SLB N.V. (SLB) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Malcolm Theobald, Please go ahead.

Thank you, Greg. Good afternoon and good morning, and welcome to the Schlumberger Limited second quarter 2013 results conference call. Today's call is being hosted from Paris where the Schlumberger Limited Board meeting took place yesterday. Joining us on the call today are Paal Kibsgaard, Chief Executive Officer and Simon Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paal. Simon will first review the financial results and Paal will discuss the operational and technical highlights. However, before we begin with the opening remarks, I would 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. Now, I will turn the call over to Simon.

Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. Second quarter earnings per share from continuing operations, excluding charges and credits was $1.15. This is an increase of $0.18 sequentially and is $0.14 higher when compared to the same quarter last year. During the quarter, we completed the wind down of our operations in Iran and as a result we have now classified this business as a discontinued operations. All prior period amounts have been restated. As previously disclosed, we completed the formation of our OneSubsea joint venture with Cameron prior to the end of the quarter. We recognized $1 billion gain in connection with this transaction which equates to $0.77 in terms of EPS. We also recorded $0.26 of charges relating to the impairment of drilling related equity investments. From an operational perspective, we had a very strong quarter. Oilfield services second quarter revenue of $11.2 billion increased 5.8% sequentially, pretax operating income increased 15.9% sequentially while the pretax operating margin improved 178 basis points to 20.4%. Sequential highlights by product group were as follows. Reservoir Characterization revenue of $3 billion increased 9.6% and pretax income grew by over 25%. This resulted in margins improving by 380 basis points to 30.1%. This growth was driven by very strong performance in both Wireline and WesternGeco combined with the seasonal rebound in SIS software sales and maintenance. Drilling group revenue of $4.3 billion increased 4.4% and margins improved by 97 basis points to 18.7%. These increases were largely attributable to the Drilling and Measurements and M-I SWACO on robust international activity. Production group revenue of $3.9 billion increased 4.4% while the pretax income increased 12.6%. This resulted in margin expansion of 116 basis points to 15.9%. Growth was led by Well Services as a strong performance…

Thank you, Simon. Our second quarter results were strong as international activity recorded significant progress and North American results benefitted from solid execution in land and increasing deployment of new technology in deepwater areas. Sequentially, revenue was up 6%. Margins expanded by 178 basis points, which together yielded a 16% growth in operating income. Compared to the same quarter last year, operating income was up 12%. The results were driven by solid activity levels in all our main markets as well market share gains for a number of our product lines on the back of new technology sales and our strong execution and integration capabilities. I am pleased with the overall results and even more so with the consistency in our business performance throughout the company seen, for instance, in the margin levels of our four main operating areas, which are all at or above 20%. The focus on the quality and efficiency of our execution is also reflected in our incremental margins, which were north of 50%, sequentially, as well as the cash flow from operations which was $2.3 billion driven by both, improving asset utilization and reduction in the use of working capital. The strength in our international business was again evident in the second quarter with year-over-year revenue growth of 12% and margin expansion of 173 basis points to reach 22%, making up over 70% of the operating income of the quarter. Activity and customer plans confirmed our expectations for the year in all our major growth markets, while revenue per rig continued to steadily increase as a function of new technology sales, increased integration related activity and a favorable business mix. Our ability to consistently execute remains critical in the international market and is a driver for both, our market share gains and superior margin performance.…

Thank you, Paal. Greg, we will now open the call for questions.

(Operator Instructions). Your first question comes from the line of Kurt Hallead from RBC Capital Markets. Please go ahead.

