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

Good morning and welcome to the Schlumberger Limited third quarter 2014 results conference call. Today's call is being hosted from New York where the Schlumberger Limited Board meeting took place yesterday. Joining us on the call 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 then 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 earnings press release on our website. We welcome your questions after our prepared segments. Please limit to one question and a related follow-up. I will now turn the call over to Simon.

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Third quarter earnings per share from continuing operations was $1.49. This is an increase of $0.12 sequentially and is $0.20 higher when compared to the same quarter last year and represents increases of 9% and 16% respectively. Third quarter revenue of $12.6 billion increased 4.9% sequentially. Pretax operating income increased 7.1% sequentially, while pretax operating margins improved 45 basis points to 22.2%. Sequential highlights by product group were as follows. Reservoir Characterization revenue of $3.2 billion increased 2.9%, while margin improved by 29 basis points to 30%. This growth was driven by a very strong performance in testing services, improved WesternGeco marine utilization and an increase in SIS software sales. These increases were offset in part by lower multiclient sites. Drilling Group revenue of $4.8 billion increased 3.6% and margins improved by 60 basis points to 21.7%. These increases were largely attributable to robust drilling and measurement activity in offshore North America, Latin America and Russia and strong IPM activity in Mexico. The second quarter acquisition of Saxon also contributed to the revenue growth. Production Group revenue of $4.7 billion increased 8.1%. This growth was led by well services largely as a result of the rebound from the spring breakup in Canada and a strong performance on US land. An increase in completion of product sales in Latin America and the Middle East and Asia and expanding artificial lift sales in North America also contributed to the growth. Margin expanded by 158 basis points to 18.3%, primarily as a result of the rebound from the Canadian spring breakup as well as from improved efficiency and recovery of logistical cost in well services. Now turning to Schlumberger as a whole, the effective tax rate was 22.1% in…

Thank you, Simon, and good morning, everyone. Our third quarter results set a new record for Schlumberger, driven by North America and further backed by robust international performance. In the international markets, growth was led by Latin America and Europe, CIS and Africa in spite of headwinds in Russia and Libya, while Middle East and Asia proved highly resilient in the face of a significant slowdown in Northern Iraq. Third quarter revenue grew 5% sequentially and 9% year-on-year, while pretax operating income increased 7% sequentially and 12% year-on-year. Several factors contributed to this performance, including continued market penetration of new technologies that helped further drive our international margins as well as margin gains in North America from operational efficiency and market share improvements. Overall our performance demonstrated the advantage of size and the benefit of a broad technology offering and operational footprint, while providing further proof of our leadership in technology, reliability, efficiency and integration. In terms of our financial performance, we generated more than $1.8 billion in free cash flow in the third quarter, bringing the year-to-date total up to $3.7 billion. This represents a 29% increase over the comparable period in 2013 and a conversion of 93% of our third quarter earnings into free cash flow. Based on our improved ability to generate free cash, we continued our active stock buyback program during the quarter, buying back $1.5 billion of stock, which puts us firmly on track to complete our $10 billion buyback program within the stated two-and-a-half year period. Looking at the operating areas, our North American results set a new record with revenue up 9% sequentially and 18% year-over-year, while margins increased by 137 basis points to reach 19.4%. This is in spite of headwinds from heavy rainfall in the Permian Basin that limited land activity…

(Operator Instructions) Our first question will come from the line of Ole Slorer from Morgan Stanley.

Excellent execution. I have a few questions on various technologies but I think I’m going to leave that for now. Probably what is on everybody's minds right now is the oil balance and the tipping point in oil and where we stand, the volatility has been tremendous. I think everybody is confused about what level of CapEx will be required given what's going on in Europe and Pandora's box talking about spare capacity and how you see it. So I wonder whether you could just expand a little bit about what gives you confidence.

