SLB N.V. (SLB) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. 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, Simon Farrant. Please go ahead.

Good morning, good afternoon and welcome to the Schlumberger Limited third quarter 2017 earnings call. Today’s call is being hosted from New York, following the Schlumberger Limited board meeting. Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer; Simon Ayat, Chief Financial Officer; and Patrick Schorn, Executive Vice-President New Ventures. We will, as usual, first go through our prepared remarks, after which we will open up for questions. For today’s agenda, Simon will first today comment on our third quarter financial performance before Patrick reviews our results by geography. Paul will close our remarks with the discussion of our technology portfolio and our updated view of the industry macro. However, before we begin I would like to remind the participants that some of the statements we’ll be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10-K fillings and other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our third quarter press release, which is on our website. Finally, after our prepared remarks we ask that you please limit yourself to one question and one related follow-up during the Q&A period, in order to allow more time for others who maybe in the queue. Now, I’ll hand the call over to Simon Ayat.

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Third quarter earnings per share, excluding charges and credits was $0.42. This represents an increase of $0.07 sequentially and $0.17 when compared to the same quarter last year. During the quarter, we recorded a $0.03 of Cameron merger and integration charges. Our third quarter revenue of $7.9 billion increased 6% sequentially. Pre-tax operating margins increased 103 basis points to 9.2%. Highlights by product group were as follows: Third quarter Reservoir Characterization revenue of $1.8 billion increased 1% sequentially, while margin increased 56 basis points to 17.6%, primarily due to strong wireline activity, largely in Russia and Central Asia. Drilling Group revenue of $2.1 billion increased by 1% sequentially, while margins of 14.2% were essentially flat as directional drilling activity on land in North America continue to improve. Production Group revenue of $2.9 billion increased 15% sequentially, while margin expanded by 62 basis points to 9.8%. These results were driven by strong pressure pumping activity in North America land. Cameron Group revenue of $1.3 billion increased 3% sequentially, while margin increased 61 basis points to 13.8%. These results were largely driven by higher product sales in surface systems in North America. One, Subsea margins exceeded 20% for the 5th straight quarter. The book-to-bill ratio for our long-cycle business was 0.8 in Q3. The effective tax rate excluding charges and credits was 18.4% in the third quarter compared to 18.9% in the previous quarter. We generated $1.9 billion of cash flow from operations during the quarter. This included a federal tax refund in the U.S. working capital consume $134 million of cash, largely due to the increase in activity. Working capital also reflected the payment of $114 million in severance during the quarter. We remain on track to achieve our cash flow generation target for the year. Our net debt improved by $385 million during the quarter to $12.2 billion. We ended the quarter with total cash and investments of $5 billion. During the quarter, we spend $98 million to repurchase 1.5 million shares at an average price of $66.04. As we previously highlighted, we have reduced our buyback activity during the quarter in light of the pending OneStim and EDC transactions, as well as various SPM opportunity. Other significant liquidity events during the quarter included $600 million on CapEx and investments of approximately $165 million in SPM projects. During the quarter we also made $693 million of dividend payments. Full year 2017 CapEx excluding SPM and multiclient investments is now expected to be approximately $2.1 billion. And now I would turn the conference over to Patrick.