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

Well, I think if you look at what enables to show differentiated margins, I think its several things. Firstly, our ability to execute very well on land, whether that is on drilling or on pressure pumping but also the fact that we have a very well balanced portfolio in between drilling and production related activities on land as well as in between land and offshore. So we honestly have a very strong offshore business both rig related as well as seismic but what we have done in recent years is, starting off in 2001 was to restructure the business on land which in previous years, I would say, had underperformed and through that restructuring, I think, we are performing on par with the best if not better in most of our product lines. So if you look at the trends of drilling, in the North America land market now going towards more and more horizontal wells, predominantly focused on liquids, all our drilling segments obviously benefit from that. At the same time, our pressure pumping business through new technology deployments such as HiWAY are also benefiting from this. We also introducing to the market our own multistage completion technology, which has been a gap in our portfolio in recent years which also should enjoy quite significant growth going forward. So I think it’s a good balance between land and offshore, good balance between drilling and production on land and overall a very strong focus on execution.

And as a follow-up on that, with respect to the overall margin performance of Schlumberger, especially in the international marketplace, are you getting any sense that we are starting to see a shift in the industry that will demonstrate Schlumberger's relative product and services strength, whether its deepwater or otherwise? Do you think whether that kind of an inflection point in the marketplace or we are going to see these strengths of Schlumberger?

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

Okay. That's great. Thank you.

Your next question comes from the line of James West from Barclays. Please go ahead.

You mentioned in your prepared comments, the third party surveys, which of course you are well aware we do a very large survey. And, what we saw when we reran the numbers here in May and in early June was that international spending was creeping up about 300 basis points to 400 basis points. So, curious if you are seeing the same things from your customers who you are having the same post conversation that we are with. Then secondarily, which markets do you agree with what we showed as the biggest growth areas of kind of Middle East, eastern hemisphere in general and which seem like markets that are Schlumberger's backyard essentially. Do you see those as the best growth markets for this year?

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

On the specific regions where the spending has increased?

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

Okay. Then just a follow-up from me, the market share gains that you also highlighted in your prepared remarks, are those happening in those markets that are going the most rapidly?

I think, in general that's fair. I would say in particular in MEA, we are gaining quite good market share.

Okay. Great. Thanks Paal.

Your next question comes from the line of David Anderson from JPMorgan. Please go ahead.

Paal, just a real quick [rig count] about six month behind schedule. Can you concur with that and does that have an impact on kind of your outlook for next 12 months?

Well, if you look at our view on the [rig count], we are still expecting the total rig count both drilling and workover to reach about 170 rigs by the end of 2013 or early 2014, so the rig count evolution in Q2 was flattish, but it is all about when new rigs arrive and how they are commissioned and so forth, but we are still expecting that we will reach the number that we have indicated earlier roughly by the end of the year or early 2014.

Okay. Then I just wanted to make sure you touched on that you can't expect bids from us. I was just curious what was about those contracts that kept away? Was it location, work, was it the contract structure or you guys just holding out for another set of tenders?

Well, let me just give you a little bit of background on our view on these production incentive contracts. So, we've been very clear about our interest in production incentive contracts, but we also stress the importance of picking the right project with the right terms. So, we evaluated all the 60s offered in the third in Mexico and based on the very detailed technical and commercially valuations we did, we only fund one field interesting. Now we've been at this field at the price that will give us the returns that we require and that is really factoring in the additional risks associated with these contract terms. The winner bid at a fee close to zero fee per barrel and basically we are not interested in doing that, so we did not win it.

Okay. One last quick question on some of the buyback you announced today. Could you just kind of give us a sense on your philosophy on the pace of that buyback? You talked about the cash flow you are generating over next couple of years. Should we expect the majority of that to go towards share repurchase? I heard on some type of broke in terms of the deal but it seems like you have an opportunity here to kind of accelerate that over the next, all it, I don’t know, three or four quarters here. Am I right in my assessment?

Okay. Well, thanks David. As I mentioned in my remark, that the buyback is basically a balancing number for us when it comes to utilization of the cash flow. You are right in your assumption of the cash flow. That's why we said latest by 2018. So as the cash flow proved to be significantly better than what we have factored in the five year scenario in making the $10 billion program, we will accelerate it. We did this in the past. We look at our excess cash over a period of time, taking into consideration the growth that we are anticipating in terms CapEx and as I said investment in future revenue stream activity, be it multi client or production incentive contracts and any balance will go into the buyback. Yes.