Well, I think if you look at what the sentiments in the market are today, it is obviously driven by the fair order supply. But if we go back to the status of the global economy, yes, there was a downward revision in GDP growth outlook, but this was only slightly. We're still looking at 2.7% and 3.2% growth in GDP in 2014 and 2015, and this is only 0.2% down for both years. So like I said, the overall slow but steady recovery in the global economy, we believe, is still intact. Now if you look at the demand side, there was a corresponding downward revision on the oil demand for both 2014 and 2015, but the key here is to look at the absolute demand, because the IEA for 2014 changed both the 2013 actual demand and the updated 2014 demand. So if we look at the 2014 absolute demand, it is still at the February level and only 0.2 million barrels a day down from the July peak. And the 2015 absolute demand is now 93.5, which is still 1.1 million barrels a day up. So based on this, we see the demand side of the oil market also as more or less unchanged. So then what's left is to look at the real supply situation, and we don't think that has changed dramatically in terms of fundamental supply capacity since Q2 as well. And that's because there is lack of growth in OPEC sustainable production capacity. And actually if you look at IEA report, the OPEC sustainable production capacity is actually down 800,000 barrels a day in September of 2014 versus last year. There is also continued weakness in non-NAM non-OPEC production and there is still geopolitical risk related to both Libya and Iraq. So based on this, we see the overall supply picture as more or less unchanged as well versus Q2. So with the growth in demand for next year, we believe that there has to be increased spending levels and where this spending is going to take place, I think, is going to be a function of where the oil price stabilizes. At the lower oil price, we believe that more of these investments will take place in lower operating cost environments. And if the oil price stabilizes back at the levels we saw earlier this year, then we might continue with a similar picture next year as we had this year. So that's our overall view.

To summarize, Paal, you believe that the spare capacity in the global system today is going down for the next two years?

What I would say at least it's not going up. So far this year, it's been flat. When more production is offered into the market, it is at the expense of the spare capacity.

Our next question will come from the line of Bill Herbert with Simmons & Company. Bill Herbert - Simmons & Company: Paal, I was hoping you could frame in light of your macro outlook perceived international opportunities and threats or headwinds and tailwinds, if you will, and how that at least conceptually coalesces into an outlook for next year? I mean the market of late seems to have been unduly focused on the prominent threats. And then moreover also if you could comment on margins as well. I was struck by how resilient your Eastern Hemisphere margins were in light of the dislocation that unfolded in the third quarter.

We are very pleased with the performance of our international business, including Latin America. So year-to-date, international revenue is up by 5%, which is outgrowing the growth in EMP spending in international market. And our operating income is up 15% with incremental margins of 66%. So today our margin stands internationally at 24.6%, which is the highest level we've seen since the 2008 pre-financial crisis peak. And I think it's important to notice as well that about 80% of our global operating income growth so far in 2014 is actually generated in the international market on a relatively low growth in EMP spend. So if you look at what happened in 2014, like you say, there was a good mix of tailwinds and headwinds. And if you look at the tailwinds this year in terms of geographies, it's been Argentina, Ecuador, Sub-Saharan Africa, Saudi and the UAE, in terms of the type of basins, it's been land and conventional offshore that's been driving the growth. And in terms of customer groups, it's been independents and NOCs. Now if you look at the flip side for the headwinds, geographically it's been Brazil, Mexico, Libya, Russia, Iraq and China in term of the basins has been deepwater and exploration and in particular seismic. And also in customer groups, it's been the IOCs going from solid growth to flat spending in 2014. Now these headwinds will make up around $1.1 billion of full year revenue reduction for us versus 2013. So looking at our full year revenue growth for 2014 in the international market, it's going to be around 5%. And that includes absorbing all these significant headwinds. And we've managed this growth at the same time as we have expanded margins by about 200 basis points and as I mentioned very strong incrementals. So it really demonstrates the strength and the earnings growth resilience we have in our international business. Now if you look at 2015, we expect that we will continue to see a mix of headwinds and tailwinds in the international market. The tailwinds may not be as strong depending on where the EMP spend levels are, but several of the headwinds will largely diminish as well. Brazil and Mexico are likely to be tailwinds next year. And deepwater exploration as well as Libya, Iraq, China should also be less of a drag than what we saw this year. So that really leaves Russia and Asia as the main headwinds that we're going to be facing and the overall balance will become fairer in these two regions in Q4. So still we expect to see strong earnings growth from our international business also in 2015.