Thank you, Simon and good morning, everyone. Our third quarter results were solid, driven by the strength of the North America land market and by growth in key international markets, like Russia, the North Sea and Asia. Elsewhere activity was largely flat sequentially. The quarter’s performance was led by the Production Group, with strong revenue growth in North America, as hydraulic fracturing activity continue to increase. The Middle East also contributed to the growth of the group, through increased activity on unconventional resources development projects. Reservoir Characterization Group results were higher on solid summer drilling campaigns in Russia and the North Sea. Although exploration related activity worldwide remained very weak. The Drilling Group also improved, driven by stronger directional drilling activity in North America, which more than offset the completion of integrated drilling services project in the Middle East and Mexico. At Cameron, OneSubsea continue to deliver strong margins for the 5th straight quarter. At the same time, CAMShale fluid delivery and fracturing services are now deployed on about half of all Schlumberger fracturing job in North America realizing one of the targeted synergy benefits of the acquisition. Looking at North America in detail, revenue grew 18% sequentially driven by continued growth for both our production and drilling related businesses, with our hydraulic fracturing revenue increasing 42% sequentially. Over the past two quarters, we have more than doubled the number of active frac fleets in the North America and we have at present deployed close to all of our idle capacity in preparation for the additional capacity that will become available after closing the OneStim transaction with Weatherford. While the strength in our hydraulic fracturing activity combined with market share gains and continued pricing traction drove significant sequential revenue growth for the production group in North America land it also inevitably led to some transition related cost and inefficiencies resulting from the rapid ramp up in activity, which impacted incremental margins. However, this impact will abate in the coming quarters. The Drilling Group product lines also benefited from the continued growth in North America land rig activity in the third quarter. Demands for our advanced road restorable systems remained at sold out levels as our customers continue to move towards longer laterals. Given the demand for our drilling technology offering, we have ramped up manufacturing capacity and will dedicate more CapEx towards the North America land drilling market in the coming years. Before I comment on the international markets, I would like to update you on our SPM project in North America, where we continue to make in-roads in the third quarter. After one year of operations on the SM Energy project in the Powder River Basin, we are currently drilling and completing the 11th well. The production wells we have designed drilled and completed all produced in the top quartile of the field driven by optimized well placement and an engineered approach to completion and stimulation. Based on the success of the partnership between SM Energy and SPM, we are making steps to develop the business model further in cooperation, alignment and scope. As announced at the end of the second quarter, we've also secured a new SPM project with Torxen in Western Canada where we started up operation in August with four wells drilled so far. Yesterday, we announced that we together with our partner Torxen also have acquired a neighboring Palliser Block making this project the largest in scope within our current portfolio. The SM Energy and Torxen projects demonstrated the SPM opportunity set that is available to us in North America. These projects also show how we are effectively diversifying and building out our SPM portfolio from the initial start in Malaysia, Romania and Ecuador where we created the technical and commercial expertise that today serves as the foundation for this new and exciting part of our offering. Internationally, revenue was up 2% sequentially excluding Cameron where the long cycle businesses as expected are still seeing noticeable sequential declines. Europe/CIS/Africa area revenue was 7% higher sequentially including Cameron due to strong summer activity in Russia and Central Asia, the United Kingdom and Continental Europe and in Norway and Denmark. In Russia and Central Asia, land activity was very strong during the summer, driven by well construction services, wireline logging and artificial lift system sales. Russia is a strong market that steady adds reserves through the drill bits and our performance continues to benefit from the extensive investments we have made in the country in personnel, infrastructure, local manufacturing and support over the past 15 years. Activity in West Africa remained stable in the third quarter with limited additions to the rig count. However, project planning and tendering reached a two year high with new offshore project start-ups anticipated in early 2018. These projects are clear opportunities for our integrated drilling service product line and we continue to see an increasing interest for performance based drilling contract in shallow water including the jackup rig market. In North Africa activity remains low although we were able to return to drilling services and continue well intervention operations in Libya as security improved during the third quarter. Middle East and Asia area revenue was up 1% sequentially excluding Cameron as strong production and drilling group activity in the Saudi Arabia and Bahrain, Far East and Australia and South and East Asia GeoMarkets was largely offset by the completion of integrated drilling services projects in Iraq. Activity growth in Saudi Arabia was driven by improved productivity in our unconventional resources project, which enabled us to complete a higher stage count. However adverse weather which disrupted WesternGeco land seismic activity partially offset these gains. In Asia, activity strengthened in Indonesia on increasing rig count and market share, while Australia benefited from higher demand for hydraulic fracturing and drilling services. China improved with increased production services and higher seasonal activity and new technology deployments for shale and tight gas development. Revenue in the Latin America area decreased 5% sequentially excluding Cameron mainly due to lower multiclient seismic sales and the completion of integrated drilling services projects in the Mexico and Central America GeoMarket. Revenue in the North and South Latin America GeoMarkets was essentially flat with previous quarters with stable SPM project activity in Ecuador and as we prepared to start up our YPF SPM project towards the end of this year. As there has been a lot of attention around our SPM activity in Ecuador including recent reports with incorrect analysis and conclusions, let me close my remarks by clarifying where we currently stand. During the third quarter, we reached an agreement with our partners Petroamazonas and the government of Ecuador to settle our overdue receivable balance in the country. With the first payment milestones related to these discussions already completed during the quarter. Based on a joint review of the future development and investment plan for the field we've also revised the tariff relating to the Shushufindi contract and added a future severance payment guarantee. This was done to ensure that this long-term contract remains viable for both parties going forward. It is also important to point out that on a going forward basis the new terms of the Shushufindi contract still need our established investment criteria. At present, production from the Shushufindi field has been restored and is now in-line with the current reservoir performance potential. I now hand the call back to Paal.

