshore, that you could be approaching 20% revenue growth year-on-year?

Well again, I wouldn't comment straight on the percentage number. But I would say that I share your positive view on the activity outlook for deepwater. I think if you look at our market share position, it is already quite good. I would also say that the sell-off potential and the draw on high-end services that I would see going into 2012 for these type of operations is also quite good. So I think we are very well placed in terms of being on the deepwater rigs, and we have a very high, I would say, value outlook on the -- on our technology portfolio going into next year.

We'll go next to the line of Kurt Hallead at RBC Capital Markets.

I was just curious if you can give us some indication on the Iraqi operations. What kind of revenue run rate are you right now? And you mentioned that -- you mentioned something about profitability, so I guess we can all assume that you are currently profitable and not waiting to be profitable like maybe some of your competitors. So in that context, can you just give us some general sense of kind of what the revenue run rate is in Iraq? And if you were to look at the profitability in Iraq, is that above or below what your Middle East, Far East margins are currently?

Okay. So looking at the Q3 performance, we showed continued progress in terms of activity, and we set new records in terms of revenue and margins. So the numbers I gave you after the Q2 call -- broke [ph] $100 million for the quarter in Q2. For Q3, we had double-digit revenue growth. And if you look at the Schlumberger legacy business, which makes up over 90% of our Iraqi revenue, we have over 20% IBT for the full quarter. Now for the Smith segments that we are bringing -- we're currently bringing into the country, they are somewhat lower because we have significant startup costs as we bring them into the country. Now during Q3, we also got extensions for several of our existing contracts, and we were also awarded 3 new significant contracts that we are already mobilizing for. So I would say that we are not waiting to be profitable in Iraq. We are very profitable. And if you look at that profitability number that I just gave you, that is now getting very close to the average of MEA.

Great. And then follow-up would be, getting a number of questions from varying investors about if you took the seismic impact away for the third quarter, what would the international revenue growth rate and what would international margins look like if it were not for the impacts on seismic? And I was wondering if you could provide us with some more color on that. Once again, it is a topic of high interest for a lot that are listening to the call.

No, I understand. So like we said -- like I said in my prepared remarks, most of the impact of WesternGeco seismic was -- we saw that in MEA. There was some limited impact in LAM, but not as significant as in MEA. If you look at MEA and you take seismic out, the growth in MEA was pretty much in line with the growth in the rig count, and the profitability of MEA was more or less in line with the previous quarter. Maybe slightly down, but more or less in line with the previous quarter.

Our next question will come from the line of Ole Slorer with Morgan Stanley.

So, Andrew, I presume this will be your last conference call, so I will take the opportunity to kind of tap into your global perspective and backdrop. And clearly, the balance and development in the spare capacity in the oil market near term is of great interest to everybody right now. And I wonder whether you could share your high-level thoughts there. Libya is coming back. Things are going on in Iraq. North Sea might be coming back. Should we be concerned about buildup of spare capacity in the global oil market on a, say, 6 months view?

I don't think so. I mean I don't think any of the single events you mentioned are significant enough to make a fundamental difference in an 85 million, 86 million barrel-a-day scenario. There's always going to be something else that goes down. None of these are increments that are really going to change the overall balance. The only thing that would change the overall balance will be a demand drop. And actually so far the signs of a demand drop even in the OECD are not particularly powerful. So I don't see it. I don't see that supply could change the picture in the short term. And by the way, Ole, if Paal invites me, I will come and say goodbye to you in January.

We'll invite you, Andrew.

We'd appreciate that. Any other sort of thoughts, Andrew, on what you think the market vibe might be under-appreciating now given the amount of stress in your stock and...

Well, I think it's not just our stock. I think a lot of quality stocks, there's a dislocation between market sentiment and the underlying realities. And that dislocation, as I sort of said earlier, I think is likely due to uncertainty, which everybody hates, which is why some form of resolution to the European sovereign debt crisis, which is going to come, is likely to be an event that will settle people's nerves. But a lot of industries, not just ours, the fundamentals are not nearly as bad as people seem to imagine. They are anticipating the worst.