Our next question will come from the line of Jim Wicklund with Credit Suisse.

Your market share gains, you mentioned, in Gulf of Mexico and the 12% revenue growth were impressive, considering that we've all been reading and hearing about loop currents and weather and you guys had won the bad weather. Can you talk to us a little bit about your mix, your customer mix and the other things that are allowing you to do so well in the Gulf of Mexico?

Jim, we have a broad portfolio. We have a good balance in the Gulf of Mexico between characterization drilling and production. Our offshore business in North America also includes a very strong position offshore Eastern Canada, which was also quite strong in Q3. But we were impacted by the loop currents, but at the same time, we have a sizeable business. And while some rigs were shut down for this, there were a number of rigs continuing to operate without any impact. So when you have a certain size and some of these events, it's easier to absorb them as you go forward.

I agree completely on the outlook for spending and the need to maintain current production, but clearly US independents spin-off of cash flow and so that puts the US activity probably most at risk. I guess my question is, is there a risk that pressure pumping pricing in a slower market crashes again like it did a couple of years ago or have we had enough capital discipline in the industry that that's not likely to happen?

I think it's going to be a function of activity, of course. So like you say, we agree that the 2015 activity, it's too early to say what's going to happen. But it is clearly going to be a function of the level of free cash flow for the EMPs, which was already negative in general at the WTI of 90. And the key going forward is going to be continued borrowing capacity. So there's really two scenarios here that we end up with a lower WTI, further cost inflation in the EMP value chain and reduced borrowing capacity, and this will likely have an impact on the spending growth rates. On the flip side, if we see a recovery of the WTI and also we see a limited cost inflation in the EMP value chain, I think these are the factors that would support further spending growth. But looking at pressure pumping pricing, it's going to be a function of the activity levels and how much horsepower capacity has been ordered in the past couple of quarters. And I believe that it's a fair bit already on order. So if the spending growth is impacted, I think it can quickly put pressure on frac pricing, including both sand and transportation as well.

Next we'll go to the line of James West with ISI Group.

In the release in your remarks, I was struck by how many times you highlighted strength in deepwater activity and strong exploration activity, particularly in deepwater drilling. It seems like there is a big debate in the market right now about deepwater. How do you see that activity evolving over the next year or two?

Well, I think if you look at first the deepwater rig supply, it was at the record high in Q3. At the same time, the number of stacked rigs continued to increase. And there's a further 10-year rigs planned for delivery in Q4. So I think it's very clear that we are in oversupply situation of deepwater rigs at this stage. Now if you look at deepwater drilling, which is really where we make most of our revenue, this year we expect to see a 6% decline in drilling rig activity for deepwater. Now this decline is mainly driven by Brazil, which is down about over 30%, and partially offset by the Gulf of Mexico and West Africa. So when you exclude Brazil, deepwater drilling is actually up about 3% versus 2013. So looking forward to 2015, we see flattish deepwater drilling activity in 2015, generally supported by lower rig rates. So we've weathered, I think, a fairly significant deepwater decline this year and we expect it to be more or less flattish going forward into next year.

A lot of the commentary was around deepwater exploratory wells. Has your percentage of wells that you're working on a deepwater on the exploration side decreased, is it steady, is it increasing?

If you look at the overall exploration market and the exploration spend, we expect now that the 2014 exploration spend will be down 45% versus last year. And this spend reduction is mainly led by seismic, which would be down more than 20%, while the exploration drilling is only slightly down. So I would say that the market is down overall, but the main driver for the reduction in exploration spend is predominantly seismic.

Our next question comes from the line of Angie Sedita with UBS.

Nice to see that big $1.5 billion buyback. As a follow-up to one of the earlier questions on pressure pumping and the just the soft North America and obviously its influx, I do believe that Schlumberger was considering building incremental new build capacity for 2015 given the market dynamics. How do you feel on that now? Is that on hold? What are your thoughts?