Thank you, Patrick. Before I comment on the business outlook, I would like to talk about technology. And in particular how we continue to build out our offering to create an unmatched upstream technology platform where the individual products and services has the industry’s lowest cost of ownership and where the collective offering is readymade for broad-based system integration. This direction will first ensure that we become even more competitive in the markets where the prevailing business model is focused on lowest price for basic standalone products and services. And second, it will enable us to better serve the growing number of customers who favor integrated and performance based contracts, which is directionally where we see the industry heading. This includes extending our ownership of hardware, software and domain expertise into new market segments. As well as teaming up with companies like Google and Microsoft to capitalize on the latest advances in digital technology enablement. So what is the basis for our pursuit of technology system integration and why do we see hardware ownerships as a critical element of this strategy? Today the broad and complex EMP industry workflows are still predominantly enabled by discrete and fragmented products and services with the dividing lines between the various work packages defined by our customers contracting framework, which was established decades ago. These artificial dividing lines make sense at the time of creation when the technology systems were made up of a limited number of isolated hardware building blocks and the value of software and data was still nascent. With the complexity of today’s oil field operations and the advances made in other industries in terms of total system performance, it is clear that replacing our industry’s fragmented approach with a new focus on complete technology systems holds a massive performance upside. In response to this we have over the past seven years continued to build out our technology offering in terms of hardware, software and domain expertise. Where we today have the ownership and technical capabilities to develop these complete technology systems, driven by the following key beliefs. First, we believe that innovating across the artificial dividing lines of today’s individual work packages to create hardware technology with a broader scope, a smaller footprint and fewer interfaces holds huge upside potential in terms of both hardware costs and performance. The way we are integrating and innovating around the drilling bottomhole assembly is an example of this. Second, we believe that the next step change in industry performance will come from developing complete technology systems based on streamline and redefine end-to-end workflows, which integrates all hardware and software components. What we are doing with the rig of the future is an example of this. And third we believe that in order to maximize the performance of the EMP industry workflows it is essential to leverage the latest advances in digital technologies. We achieve this by making these enabling technologies an integral part of the new hardware and software technology systems as opposed to attaching them on top of the outdated and fragmented technologies of yesterday. What we are doing with DELFI, which was introduced at the FAS Global Forum during the third quarter is an example of this. DELFI is our new cognitive E&P environment that leverages the latest advances in data security analytics, machines learning, high performance computing, as well as teamwork and collaboration to drive total system performance. The DELFI environment provides a new way of working for the asset teams by strengthening the integration between the technical domains and by enabling our customers and software partners throughout their own intellectual property and workflows through the system. With the launch of DELFI we have also deployed an E&P data lake on the Google Cloud platform comprising more than 1000 3D seismic surveys, 5 million wells, 1 million well logs and 400 million production records from around the world demonstrating a step change in system scalability. DELFI will ultimately cover all industry workflows however the initial focus is on drilling and well construction. In this respect the DrillPlan and DrillOps [ph] solutions will in the coming quarters be introduced to the market and this combined with our down hole hardware and the rig of the future will under the one drill offering create an unprecedented step change in drilling performance. So this summarizes the strategic rationale behind our pursuit of technology system integration and also explains why we see hardware ownership as a critical element of the strategy. Our commitment to technology leadership is stronger than ever as can be seen by how we have advanced our technology strategy during the downturn of the past three years. We are now ready to capitalize on these investments in close collaboration with our customers. Let me next turn to the business environment where the reduction in global oil inventories in the third quarter clearly demonstrates that the oil market is now in balance, which is creating the required foundation for a further increase in the oil price and the inevitable growth in global E&P investments. And while the timing and pace of the pending industry recovery is still not completely clear we now see a number of converging market factors that make us increasingly positive about the outlook for our global business. First and foremost the growth in oil demand continues to be very strong and importantly the upward growth revisions in 2017 were primarily seen in the OACD countries. The