Okay, great. Thank you very much.

Your next question comes from the line of Jud Bailey from ISI Group. Please go ahead.

Thanks, good morning. I wanted to ask a couple of questions on Mexico, if I could. The first is, that's obviously a big market for you guys. Are you there?

Yes.

I am sorry. Obviously a big market for you guys, pretty-diverse. Pemex still has pretty ambitious growth expectations in next few years. It obviously pulled back activity in the North. I wanted to get your thoughts. They have the lot of tenders coming up and tenders in process and it would look like, you could see pretty strong growth in that market next year. In your view, is there any reason for skepticism that Pemex may be wouldn't follow through or is there else going on down there that would give you some caution in terms of the growth opportunities down in Mexico?

No, I don't see any reason for that. I do not think Pemex has signaled that there is a number of bids coming out for the remaining part of this year and probably into next year. We are going to actively compete for all of that work and we continue to see Mexico as a very interesting market for us.

Okay, all right. Then next question, just on North America. Obviously, very strong margin results factoring in Canada and everything else going on in that market. With the continued growth in the Gulf of Mexico and let's just say that the U.S. landmark, it kind of continues at this methodical pace with very little pricing traction. How should we think about Schlumberger's margins in terms of, we would assume you would get some more market share gains, you would benefit from the very strong Gulf of Mexico and a rebounding Canada? Can you help us think about maybe the near term and the long term margins for the Schlumberger in the North America market?

Well, I would say that over the past year when there has been significant struggles in the pressure pumping business, I think we have shown commendable margin resilience and again, as I alluded to earlier, it is down to how we execute on land as well as the balance between land and offshore. So in terms of what the margin progression is going to be, the main uncertainty is still what is going to happen in terms of pricing on land. As I mentioned in my prepared remarks, we still saw pricing pressure both in the drilling, stimulation and Wireline product lines in the second quarter but that was slowing somewhat in pace. So assuming that the pricing is reasonably behaved and drilling efficiency continues to be the main activity driver going forward, I would expect us to show continued margin resilience and obviously we are looking to drive up margins in any operating areas. I can't promise you exactly how that’s going to progress but we have a lot of focus on margins in every part of our business and we will continue to look drive it up in North America.

All right, great. Thank you Paal.

Your next question comes from the line of Bill Herbert from Simmons & Company. Please go ahead. Bill Herbert - Simmons & Company: Thanks, good morning. Paal, I was wondering if you could sort of reconcile on the one hand for double-digit E&P capital spending growth, not so much for this year but on a structural basis perhaps going forward internationally, and reconcile the tension between on the one hand the increasing need on part of the customer base to reinvest simply to keep production flat and on the other hand increasingly challenged cash flows in a range bound oil pricing burn and rising cost environment. What do you think ultimately happens over the next several years assuming range bound oil prices? Does the rate of E&P capital spending growth decelerate or what happens?

Well, I think we are still optimistic about the further need to increase overall E&P spending going forward, right? So, we saw the upward revision for the spend survey this year. And at this stage, although it's early to conclude our next year the customers need to go through their planning process, but we are still optimistic about the initial projections for 2014. The resilience in the spend as you say is linked to partly the working intensity linked to fighting decline, but also due to the overall size and complexity of the projects that are undertaking in particular in the international market. So, I think for the company, for E&P companies that potentially are or will be facing cash flow issues, we expect them to be likely to shift more of the spend within the E&P spend from more infrastructure related projects towards more well CapEx. So that obviously will be good for our business, because that's sort of where we make most of our money on, right? So, I think the general shift from infrastructure towards CapEx is where I expect to happen for those E&P companies that are facing cash flow issues. Bill Herbert - Simmons & Company: Okay. Then secondly switching gears. At the reservoir level, I'm curious as to what your views are with regard to the outlook for U.S. oil production growth, I mean, clearly it's been extremely vigorous. We are up about $1 million barrels per day on a leading edge basis that's 15% to 20% year-over-year, yet I think there is a healthy debate here with regard to the prospects going forward, the prospect of the Bakken growth flattening out and filling their production growths vacuum with other basins, perhaps not as easy as some contend. Where do you fall out with regard to the domestic production outlook going forward stronger for longer, or decelerating or too early to make a case either way?