Well, we have a pretty sizeable pressure pumping business, which is including both North America and international. So we have made some orders for new pumps. We still have some pumps left in the idle asset program. But we made some orders for new pumps by the level that it doesn't really worry me. These new pumps will be distributed in between North America and international. And we've had fairly significant growth both in Argentina and Saudi Arabia over the past six to 12 months. So the orders that we've made is generally what we want to have on order in terms of long lead items to make sure that we can cover the business in any eventuality.

Obviously the Middle East is very strong, particularly the Saudi. But just theoretically, in the Middle East overall, excluding Iraq of course, where do you think Brent would need to be for them to begin to slow their drilling activities where they start to become uncomfortable? I know obviously they're drilling both for gas and for oil.

I'm not going to make any predictions at what level the Saudis would change what they're doing. We have a very strong business in Saudi Arabia. Growth has been very strong this year. And as of now, we continue to expect solid growth in Saudi Arabia next year as well.

Our next question will come from the line of Michael LaMotte with Guggenheim.

Paal, you mentioned the potential for inflation in frac value chain in US onshore. And I was just curious, given that most of that is now being driven by sand and transportation and distribution related to sand, how is that impacting the market for highway and broadband?

Well, I think there's no real impact from these things in particular to broadband and highway. I think the escalating cost of transportation and sand at this stage I think is something that all the players are looking to pass on to the customers. I think there's going to be a limit to how much of these additional cost escalation that our customers are prepared to take, given their free cash flow situation and also given the drop in oil prices. But there is no relative impact on these cost escalations on either broadband or highway.

Well, I was thinking more from a marketing standpoint if the sand availability would actually push customers to look for productivity improving alternatives such as highway and broadband?

Yes, we do use less sand in highway in particular. So that is obviously a selling point. But it is more a function of what the philosophy of the customer is. Do they want to go with a slickwater frac, which generally now has a lot higher volume of proppant, or they go to a more cross-linked or highway type of frac, in which case the proppant volume is significantly less.

And are you seeing a shift in trend, one versus the other materially over the last couple of quarters?

Not materially. Highway continues to do very well. And I'm actually very pleased with how broadband is going. Broadband at this stage of its introduction is growing significantly faster than what highway did back in 2011/2012. And we are now continuing to engage in broadband, I would say, presentations and broadband sales and information at the sea level of our customers. So we engage at that level to establish a very clear understanding of what this technology brings and also to try to agree on pilot programs and evaluation of these pilot programs over a period of time.

Our next question comes from the line of Kurt Hallead with RBC.

I wanted to follow up in particular on two things. You mentioned cost recovery dynamics that have been underway in the North American market. Do you feel that you're at a point now where you'll be able to get some net margin accretion going forward, or is it still just offset to the cost inflation?

I still think in terms of price increases with our customers, we're generally looking to recover the cost inflation that we're seeing. Like we said before, we believe that the main way of driving margins in the North America pressure pumping business will be through efficiency and through introduction of new technologies that increases production or lowers cost or improves efficiency. So the main focus that we have now is to pass on the cost inflation that we have from our supply chain to our customers. And like I said, given the state of the free cash flow and where the oil price is, I think the appetite from our customers will be lower in terms of how much of the further cost increases they're willing to take.

In terms of the challenges that occurred during the course of the third quarter that resulted in that announcement that the earnings would be impacted by $0.02 to $0.03 and the comment that you made about being a $0.02 impact in particular, what kind of lingering effect do you expect from Russia and maybe Libya going out into the fourth quarter?

If you look at Q4 as a whole, this year we expect sequential growth in earnings per share probably around $0.05 to $0.07. That's our target. This is somewhat lower than the sequential increases we normally see in Q4. And there's really two primary reasons for that. One, as you alluded to, we expect to see a continued impact from the situations in Libya, Iraq and Russia and in particular the ruble effect in Russia is potentially going to be higher in Q4 than what we saw in Q3. The second main factor is the cost focus that our customers have, which is likely going to lead to lower levels of year-end sales, including both software products, but in particular multiclient. Still the base business should continue to be solid, driven by both North America, Latin America and the Middle East, but somewhat lower sequential growth in earnings per share in Q4 this year than what we normally see.