demand growth outlook for 2018 is again expected to be north of 1.4 million barrels per day and is further supported by upward revisions in global GDP growth clearly suggesting that the demand side of the oil market equation is on a very solid footing. Looking closer at the global oil inventory, we also believe that the current situation is more positive than what is reflected by the market. Today global inventory levels are down to 64 days of forward cover and the North American stocks are already down to 2014 levels. Brent crude which is now in backwardation is seeing faster inventory draws and stocks are already approaching the five year average. In North America land where the E&P companies have added significant CapEx over the past year, the production growth is so far falling short of expectations, driven by supply chain inflation, operational inefficiencies and the need to step out from the Tier 1 acreage. This has led to a moderating investment appetite where the previous pursue to production growth is now being balanced out with an equal focus on generated solid financial returns and operating within cash flow. This moderation can be seen in the flattening trend of the U.S. land rig count during the third quarter and it is also reflected in our customers’ 2018 activity outlook. The more tempered activity outlook for U.S. land combined with the short cycle nature of the business has an immediate impact on the outlook for production growth, which for 2017 and 2018 has been revised down by 100,000 and 500,000 barrels per day respectively. This clearly has a material impacts on the global supply and demand balance. From the OPEC side compliance with the stated production cuts has been better than expected. At the same time comments from several of the key OPEC Gulf countries and from Russia suggest that an extension of the existing production cuts beyond the current agreement is a possibility although this may ultimately not be needed. Looking at the ongoing activity and investment levels in the international markets outside OPEC Gulf and Russia, we have so far seen very limited growth since we reached bottom of the cycle in the first quarter of this year. However, we’re seeing signs in many parts of the world of conventional land and offshore projects now being prepared for FID, and the total number of FIDs this year is double that of 2016. It is also worth noting that our overall tendering activity in the international markets is also up by over 50% in 2017 compared to last year, measured in total contract value. And we expect these positive trends to strengthen further in the coming quarters. Based on the combination of all these factors, we’re currently increasingly the positive on the overall outlook for our global business. It is still early to say what the specific impact on the 2018 E&P spend will be, as our customers are now in their planning process. But we do expect activity tailwinds in most part of the world in 2018. In the meantime, we’re fully focused on delivering industry leading products and services to our customers, and we also remain opportunistic with respect to making further strategic moves to position Schlumberger at the forefront of the industry as the global activity upturn slowly, but surely emerges. Before we open up for questions, which will likely initially be focus on SPM, let me again reiterate the rationale and objectives behind our SPM investments, which has not changed over the past two years. SPM will not alter the phase of Schlumberger it will simply complement our core business where the objective is to grow SPM from the size of a product line today to the size of a group over the next five to seven years. Granted SPM has a different risk profile compared to our core business, but different does not mean higher. The biggest risk to our full cycle returns in the core business is first the huge cost of scaling up and scaling down capacity in an increasingly volatile business environment. And second, failing to adjust our business approach in some of the large, but commoditized land markets around the world. Faced with these challenges, we’ve concluded that a strategy of doing nothing new is simply not a strategy. The SPM business model and contract duration significantly mitigates both of these core business risks, while in return we take on the reservoir risk and in certain cases higher counterparty risk. Our track record over the past 20 years of SPM activity shows that we’re very good at managing the reservoir risk and we’re also getting increasingly good at managing the counterparty party risk as demonstrated by how we have resolved the current and future payment situation in Ecuador. So, in short, SPM helps mitigate some of the major risks in our core business. At the same time, we know very well how to manage the new risk we take on through the SPM model to the points where we see SPM in combination with our base business actually lowering our overall risk profile rather than increasing it. In terms of returns, we have disclosed that over the past five years, the SPM business performance is highly accretive to both our operating margins and return on capital employed. So it should at least a crack at corresponding multiple to our core business. To realign our stated growth objects for SPM we are pursuing investments in new projects and the announcement made yesterday is in line with this strategy. Lastly, let me also point out that SPM remains a small part of what we do as a company. And that the core of Schlumberger continues to be focused on our technology leadership where there are currently a lot of exiting things happening. With that, lets open up for questions.