It's a good question. First of all I would say that the overall production increases that we have seen on our North America liquids, they have been very impressive. We always maintained that it's too early to extrapolate the early production trends in terms of how great they see. Also, I think it's too early to conclude on whether the trends we are seeing on the Bakken, is something that is also sustainable, right? For the early production trends, I think we need more information to look at the production of these wells over a longer period of time and I think we also we need to look at the initial rates or the inflow performance for the wells that the operators are started to drill outside of the fairway, right? As they step out on the acreage, so I am going to have to go for option three of your multiple choice there. I think it's too early to say both, while we can extrapolate the initial overall trend from North America or whether there is any significant impact or the recent trend that we see in the Bakken.

Your next question comes from the line of Scott Gruber from Bernstein. Please go ahead.

Paal, I found you comment about becoming more selective regarding when and where you chose you peers interesting. Is this a reflection of capacity constraints desires to avoid problematic contracts some of those? Why is the stance shifting?

Well, I think obviously if a customer calls upon us and wants us, generally, we will do utmost to serve them. At the same time, we also have to make sure that we prioritize putting our equipment into the customers that have initially selected us, and if we are going to go on replace the competitor on or their contracts, we obviously need a significant pricing increase from the initial rates that our competitors took the work on for, right? So, and there's also other strategic considerations as to where do we put our capacity while it's a priority in terms of the customer mix this well, so can't really going into the details of how we select, what to do. I would just say that we will always look to serve our customers as best as we can. But at the same time, we are continuing to look at how we optimize our business mix and how we maximize the return from the resources that we have up in operations.

Okay. Then an unrelated follow-up. Can you discuss the efforts internally to improve the working capital management? If you look over the last six months you guys have held the line here on receivables and other current assets but I assume that you are not completely satisfied in the working capital at this point. Then if you have year end targets that you could share with us, that would be greatly appreciated?

Well maybe I will say a little bit about what I think the investment community call self help initiatives, right. So first of all, in Schlumberger we believe that in order to maintain and extend to our market leading position, we always need to do better tomorrow than what we did today. So, company wide programs addressing execution improvements they are not really sporadic or episodic with us. They are a way of life. So we have, in recent years or in the recent year, put more focus on working capital on cash generation. In the past before we had more focus on more cost and resource management to be trying to balance the focus on both cost and resource management with cash management. So we have specific programs running focused on capital efficiency, around receivables and also around inventory management and we build it into our business plans and we also build it into the incentives of the entire management team. So this is really how we try to put focus on it and what we put focus on in Schlumberger will generally do quite well.

I would like to add a bit to what Paal said. The last couple of years since the acquisition of Smith, you probably noticed that the working capital as percentage of our sales has gone up a bit. This was all planned. As a result of expanding certain segments or product lines of Smith internationally, which are more inventory intensive segments or products line, we had to increase inventory to meet the expansion that we have done internationally. One of the main reasons for acquiring Smith and integrating it with the rest of Schlumberger is also to use the footprint of Schlumberger, which meant that some of those segments that were mainly U.S. focused we took them overseas and therefore an increase in inventory. We have managed to do this now and going forward we will not have to increase it at the same pace that we have done before.

Great, I appreciate the color.

Your next question comes from the line of Ole Slorer from Morgan Stanley. Please go ahead.

Thank you. First of all, congrats on your decision to return a greater part of cash flow to shareholders. I think there is a very clear difference at the moment in this evaluation of companies who do that and those who don't in this slower growth environment that they are in. First of all what were the biggest technologies that drove your share gains?