Good to hear. And, Paal, you did comment on the fourth quarter, so you did open that Pandora's box. You did suggest it was somewhat optimistic. But is it completely crazy? Or I mean, you do have a fourth quarter which is going to be a seismic rebound. I mean, clearly what happened in the Middle East region on contract seismic should normalize. There are other factors that are seasonally strong in the fourth quarter. So I mean, is it completely crazy? Or is it is slightly optimistic? And I do realize that as the incoming CEO, you will not set the bar low, so let's get that out of the way.

Well, I think we've normally gone further than what we normally do on this. So I'm not going to go further than what I already said. I think the current consensus is somewhat on the optimistic side.

And we'll go next to the line of Bill Sanchez at Howard Weil.

Paal, I just want to circle back on the Latin America margin performance. I know you mentioned mix in the quarter here. Just curious, strong revenue quarter yet margins are down in total. Brazil was mentioned on the Geco side. You mentioned the IPM project in Mexico. Can you talk a little bit more about the margin degradation you saw sequentially there, and then just near-term outlook there going forward?

Just focusing first on the margin, I'm not really worried about the Latin America margins. The reason why it dropped during Q3 is down to the revenue mix. If you look at where we grew the most, it was in Mexico and Argentina, and that had some impact on the overall margins. Brazil was still good. We had some impact from Columbia as well on an IPM production incentive project there, where we had some shortening of production. But in addition to that, the oil price obviously was down during the quarter as well, which had some impact. So when you said the overall underlying margin in Latin America, I'm quite comfortable with. In terms of the outlook, I think that's quite positive. Mexico continues to add rigs offshore and mainly on shallow water, but also some in the deepwater. We've seen a rebound in the IPM activity, both on the Mesozoic Aliansan [ph] and Chicontepec, which sort of bodes well for our Mexico outlook. And we also got 1 out of the 3 first production incentive contracts awarded in Mexico as well. So I would say, generally our outlook for Mexico is good. Brazil, as you all know, is obviously very strong. There's a continued influx of deepwater rigs in Q4. We're probably going to reach up to 64 rigs by year end in Brazil. All customers are active, both Petrobras, the IOCs and the independents. And we're also seeing a pickup in activity in Argentina related to shale gas, as well as strong activity both in Colombia and to a certain extent in Venezuela. So I think overall, Latin America is looking strong.

And as my follow-up, Paal, you reiterated again this quarter -- or it was discussed again about North America pricing momentum led by Drilling and Wireline, and you made commentary with regard to your pressure pumping outlook. Do you see the Drilling and Wireline product lines pushing net pricing higher for you in the U.S. and North America as a whole, certainly given your outlook of a more challenging backdrop on the pressure pumping side?

Well, I think there's still more lag to pricing in both Drilling and Wireline. I think we're seeing a flattening of pricing to a certain extent on pressure pumping. I think what is also going to drive the mix of the pricing in North America is Gulf of Mexico, which is -- we are now adding one deepwater rig per month. We have a very strong market share position both on Drilling and on Wireline in the Gulf of Mexico. So I think the overall pricing for -- both those market segments still have upside on the pricing side in NAM.

And enough as you see it, given that mix, to absorb the cost inflation that seems to be prevalent now in the industry, in the U.S.?

Well, I think cost inflation is one. But I think what is more interesting is what's going to happen to the pressure pumping pricing. As at some stage, we will approach more than equilibrium in terms of horsepower supply and demand. And so we are obviously doing what we can to manage the cost inflation on the pressure pumping side. I think what is going to be more dominant or more important is going to be what happens to the pricing going forward on pressure pumping.

We'll go next to the line of James West of Barclays Capital.

Paal, the issues at WesternGeco this quarter seemed pretty transitory to me. So I think, one, is that the case? And then what's the outlook on the seismic business for the rest of this year and into next year? And are we at the point now where you think we can get some real pricing traction on the Marine side?