[Operator Instructions] Your first question comes from the line of James West from Evercore ISI. Please go ahead.

Hey, good morning, Paal.

Good morning, James.

So, I'm going to skip SPM question, I’ll let somebody else go after since I'm pretty comfortable there.

Very good.

I know it returns accretive. What I wanted to talk about and you highlighted a lot of this in your prepared commentary is international, Brent at you closing on 60 here all market fundamentals clearly better than there were a quarter or quarter two ago, which market I know you don't want to get into numbers yet because it's budgeting season et cetera which international markets that are at basically rock bottom right now, do you see probably turning the fact that as we go into ‘18 and maybe the back half of ’18-19?

Again, it's a bit difficult to say, but if we just go through the various parts of the international market, we were actually quite pleased with the activity we saw in Q3 in Europe, North Sea in particular as well as in Russia. The Gulf part of the Middle East remains also very solid. And then in addition to that you have Africa and Asia, where we saw basically flattish activity in Africa and we had some small encouraging signs of growth in Asia, while also Latin America was flattish. So, I would say going forward I still think that the markets that would lead is slightly going to be Russia, Europe with the North Sea and the Middle East, but there are some emerging positive signs I would say in Asia. While Africa and Latin America is still looking flattish as of now. So, early to say, but for all markets I think we are at bottom and the encouraging signs as I mentioned in the prepaid remarks is that the number of FIDs overall this year is up by about 50%.

Right.

Lag on activity, but it's a positive sign as well as our tendering activity, which is also up in total contract value this year by over 50%. So, there are really encouraging signs to be seen.

Okay, great. And then as we think about those markets that are now starting to show signs of life or will show signs of life here shortly is the pricing environment starting to finally stabilize out?

Yes, I mean as always every contract bid any part of the world is competitive. And there is still pricing pressure and pricing challenges for all the new contracts we bid, but I would say the downward trend of pricing is slowing significantly, which I think is in line with the fact that we see activity having bottomed and is probably starting to head in the opposite direction. So, pricing headwinds at this stage is not a huge issue for us in the international market.

Great. Thanks, Paal.

Thank you, James.

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

Thanks, good morning guys.

Good morning.

So, maybe we could start with a lob for you and further a softball, thoughts on Q4, your comfort maybe around consensus or anything you talked about at a high level on the revenue or margin side?

Right, so, for the Q4 outlook, we generally expect the continuation of the underline trends that we’ve seen in the third quarter, moderated somewhat by seasonality. In North America land, we do expect to grow but I think the growth rate will slow, partly due to the flattening rig count, partly due to the fact that we have deployed most of our frac equipments and also the pending holiday season. So, I would say that some growth in North America land, but obviously not the same rate as what we've seen in previous quarters. And the international market we expect some modest growth in both EMEA and Latin America, but due to the winter seasonality likely a decline in ECA. I think also year-end sales this year will be low there is no real indication of anything significant. So if you look at the Q4 consensus as it stands today, it is potentially on the high end, but I think is a good target to work towards.

Okay, appreciate that that is very helpful. And then great to hear the positive sentiment around the international outlook, clearly your tone has changed and you're seeing has changed, but maybe just to hear quickly on Ecuador and Shushufindi with the restructuring of the tariff the thoughts on what the impact could be going into 2018?

Patrick do you want to handle that?

Yes, so clearly we are very pleased that are in a more positive situation around the whole payment issue in Ecuador that has been largely resolved. Activity wise we expect to be fully focused again on maximizing production. And it is correct that we have had a change in the tariff, but it continues to be one of the heartlands of SPM that we have and where we have a business that we're very pleased. So we continue to have all the technical resources focused on improving the production levels as much as we can and where we're quite pleased with the opportunity that we have both the renegotiations in Ecuador.

Okay, great. Thanks guys, I'll turn it over.

Thank you, Angie.

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

Yes, thanks a lot. I have two questions for you Paal, one is around Borr Drilling and the change in contracting model there. And the second one is the similar question on Cameron. But starting with Borr and in context of your comments that you are now seeing an increasing number of customers that are seeking performance, some kind of performance based contracting model that sort of breaks a little bit with the history of procurement and couple that with your view that this is sort of 50% increase in bid value. Could you talk a little bit first maybe about how the reception has been from the drilling side of proposing performance based contracts? Is this something which is something that one or two your customers are now interested in or is it broader?

Obviously performance based drilling contracts has been established on lands quite a long time. And we see that the next I would say area that this will start growing is in shallow water. If you want to drill performance based, you need to have a pretty good handle on the subsurface and the drilling rigs. And given the drilling activity that you had historically on shallow water, this is again why we see this as the next horizon that these contracts will take on. So in terms of customers, we have a range of customers who are already pursuing performance drilling contracts offshore on shallow water. The main thing is that these contracts traditionally has not included the rig. So what we're seeing now is several customers are trying to bring the rig into play. And our rationale for investing in Borr is generally to get closer to one of the rig providers to try to drive this new behavior and establish performance contracts including the rig. Now our relationship with Borr does not preclude us from having similar relationships with all the other jackup providers. And we have engagement and discussions with several of them to do exactly the same there. So I would say it's a growing interest from the customer base. We have a several key customers who are already well advanced in trying to establish this and the main thing is that we need the rational drilling company and all the other well construction related services on the rig together with the rig provider to come together and establish a contracting framework that is benefitting all parties involved. And I think that's what we are trying to drive to our initial investment in Borr.