In terms of specific technologies, let me elevate it and maybe focus in on the product lines. So I would still say we have gained more share in wireline and drilling and measurements. Those are the kind of spearheading segment for these efforts, right. So there is number of new technologies that we have introduced in both these product lines over the past year or two and the uptake of them is good. What we also find now, as you know, we have restructured our engineering manufacturing into same organization about five years ago and this is really starting to pay dividends now because the new technology that comes out, it's performing much better than the initial technologies that came out five or ten years ago. There were lot more teething problems, which we are basically now avoiding. So, the new technology, which is commercialized within its first year, is actually now growing significantly faster than what it did may be five or ten years ago. So, I would say, wireline and drilling and measurements are still the ones again that are gaining the most share.

So it is then fair to say that this is largely driven by offshore?

No I think, it's both on land and offshore.

Okay, and a follow-up question would be, what market share changes are you seeing in the offshore market? One of your largest competitors continuously make claims that they are gaining share across all kind of (inaudible) technologies?

Well, I don't know who they are gaining share from, because it isn’t us. So I think, we are in the offshore market we obviously already have a quite a high share, but we reference Gulf of Mexico in some of these discussions and we continue to gain share in the Gulf of Mexico and in several of our high end product lines.

Okay. Just finally, how far away do you think from being a new pricing cycle in North America pressure pumping?

Well, I would say there is still significant overcapacity horsepower in the sitting on the sides today, so I don't see that happening in 2013, at least. I think, we are still going to have overcapacity as we exit this year.

Finally, what are some of technologies that are reducing the pressure pumping in tentatively of shale oil and gas in North America?

What technologies do that?

Yes.

Well, HiWAY is obviously one of them. We use significantly [less] and also generally less water in the operations that we do with HiWAY. The other way of reducing or lowering the intensity of these operations is to use much more of the subsurface approach prior to actually designing the jobs, right? So, having a much better understanding of the subsurface will allow you to design the completion of the well and the amount of horsepower water and pump use by be more selective in which stages you frac and also using more sophisticated frac fluids like HiWAY.

Are you seeing a change in attitude there with the shale oil gain becoming more and more of a large company gain?

Not a dramatic change, but I would say we have. We are starting to get several key customers that we are collaborating much closer with than what we've done in the past and where we engage all the way from characterization to drilling and production and taking a much more sophisticated approach to how we go about working with them on their developments, right? So, it's still relatively slow, but through some of the contracts we won over the past 12 months to 18 months, we have established as part of those contracts, a very strong technical collaboration agreements, which are also benefiting technology penetration.

So, on Forest Oil, the contract being in Eagle Ford, how would you characterize that in the context of just that?

Well, I can't really comment on that. Forest will release their results I think in a couple of weeks. We'd need to refer you to them.

Your next question comes from the line of Michael LaMotte from Guggenheim. Please go ahead.

Thanks and good afternoon, guys. I wanted to just follow up on the North American onshore market and a little bit on the Forest Oil as well as Spark. Let me ask the questions just from the context of shift in business model in North America. I think both with Forest as well as Spark, you've tried to introduce a new model to the U.S. land market and I was just wondering now as you've been out marketing concepts like that for a while what the perception has been and what you think the uptake and penetration rate might look like?

On Spark, we are seeing a reasonable uptake on it. Nothing dramatic which we weren't expecting either. It's mainly focused on customers that are have vertically integrated. They have their own horsepower with very limited capabilities in terms of pumping more sophisticated fluid systems, so we continue to do Spark-related activity, but it isn't a significant part of our business which weren't really expecting either, but it's progressed reasonably well and we are happy with the performance from this. We are mainly doing Spark in North America, but we are also doing Spark in China for some of the frac operations there. The other part of your question in terms of the Forest Oil type of deal, initially as we said when we closed the Forest deal, our main motivation for doing that type of a deal was actually to get a display window for our shale technology capabilities, so we haven't really been actively out promoting SPM or production incentive type of contracts in North America, beyond trying to get that deal done, so we could demonstrate our capabilities for the technologies that we have developed. So, we know other progress or we haven't really even been pushing that model beyond that one deal we struck.