Okay. So in general, I would say that we are still quite positive when it comes our seismic outlook. Now if you look at the Marine market, Q4 and Q1 are normally softer quarters, as the vessels finish off mainly the North sea season. Now this year, we were expecting higher activity in West Africa and the Gulf of Mexico, and we also expected that this type of activity would offset the seasonal softness or weakness that I just referred to. And the fact that we would have higher of activity in West Africa and Gulf of Mexico would present some opportunity to test pricing. Now what we've seen in reality is that the ramp-up of activity in both places have been slower than expected, but we don't see this as being structural. There's basically delay in signing of contracts and also somewhat slower mobilization of additional vessels into the Gulf of Mexico. So I think we would see the normal softness that we see every year in Q4 and Q1 on Marine. But looking forward to Q2 and Q3 of 2012, the slate is already filling up quite nicely there. There's very good tender activity for all the basins: North Sea, Barents Sea, Angola, Brazil and so forth. So the outlook for 2012 is, I think, still quite positive. We were hoping to get some pricing traction at the end of this year. I think this is now pushed out a couple of quarters. But beyond that, we remain still quite optimistic and positive on the seismic market.

And with respect to near-term quarters, would the multiclient data library sales offset some of that vessel weakness? I mean, would 4Q WesternGeco be weaker than 3Q? I mean, 3Q seemed to have more one-off issues.

Yes, absolutely. So the third quarter had a number of one-off issue. I think overall WesternGeco will be up in Q4, and that would in part be driven by higher multiclient sales. But I think also, some of the issues we had both on land and Marine are being rectified and we will have stronger performance, I would say, in all product lines of WesternGeco in Q4.

We'll go next to the line of Michael LaMotte with Guggenheim Securities.

I wanted to try to reconcile a little bit just this color on the international growth rates and your optimism. One of the differences that I see in Schlumberger's portfolio is the mix of rig-less services, excluding seismic. And I was hoping, Paal, maybe you could contrast sort of growth rates in rig-less capabilities relative to rig count or just sort of general wellbore construction. And maybe highlight some product and service lines and geographies where growth is perhaps a bit stronger.

Well, I would say overall in the rig-less activity, we have seen pretty good growth in recent quarters and I expect that to continue into 2012. I think part of our portfolio that is probably somewhat underestimated is our abilities within rig-less from Wireline cased hole to coiled tubing and to slickline, where we have #1 market positions in all of these product lines. So I'm -- we are putting a lot of effort into growing this part of our business, and I'm quite optimistic in terms of how these product lines are going to perform going into next year. And I think where you'll probably see more on growth in these type of product lines is partly on land. Now there's also opportunities offshoring it, right? But generally, I think we'll see strong growth in the rig-less activity going into next year.

Stronger than wellbore construction, do you think?

Well, I think there's still some uncertainty around wellbore constructions when it comes overall rig count and so forth. But I thought this is more independent to the rig count, right? So it all depends on what happens on the rig count growth. It's a bit difficult to say. But the fact that it's going to represent strong growth, I'm quite confident in.

And, Andrew, maybe I could address the second one to you. As it pertains to some of the technologies around completion, I think that you sort of set the high bar of expectation in terms of the migration of moving from brute force to more intelligent drilling and completion activity. But it strikes me as we move in that direction that -- with HiWAY and the reference to COPPERHEAD in the press release, that there's a portfolio of capabilities, call them incremental technologies, that are moving us in that direction and sort of getting away from just pure horsepower more immediately than sort of waiting for the drill-perfect kind of solution. Can you talk about that portfolio perhaps, and put COPPERHEAD and HiWAY within that context?

I think what -- it's perhaps important to start by saying is that when I said brute force and ignorance, I never for a moment imagined that hydraulic fracturing is going to disappear. But firstly, proper characterization will reduce the necessity to geometrically frac in order to obtain a correct IP and therefore, eliminate a large amount of waste. And products like HiWAY or COPPERHEAD or other things that we're working on in Well Services in particular, will serve to provide, as HiWAY does, a better frac but using less proppant, sand, chemical and all the rest of it. So we don't -- we're not, for a minute -- that we're going to apply the unconventional just to our Reservoir Characterization workflow. It is also technology we're working on in both pressure pumping and in completions. It's a suite. But the big step forward, and you may have noticed as well that Paal referred in his commentary to the fact that we now have a unique seismic spread in one of the unconventional basins on land in North America, which is beginning to show that -- the appreciation that proper characterization before you start frac-ing is going to save you a lot of money.

So is it fair to say that, in effect, the value creation comes from not just the application of more intelligence and characterization, but also in the reduction of capital intensity?

Absolutely, absolutely. I'm still convinced that long term, the cost of producing unconventional gas is going to decline.