And it does break with the traditional way of contracting, so very much so, so I was just kind of looking for to what extent customers are really opening up to that type of debate.

Yes, I think it’s fair to say that several key customers, I think are happy to never see rig day rates again, if they can get the entire drilling package, including down hole and surface on to performance based, I think that would be a benefit both for the customer and for the service companies involved.

Second question on Cameron, I mean, I think it’s clear to everybody now that when you bought Cameron back few years ago, a lot of eyebrows got raised, and looking at the results now it’s clearly something that if you believe that, I think, Cameron could’ve achieved on their own. So, you highlighted CAMShale as one of success, can you talk a little bit about other areas where give us some examples of areas where Cameron is now achieving a performance that they wouldn’t have not been able to do on their own. I presume there are international markets that you’ve opened up for valve for that type of thing on the subsea side where you continue to crank pretty hefty margins, we hearing about pricing pressure, but sometimes it’s a little bit difficult to understand the difference between the pricing pressure and the lower cost solution. So, could you give us a few more data points around what you’ve done with Cameron? And how far you’ve come relative to what you had hoped for?

First of all, Cameron was always a well-run company. And I think, what we’ve done is, we’ve brought in to our overall global organization and manage to take a well-run company, and together with what we can offer on this make one plus one equals three, that’s the whole idea behind it. So, if you look at the various product lines of Cameron, obviously OneSubsea we have been involved with for a number of years already, and the momentum of that part of the business was already quite strong, when we took full ownership of Cameron. I think you’ve seen in terms of tender win rates and the margin performance that the whole thesis behind what we try to achieve with OneSubsea is really working. On the drilling side, it’s obviously a significant lull in the market, where Cameron drilling which was to a fair extent focused on the offshore market has seen a significant reduction in activity, but they’ve done I’d say an outstanding job in redirecting the portfolio and the capability set towards supporting our rig of the future efforts. And they’re in the process of finalizing all the surface rig equipment packages as well as being more focused on the BOP side for land rigs as well. So I think we’re really working very well together with the Cameron drilling side and rig of the future project to drive performance there. On the surface side, obviously the closer tied to our frac business, where we’ve ramped up significantly in U.S. land over the past couple of quarters is a very good synergy and benefit. And I would say on surface international, there are some core very good markets for surface in the international market, but at the same time, there are number of countries and huge markets for the rest of Schlumberger, where there is very limited presence of surface and we’re obviously attacking these as we speak. And finally on valves and measurement as well, very good, I would say synergies and performance up towards what we’re doing with the early production facilities and Cameron processing overall. So, I think, all of the product lines are performing very well. I’m very pleased with the management capabilities of Cameron and also how they are very seamlessly integrating with the rest of the organization.

Congrats on that both. I hand it back.

Thank you, Ole.

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

Yes, good morning.

Good morning.

Paal wanted to ask another question on SPM, with the growing book of business in North America, how critical are these projects to not only diversify the portfolio, but also showcase the various technologies and techniques that you can bring to the table to enhance production. During the prepared remarks Patrick mentioned the impressive results in the Powder River, are you at the point now where you can start the market results to other customers outside of the SPM initiative?

To answer the last part of the question first, yes, within what is agreed with our customers, we can use this to market it. Again that’s partly the background for Patrick’s comments today and we’re quite pleased with the performance of the project and the collaboration we have with SM Energy. So I would say that looking at the North America market SPM has an opportunity set in North America for sure. And I think both SM Energy and the talks are clear examples of that. Now the benefits we have in the North America land markets that we might not see in other land based fairly commoditized market is that scale really matters. So while we obviously we will look at SPM opportunities in North America getting scale behind our activities whether this is on frocking or drilling is also something that will help us perform better in these markets. But we are pursuing SPM in the North America land market as we indicated in our conference call in July.

But do you think the production enhancement benefits that you're delivering in the Powder River and hopefully in Canada. Do you think that can drive the broader sales effort in North America around your technologies and capabilities?

Yes absolutely, because I think what we are doing in these projects we can provide to other companies whether that is all the way from standalone products and services, consulting services, it could be also integrate and drilling services all the way up to SPM. So the main thing is the methodology and the principles of how we go about developing these reservoirs. And we are happy to engage with our entire customer base in the range of business models that we offer.