Your next question comes from the line of Bill Sanchez from Howard Weil. Please go ahead.

Thanks. Good morning. Paal, two questions, one, I wanted to follow up on just how things are progressing on the SPM side. In the first quarter, you mentioned you had 10 projects. Goal was that two to three a year. I didn't see anything in the press release with regards to another announcement there. Perhaps if you could just update us on your thoughts? And maybe perhaps your size for us on a revenue basis annually? What SPM is going to contributing to the top-line for Schlumberger?

Yes, you are correct. We didn't sign any SPM projects in the second quarter. Our goal of adding two to three projects a year basically stands firm. But again, as I mentioned on my comments on the Mexico bid round, we will only sign the project that we believe are right for us. This is all about portfolio management. It is about picking the right projects, the right fields with the right terms and we have very stringent return criterias in terms of what we will engage in. So, our goal is two to three deal. If we can get the right ones, we will do it and if we can't find the right ones we won't do it. In terms of the impact on the business, it's still relatively a small part of our overall revenue stream, but by picking the right project it is a highly accretive part of our revenue stream and we will continue to focus in on maintaining it as highly accretive.

Right. Your view has been that these projects are accretive to margins and essentially every geo market in which you have rolled it out. Is that correct?

That is correct.

Okay, great. Well, my second question was just a follow up on North America margins, specifically as it relates to Geco which was called out in the press release but you didn't you specify, perhaps I missed it in earlier comments, whether or not Geco really was being driven in the Gulf, more by the Marine side of the business or whether we saw multiclient or maybe a combination of both? Then maybe just address Gulf of Mexico Geco as we think about the balance of '13?

Well, in the Gulf, in terms of ongoing operations, we have one Dual Coil fleet operating. It continues to operate in the Central Gulf. It has got a good backlog of things to do there on the multiclient site acquisition. We have an ongoing multiclient late sales business where we had some revenue progression which is seasonal basically from Q1 to Q2. We don't break up what that revenue progression was in a multiclient. You can see what the total is. The total for Q2 worldwide was $250 million, up from $175 million in Q1. So a part of that was North America, but I would say as the general comment on the multiclient performance in North America in Q2, it was below our expectations. We were expecting more sales to multiclient than what we actually realized. In addition to the multiclient business in terms of late sales and acquisition in the Gulf of Mexico we also started of the third-party survey offshore Eastern Canada and this is with isometrics. So those are basically the WesternGeco business in North America.

All right. That sounds like that continues in second half of the year should be accretive to overall North America margins?

They should.

Okay. Thanks, Paal, for the time.

Your next question comes from the line of Angie Sedita from UBS. Please go ahead.

Good morning, guys or good afternoon and it hasn't been said. So I will say, congratulations on a great quarter. Very impressive of you and the team.

Thank you.

Thank you.

On Mexico, Paal, I appreciate the color on the production of incentive contracts and the bidding there, but your thoughts on, I believe the next round of awards will be IPM potentially as much I have heard as $8 billion to $10 billion in contracts. You view that as the better and more attractive opportunity in the region and then along with that, have you had conversations with Pemex on the potential timing and is it multi-year for Mexico to open up and the opportunities there?

So what we know about the bids coming out is that there are a series of bids. So probably there would be a single service bids, there would be IPM well construction bids and there will probably be more production incentive type of bids coming out as well over the next couple of quarters. So, as I said earlier, we are very interested in the Mexican market. It is going to be very highly competitive. It has always been highly competitive but it's about, as I said before, being able to bid strategically, trying to pick up the right contracts and the right opportunities and having a plan for how you would create value for Pemex and at the same time create value for Schlumberger as we engage in these contracts, right. So I gave you a quick summary of our view on the third run of the FDM contracts and we will continue to evaluate every opportunity for gaining more work in Mexico and will engage in it with a view to make returns for the Schlumberger shareholders.