Our next question comes from the line of Bill Sanchez with Howard Weil.

I think one of the things that's been a surprise to many is how much supply growth we see in that region. At a time when seems like you and others are really contracting in the area and there is very little service activity going on, just given your macro thoughts so far during the call, what are your views in terms of sustainability of Libyan production here given there's ramp-down in activity? And I guess what's the trigger point for you to make a decision on whether or not you start to cut headcount there, and is that strictly going to be just on land side or is that going to be offshore as well?

In terms of our resource base, that's something that we continue to look at in any country that we're in. Offshore, we're currently operating one rig. There might be another couple of rigs added in the next couple of quarters, but that's not a significant part of the headcount that is related to the offshore activity. The main headcount is focused on the land business. And the land business is, as I said, at the minimal level. So we are currently looking at what the outlook for 2015 is. Q3 of 2014 is about 50% down in activity in Libya compared to what we saw in Q3 of last year. And that low activity in our mind, if it's not changed, we'd obviously have an impact on the sustainable production capacity of Libya going forward. So the fact that Libya, which I think in OPEC now is listed as about 900,000, but obviously the key to maintain that production capacity is to continuously invest into it.

You mentioned Brazil now as a tailwind for next year. I know there's a Wireline services contract that's pending. Can you talk about timing on that? And would that be incremental to Schlumberger or is that strictly just a re-tender here of an existing contract?

Well, the two main contracts that have been out for tender recently have been the Wireline services one and the directional drilling (inaudible) contract. We maintain the market share we had in both contracts. We had the largest lot in Wireline and the middle lot in drilling and measurement, which we see as good, because it basically prevents us from having any significant mobilization or demobilization cost which are always key to the profitability of these types of contracts. And both of those contracts we got quite reasonable price increases while we maintain our market share. So activity-wise or market share-wise, no change for us, but the pricing and really no additional cost of mobilizing or demobilizing. So I would say that these contracts are incremental to Schlumberger in 2015. I expect the contracts to be finalized over the next couple of quarters.

Our next question will come from the line of Jeff Tillery with Tudor, Pickering, Holt.

In talking about the exploration results for you all, obviously seismic is down, but in the release several times the success in Africa and Sub-Saharan Africa specifically, there's been tailwinds for margins. Just given the customer degree of exploration success this year, how does that impact your view of, say, the next 12 to 15 months, just specifically in terms of how it could impact the ECA region?

I agree with you. The exploration success both in 2013 and 2014 has been relatively poor, which I think is part of the reason why a number of customers are taking a step back and reevaluating their prospects and then how they're going to go about doing this. So like I said, we see exploration spend this year being down 4% to 5% driven by seismic. But looking towards 2015, we expect exploration spend to be flattish to only slightly down. And again, this is going to be driven by seismic. So we continue to see good exploration drilling activity and the main thing impacting exploration spend is still going to be seismic next year.

The success you're having in bucking the overall trend, how much of the integration that you discussed back in June is a driving force in that?

Well, I think the impact of the whole range of transformation of efforts that we're doing as well as new technology and as well as our integration capabilities, all of these elements are key factors that allows us to produce outstanding results, in particular in the international market. And we expect that strength to continue to grow and expand going forward, as we further implement these transformational programs.

Our next question comes from the line of Jud Bailey with Wells Fargo.

In Norway, you've had StatOil who is starting to scale back activity and now you add on to that. You got a little bit lower commodity prices. I'd be curious to know how you see that market playing out maybe over the next one to two years with commodity prices as a headwind and StatOil kind of suffering through some cost overruns.