And how quickly do you think that that benefit can materialize? I ask because I often hear investors comment that the E&Ps particularly the larger E&Ps go around to the energy conferences and actually discuss how they're less reliant upon big service companies to execute in the shale plays. But if you can go out on these SPM projects and really showcase production enhancement it would seem a strong counter to this narrative.

No that's fair. But I mean we are there to serve our customers. And if customers belief that they can do a better job without us then we will obviously try to engage with them and ensure them what we can do, but if their conclusion is that they can do it in a different way than we don't want to have an argument about that. I think there are plenty of customers who are open to kind of listen to what we do. Some of them might be doing similar things already, in which case they may not need us. But I think there is a still a significant part of the customer base in North America land where we can have an impact. And that's what we pursuing.

Got it. And just a quick question on U.S. frac, the impressive growth during the quarter was that primarily just riding the growth plans with customers. Would you feel like you are often displacing less efficient frac companies that maybe experiencing some execution issues given the growth in the frac count?

Generally this quarter we have just continue to deploy along the frac calendar that we've already had established. Now there is as you continue to push pricing and as you know some companies perform better or worse, there is always a flux around what service company works for what customer. But generally we have been executing and implementing the targeted deployment plans that we already had established. So there hasn't been a huge move around replacing others as of this stage.

Got it, I'll turn it back. Thank you.

Thank you, Scott.

Your next question comes from the line of Waqar Syed from Goldman Sachs. Please go ahead.

Thank you for taking my question. My question relates to the Weatherford deal, could you appraise us of what the timing is on that deal and I understand there is a true up component as well. And could you comment in which direction the valuation could move on that deal?

I won't be able to go into the details of that other than the first priority that we have been working on is to obtain the U.S. Antitrust approval. And we work closely with the DOJ to get all the information to them that they require to make their decision. And we are optimistic that we will get the U.S. Antitrust approval during the fourth quarter. And as you mentioned, there are some ancillary agreements that we still need to work through with Weatherford. These agreements were all identified and laid out as we initially sign the deal. And we hope to be in a position to finalize these discussions and basically get all the agreements done by the end of the year. So going into any details of what those agreements cover and what we're discussing, obviously I won’t be able to do that.

Okay. And then just question on SPM investments in ‘18 based on the projects that you’ve already announced, what level of SPM investments do you expect in ‘18?

Patrick.

I mean obviously there is number of deals that we have announced depending on which particular project you look at whether there is production are not obviously the investment profile and whether or not that is generating cash from day one is quite different. Overall it is a business that we see growing and therefore we intend to continue to invest in it. So you should see a -- still an increase in SPM spending and it's all going to be a question of how many deals we do. I think that is important to keep in mind that we've obviously seen quite a few SPM deals continue in the last few quarters, it is unrealistic to believe that we are going to keep at this very high rate of deals continuously going forward, it is not necessary. So, what you will see as well is that as time progresses more and more of the projects are actually going to be generating their own cash flow. So, that is really the way that we see it going forward, it is a growing business and we'll continue to invest, it really depends a little bit on what is the total makeup of projects that we have finally in ‘18 and we're still working on doing a few more before this year is over.

So normally the run rate is around $150 million investments on a quarterly basis I guess that's the base level. So if for next year based on announcement should we assume more or like a $250 million kind of per quarter level, would that be reasonable?

I think it is reasonable to expect that it is going to be somewhat higher. I don't want to give you a number right now.

Okay, thank you very much.

Your next question comes from the line of Bill Herbert from Simmons & Company. Please go ahead.

Thanks, good morning. So another question on SPM, could you talk about Patrick the mix of business going for the mix of investments, the mix of projects that you expect to invest going forward on SPM?

Yes, so there is wide variety of things that we look at when we are taking SPM projects on. It is clear that we have had traditionally a fairly strong concentration in Latin America, which we wanted to make sure that we get a more global coverage, more in line with the overall footprint that we ask and where we see the opportunities. I think it is very clear that the way we invest in SPM is also related to where we have the strong footprint and where we have some excess capacity. Because one of the key things that we do in most of the projects that we take on is that we are investing in kind, meaning we are using our services to invest and get -- and earn a certain equity in the project. The bigger of a footprint that we have in a certain place the better we can use that to at a very efficient rate invest through our own services. So going forward, you should see us to more of a coverage of SPM projects around the world that is in line with our overall footprint and where we have largest Schlumberger operations, it is likely to have SPM opportunities as well. Now, going back to how we always have described SPM opportunities, it is the field that we are looking at where we are having an opportunity to do something different than what the current customer or owner of that field is doing. So, there is got to be a technical angle in which we see that we can improve what is currently being done. And we see opportunities today in just about every area, we see them in the Far East, we see them in the Middle East, we see them in North America. So, there is plenty opportunities at this moment and I would say think about more of geographical match where the Schlumberger footprint see us go a bit more into gas and I think that is probably the best way of describing it.