We'll go next to the line of Bill Herbert with Simmons & Company. William A. Herbert - Simmons & Company International, Research Division: Paal, and I guess Simon as well. In light of your commentary, Paal, with regard to a transition in pressure pumping pricing in North America likely at hand, how should we think about the 2012 capital spending budget at this juncture? Is it likely to be up year-over-year? Or what's the likely path on that front?

So if you look at our original plans for 2012, we were looking to add from the 2011 levels. We are maintaining our capacity to add both from a supplier and from a manufacturing standpoint. I'm not talking about global CapEx. To what extent we will add, I think, is going to be a function of what comes out of the budgeting cycle of our customers. But generally, we are maintaining our capacity to add CapEx going into 2012. William A. Herbert - Simmons & Company International, Research Division: All right, so capital spending translation is likely higher year-over-year.

I think it generally will be higher. To what level higher, I think we'll come back to you in a quarter's time. William A. Herbert - Simmons & Company International, Research Division: Understood. And then secondly, you guys I think have been sensibly balanced, if you will, with regard to the evolution of the development of the international unconventional resource. And yet, you read through this release and you have more than a few wins here with regard to what's going on in Poland, in Argentina and using HiWAY in North Africa and what have you. Do you have an update with regard to what your expected timeline is with regard to the blossoming of the unconventional play? And is it evolving more quickly than what you thought maybe a couple of quarters ago?

So I think we've always been, I would say, positive on the outlook for unconventional resources internationally. If you look at some of the reports coming back, the estimated resource base for unconventional gas overseas is 6x that of the U.S. So I think we've always been positive on that. I think the main thing we've been saying is firstly, that we're going to have to go through a phase of exploration and appraisal to understand these resources internationally. And I think also, the approach to how they are going to be developed are going to be different than what we do in North America, and more in line with what Andrew just described, which is focused on a more scientific approach where there is more upfront investment in the characterization, and also it's going to have to be focused on using less resources for the drilling and completions of these wells as well. So we are actively pursuing all these exploration and appraisal projects in all parts of the world, whether this is Argentina, Colombia, Canada, Poland, India and China and so forth, right? So we are, I think, very well placed to play a strong role in the international shale market. I think the volume of activity is still going to take some time before it gets there, but I think there's been encouraging results from the exploration and appraisal projects. So I think the outlook is positive, but it's not going to be as significant as what we have seen in North America over the 4 -- in the past 4 or 5 years, in the coming years at least. William A. Herbert - Simmons & Company International, Research Division: Okay, and if I could slip on in here with Simon. Simon, do you have handy what the sequential revenue increase was in U.S. and Canada, respectively?

Of course I have them. But we've seen the 15% overall NAM increase and we'll leave it at that. I'm not going to separate it between Canada and the U.S., but Canada had a significant increase obviously because of the spring break-up.

We'll go next to the line of Jim Crandell at Dahlman Rose. James Crandell - Dahlman Rose & Company, LLC, Research Division: Andrew and Paal, you spoke very positively about the outlook for deepwater. And one of your -- I believe one of your competitors said the most competitive pricing part of the market was in deepwater and on longer contracts, and you talked about some improvement. Are you actually seeing some improvement in the deepwater area in terms of pricing? Or is that an area that's not really shown improvement in pricing and you're getting it somewhere else?

Well, if you look at the deepwater pricing, the -- I would say it's still generally competitive. But I think what we see on the deepwater side is that there is a continued, I would say, value puts on our technology and the integrity that we have of our operations, right? So in some cases, we are able to get a pricing premium for the performance that we are able to offer up on these very highly expensive rigs. There's also been an increase though on the high-end services that we offer up as part of the contracts on these rigs, right? So I think overall pricing on deepwater, we are -- I'm quite happy with. James Crandell - Dahlman Rose & Company, LLC, Research Division: Okay. And, Paal, what -- different subject, but what new or recent technology introduction with Schlumberger, let's say, over the last year to 18 months, do you feel will have the biggest commercial impact on the company in 2012?