All right. Then on the U.S. market, thoughts on the pace of activities for Q3 and Q4, are you seeing based on your conversations with the customers still steadily higher in Q3 as far as activity and Q4, the seasonal decline or are we going to run into the spent budgets that we did last year?

Well, whether Q4 is going to see the same as last year, I think it's just too early to say. Obviously, as WTI ticking up a little bit over the past month or so could be a positive preventing that from happening, but I still think it's too early to say what will happen in Q4. Our overview on the second half of the year U.S. land is, I think rig count is going to remain relatively flattish, but drilling efficiency is going to be the main activity driver, again generating reasonable growth in stage count, sequentially. Looking at Canada, we expect the H2 rig count at this stage to come in or the recovery in the H2 rig count to come in lower than 2012. While the stage can be expect to be more or less flat with last year. Then, again, continued strong activity in terms of offshore Gulf of Mexico, both shales and deepwater.

Then finally you mentioned Russia being one of your strongest geo markets in 2013, is that in part driven by the Eurasia deal, or is it outside of that project?

Well, the Eurasia deal is part of our business and it's important part of our business in Russia, but it is only part of it. We have significant other activities both, on land and offshore both, in Sakhalin, in the Caspian, in the Barents, in the Arctic, so we are very well diversified in terms of both, customers and regions that we operate in Russia and that's why I think we manage to sustain very high growth rates.

Your next question comes from the line Jim Crandell from Cohen. Please go ahead.

Paal, one of your competitors was indicating in the marine seismic business relative softness in bidding activity for the fall winter season. What are you seeing in the fall winter season relative to the spring summer season and how does pricing look for that season right now?

For the marine market, we maintain our positive outlook, which we have basically conveyed over the past couple of quarters, right? The way we see its supply and demand appears to be relatively well balanced. In terms of bookings for Q3, we are basically already fully booked, and also Q4 in terms of backlog is filling up quite well. So, activity wise, things are looking quite good for us. In terms of pricing, in the second quarter, we didn't see any significant further traction in terms of basic bid pricing, but we also track another pricing indicator, which is revenue per streamer and our revenue per streamer was up about 10%, sequentially, and that's mainly at the backend of new technology and the type of service we conduct and also some seasonality effect. That's basically where we stand.

Good. That's helpful. And, one follow-up question about WesternGeco, when you used to break it out, this would of course be obvious, but could you give some indication where margins are relative to let's say the oil service average at WesternGeco, and I am just trying to handle on how much margin leverage there was there going forward?

We are not breaking out about any individual product line is doing in terms of margins. I can't really comment on that, but given where pricing stands and given the very significant new technology portfolio, we have and just putting into operation both, on land in terms of processing as well as marine, we obviously see margin upside potential for WesternGeco.

And, we have time for one further question today. That question comes from the line of Jeff Tillery from Tudor, Pickering. Please go ahead.

One of my questions I have is around the U.S. land business. You mentioned improved well service and pressure pumping utilization several times in the release. What are your thoughts around bringing some of the never deployed equipment in to the market given where your margins are? How do you see that as an opportunity in the second half of the year?

So we will look at bringing equipment in from what we have apart when we can get the utilization that we require for the overall group and at this stage we are not looking to bring anything back in that we have parked and I don't expect that to happen in 2013.

Great, thank you. Then my last question is just around the reservoir characterization business. With the significant margins increase there, I mean obviously multiclient helps, but if I look back historically there doesn't really tends to be a follow-up in multiclient sales in the third and fourth quarter relative to the second quarter. So any reason we should think about margins perhaps stepping backwards in the Reservoir Characterization business in the second half of the year?

No, nothing fundamental. This is a huge business and there are mixed effects depending on what region grows and there is exploration and development type of mixes even in characterization, but overall I expect the Characterization Group to continue to post very strong margins.

All right, thank you guys very much.

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

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