In terms of what the commodity price is going to be, I think it's too early to say what level it's going to be at in 2015. Obviously there's been a sharp drop over the past two to four weeks. How this is going to evolve I think is still highly uncertain, and I still believe that there's going to be some kind of recovery happening. Now rate into the North Sea, we still see low single-digit growth in activity for our North Sea geo market in 2015. And you got to break that down into three. First in Norway, we expect to see lower exploration activity and flat development activity. In the UK, we actually expect to see somewhat higher exploration activity next year and still flat development activity. And in addition to this, other in North Sea geo market, we continue to manage somewhat the remote activities, and there's strong remote activity next year. We have project in the Canaries. We have a project in Cyprus. And we also have a project in Mauritania that we manage out of the North Sea. So overall for that business unit and the assets and the resources we have in the North Sea, we see still some growth in 2015.

You noted all the various headwinds and tailwinds internationally for 2015. It looks like, and you've alluded to this, Latin America is poised to finally show a nice recovery. Knowing what you know today, will Latin America be your best growth market in 2015 versus even the Middle East and Asia?

Well, I think it's still too early to say. But if you look at the trends that we saw in Q3, we are clearly seeing the recovery of Latin America with good growth in pretty much every geo market. So I'm quite optimistic about what Latin America can do next year. And one thing is the revenue growth. The other thing is the pretax operating income growth. And I would say for next year, I'm quite optimistic at this stage still on Latin America in terms of growing earnings and similarly also for Europe, Africa as well as the Middle East. So those will still, I think, be the three main drivers of earnings growth in the international market next year.

Our next question comes from the line of Brad Handler with Jefferies.

I'd like to come back to your artificial lift initiative. Maybe as a grounding for us, can you ballpark the revenue contribution that you've acquired just in terms of framing for us your starting point for growth?

I can, but I won't. If you want to try to make some interpretation, we gave you some numbers on installations of pump jacks and PCPs. It might not be easily transferrable to revenue, but we've had a big program. We bought a number of smaller companies. And it has a reasonable contribution to North America and also to our overall artificial lift position. But I'm not going to break out and give you a specific revenue number.

In an environment if there's a somewhat lower commodity price, what is your sense of the impact on artificial lift on the production side of the business, maybe a little bit more broadly presumably in the North America market?

Well, for the overall production business in the event that activity is down in North America, any part of the business might have challenges and pressure on pricing. I think again where you'll see it the fastest and the most will likely be in pressure pumping. In terms of artificial lift, we have not seen the same uptick in pricing when activity is very high, and I don't expect to see the same kind of pressure there as well. But any flattening of growth or reduction in activity will likely have an impact on pricing in any product line. But I think it's way too early to say even for North America whether we will be in that situation in 2015.

Our final question comes from the line of Scott Gruber with Citi.

Another scenario if crude prices stay low, your project management businesses, both drilling and production, should be real differentiators. How bigger are these businesses as a percentage of revenue now, and given the contract backlog, what's the growth outlook for '15?

We're not breaking out these numbers. Other than that, we've given some indication of how much our integration related business is. That's not all project management or production management. That's any type of integration. In a more challenging environment, the ability to take on projects and provide more integration to drive value will be a competitive strength.

And I believe that there's some flex in how you pursue with your internal transformation given market dynamics. So if we paint a scenario where upstream CapEx flattens and the expectation is flat for a few years, can you provide some color on what changes you make to your program and how quickly you think you can achieve some of your targets, realizing that some are partially dependent upon customer acceptance of your tools? How quickly do you think you can accelerate some of those changes?

We have some discretion as to what we can accelerate in terms of the implementation, but some of these things are also based on the overall schedule that we've laid out and things that we have to develop in order to roll them out. But yes, there is some flexibility of accelerating investment and implementation in terms of part of the transformation. And these are things we are actually looking at now. We laid out our financial targets for 2017 in June in New York. And they were predicated on macro and industry assumptions. And if these assumptions end up being optimistic, we will see what we can do internally to still be within the ranges that we've given or at least close to them even if the macro assumptions are below. I can't promise that we will do it, but that's obviously going to be the ambition. So new technology introductions, new technology sales and acceleration of transformation programs are going to be key drivers that potentially would allow us to do that.

And with that, I'd like to turn it back over to Mr. Farrant for any closing comments.

Well, that's all the time we have for questions today. Now on behalf of the Schlumberger management team, I would like to thank you for participating. And Cynthia will provide the closing comments.