Well, I don't know. If I single out one, then I'm going to get a lot of my segments upset, right, so I'm going to have to be careful with that. But I would say that if I look at some of the key introductions that we've done over the past year, I would say for Wireline, I have a lot of hope and faith in the Dielectric Scanner. I think what this can offer up in terms of high-end petrophysical evaluations is going to be good. I referenced in my prepared remarks several D&M technologies: PowerDrive Archer, MicroScope, SonicScope. These are all, I think, going to have -- they're going to create very good value for Drilling & Measurement. We've also introduced several new drill bits technologies, in particular the spare bits, which is focused in on unconventionals, which I think is going to be good. And obviously HiWAY, without saying, has a very significant impact today. And I think as we continue to widen the customer base for HiWAY, it's going to have a very significant impact on pressure pumping both in North America and overseas. And then one other key technology, which again Andrew referenced, is the UniQ land seismic. This is a single-sensor land seismic system where you can basically house up to 100,000 channels, and it's going to give us a lot better quality images for both structure and also for endorsing the rest of our properties. And then the last part, which I also referenced in my prepared remarks, is our abilities now in terms of exploration software and petroleum system modeling. These are some of the key technologies that we have introduced, which I have a lot of faith in going forward. James Crandell - Dahlman Rose & Company, LLC, Research Division: Okay, and one quick one for Andrew. Andrew, after the elections in Mexico, would you expect drilling in Chicontepec to come back significantly? And if so, what sort of form do you think the contracts could take over there?

Look, I don't think that the elections have a huge impact on spending in Chicontepec. What will have an impact on spending in Chicontepec, and so far we don't seem to have a clear case, is a method of improving their recovery from this reservoir, which as you know, is extremely difficult. And while there are lots of different experiments going on, I don't think there's a conclusion on it yet. So I don't think the election will have any effect. James Crandell - Dahlman Rose & Company, LLC, Research Division: Okay, so you really would not expect at this point Chicontepec to come back to any meaningful extent in 2012.

Only if Pemex is satisfied that one of the technologies that they're applying to improve recovery is really working.

We'll go next to the line of Angie Sedita at UBS.

Great. Clearly, the international and deepwater recoveries is far and away the bigger story for Schlumberger. But on North America, you touched on the uncertainty in pressure pumping pricing. Given the capacity that we're adding today and next year, do you think in a flat rig market in the U.S. that we could reach a balanced or oversupply scenario in 2012? And then your thoughts on your North American margins in a flat rig market in 2012.

So in terms of trying to predict when we're getting to horsepower balance in terms of supply and demand, I'm not going to do that. I -- obviously, with a flatter rig count it's likely to happen sooner, but I'm not going to venture out and say exactly when that's going to happen. I think the impact on pricing will be a function of when it happens, but it's also going to be a question of when we think it's going to happen. So I think you will have impact on pricing even before you actually get to saturation, right? If you look at our plans with that backdrop, we are at this stage continuing to add horsepower, and we will continue to add horsepower until we see an actual change in the market, that being either change to our customer plans or change to the utilization of our assets. And we haven't really seen anything in terms of these changes yet. But we are continuing to add, and the reason for this is that we are actually looking to gain pressure pumping market share. And we are looking to gain share through our HiWAY technology, and also by bundling our pressure pumping with the shale reservoir characterization workflow that we have highlighted, right? So we are continuing to add the function of when the supply and demand is going to meet in horsepower. I'm not going to make a prediction on when it's going to happen. It will eventually happen. I think that's what I would say.

Okay, and then a follow-up to that. So the horsepower that you're adding, are you -- are your plans only for the first 6 months of the year? Or is it so far for the full year? And then how much of your frac fleet is under term today?

Well, we have a relative flexible way of handling how we add the resources, right? So we have a very good relationship with our suppliers here. So we are looking out for -- in various time horizons. So I'm not going to say exactly how we're going to add quarter-by-quarter. But we are -- we have the capacity to add throughout next year if we choose to. In terms of what part of contracts we have on terms, there's still a good mix between our spot market and longer-term contracts.

Okay. And then touching back on the fourth quarter. You touched on revenues, but a little bit on margins. Broadside on North America with the seasonality going into Q4, could you see some modest margin pressure just due to the holidays? And then thoughts on your international margins for Q4. In Q3 you were at 18%. With the seasonal jump in Q4, could you move to the 20% range?

Well, I'm going to have to give you the same answer I gave to Ole, right. We have already ventured further off than what we typically do in indicating what's going to happen to the next quarter. So I would just reiterate that the EPS consensus estimate at this stage is probably on the optimistic side.

Okay. And then finally, in the international markets, is there any market that you're concerned that may be slow or sluggish versus the areas that you pointed out that should be quite strong in 2012?

No, I think in general not. We've indicated in the Q2 call that the growth in international market is not going to be linear. So you will always potentially have an off quarter in some of these markets. But generally, I don't have any particular concerns in any parts of the international market in terms of the growth potential.

The U.K. North Sea should be...

I get it; I get it. Cut her off.

The outlook for the U.K. North Sea should be okay, flat, not down.

Angie, it's Andrew. Can I remind you our rules? It's one question and one follow-up. And we do need to get our last question in. Thank you, Angie.

And our last question will come from the line of Geoff Kieburtz at Weeden & Co. Geoff Kieburtz - Weeden & Co., LP, Research Division: Paal, just to clarify a comment I think you made during your prepared comments that pressure pumping pricing has flattened in the liquids market and declined in the gas regions. If that's right, then pressure pumping prices fell in the third quarter. Can you clarify what you said earlier?

I was saying that the pressure pumping pricing in the liquids-rich basins was flattening during the quarter, but we saw a modest drop in prices in the gas basin. Geoff Kieburtz - Weeden & Co., LP, Research Division: So overall, pressure pumping prices still climbed in the third quarter.

Slightly.

They climbed slightly, yes. Geoff Kieburtz - Weeden & Co., LP, Research Division: Okay, all right. And not to be too cute, Schlumberger has forecasted a rolling over of pressure pumping margins and pricing several times in the past. What -- and I understand your point that it will happen at some point, but are you seeing things -- and perhaps it's just what you just said, the pricing -- that makes you more certain that it is going to happen and it's going to happen in a reasonably near future?

So again, I'm not saying that it's going to happen in the near future. I'm just saying that during the third quarter, we saw flattening of the liquids-rich basin pricing, which we haven't seen in recent quarter -- quarters. And I'm also saying that there is a significant amount of horsepower coming into the market as we speak and also going into next year. So my concern on the North America outlook is what is going to happen to pressure pumping pricing. Geoff Kieburtz - Weeden & Co., LP, Research Division: Right, okay. And on HiWAY, kind of a technical question I guess. My recollection was at the analyst event this year, that at that time, HiWAY wasn't delivering a reduction in water usage but now, clearly, it is. Is HiWAY -- should we be thinking about HiWAY as still an evolving and developing technology?

I think, absolutely. So whether you reduce only proppant or whether you reduce proppant, water and potentially horsepower, is a function of how you design your jobs, and it's also a function of what type of jobs -- what conventional type of jobs you are replacing, right? So that's one thing. But I think to your second point, it is clearly an evolving technology. We are putting a lot of effort into the application range of HiWAY, and we are also putting a lot of effort into how we design the jobs to be -- to make it even more impactful in terms of how it can reduce resources and basically provide more production for less. So yes, it is clearly evolving. And I'm actually very optimistic with the traction we are now getting with the customer base. With any new technology, and I would say also maybe in particular in North America land, it takes time to break through and penetrate the market with a new technology. And I think we are starting to get some good traction. Geoff Kieburtz - Weeden & Co., LP, Research Division: Okay. And if I could squeeze a third one in here, please. On the international pricing, the Texas early signs of pricing traction, specifically for Wireline and D&M. This is -- it seems on the surface to be quite similar to the comments that have been made in prior quarters. Can you point to something specific that's changed? Or is it just that we continue to be in this state that it looks imminent?

No, I think what we said in the earlier quarters is that we expected to see pricing traction towards the end of this year. That's what we said earlier. And what I'm saying this quarter is that we are actually seeing some signs of it. There's really 2 signs I would highlight. First of all, higher demand and higher sales of our high-end technology. So there's a lot more salable technology from basic technology to high end. And secondly, we are also testing pricing on specific contracts, typically smaller contracts, with reasonable success.

On behalf of the Schlumberger management team, I would like to thank you for participating in today's call. Keely will now provide the closing comments.

Thank you. And ladies and gentlemen, today's conference will be available for replay after 10:00 a.m. Central Time today, running through November 21 at midnight. You may access the AT&T TeleConference replay system at anytime by dialing 1 (800) 475-6701 and entering the access code of 211522. International participants may dial (320) 365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.