Okay. And then with respect to just staying on the SPM theme, again an improving kind of macro outlook and firming oil prices, that should lead to less of a need on the part of resource holders and less of a need on the part of Schlumberger given the fact that your asset employment for your global franchise should be improving, is that correct or no?

That's correct.

Okay. And then finally, you mentioned it in your upfront commentary Patrick that there was a lot of noise around Shushufindi and a lot of miss information, can you give us the magnitude of adjustment on the fee per barrel with regard to this project?

So clearly, as I’ve described that we’re continue to be very happy with what we have and I think that maybe the most important to take out of the commentary and how we describe the impact is that the tariff that we’re having on Shushufindi still fully makes the returns and margin that we expect from an SPM project. So, that is probably as close as I want to get in giving you a bit color around the reduction that we have seen there. It is a project that we’re pleased with and it fits very well within our portfolio.

Okay, thank you.

Your next question comes from the line of Jim Wicklund from Credit Suisse. Please go ahead.

Good morning guys. Thanks for fitting me in. Paal, you were talking on Ole’s question about performance based drilling and you do it now, but you haven’t done it with the rig. Can you update us on Eurasia, because if I remember correctly one of the points of owning Eurasia was the prime contract on a lot of Russian situations as the rig owner rather than in the U.S. it’s driven by completion, is that the case, is this a continuation of the trend and can you fetch us up where you’re in Eurasia?

Yes the rationale behind the EDC transaction is exactly as we said or described it for Borr, this obviously happens to be on land in western sub-areas as oppose to shallow water, but it’s exactly the same thing. It’s about driving drilling performance through our down hole drilling technology through the rig technology, but also through the entire one drill system including DELFI as I described earlier in the prepared remarks. So, the rationale is exactly the same. In terms of where we stand, we’re currently working through the requirements from the various Russian regulatory authorities, providing them with the information that they need to assess the application that we have to get antitrust approval. And I think the process there is moving along. We remain optimistic that we will get the ultimate approval, but our job at this stage is to provide the authorities with information that they need so that they can make their determination and their final decision. But, we remain optimistic that we will get this closed.

Okay. My follow-up, if I could, we’ve been asked this by a couple of investors, does the latest Canadian SPM investment in terms of what you’ve done and what you’re talking about doing, does that diminish the likelihood or magnitude of buybacks or dividend increases going forward?

Well, I will say on the way we’ve always planned to use our cash, the priority is always being to reinvest into the business, into projects and activities that are driving earnings and that are accretive to our returns. Beyond that, we’ve said that we’ll review dividends on an annual basis, and the balancing factor will always be buybacks. Nothing has changed to this effect. And we’ll review dividends in January and we’ll continue to be in the market to buy back stock, but we won’t buy back stock at the expense of not being able to do what we think is right, in terms of driving the growth of the underlying business.

Perfect. Thanks guys.

Let me add one thing about the Canadian project. The maximum cash exposure that we’ve announced, which you see the basically the amount we’re going to pay upon it is a maximum cash exposure, any future investment in the project will be mitigated by the cash flow that we will generate from the production of the projects itself. So, just to make it clear, the future investment in Torxen will be basically self-sufficient from the production that we’re going to generate from the project itself.

Okay, thanks guys it’s helpful.

Thank you, Jim.

Your next question comes from the line of Kurt Hallead from RBC. Please go ahead.

Hey, good morning.

Good morning.

Question I had for you guys, you referenced the 50% increase in FIDs and tenders, so I think that’s both in terms of number and then you mentioned contract value. I was wonder if you could give us some general size of that potential contract value and how you might assess your win rate on that contract value?

Yes, I don’t want to go into what the exact volume is in terms of contract value, but if you look at our win rates, obviously all of these contracts are highly competitive, but I’d say that I’m at this stage satisfied with our win rate. Our win rate in 2017 is somewhat up from what it was in 2016, it continues to be competitive. But we’re looking to balance out the pricing that we put into these contracts, which we will need to leverage for a number of years. At the same time having I would say the contract base and the growth platform we require to be in an optimal position as the international upturn starts. So, overall we’re spending a lot of time making sure that we treat every tendering opportunity with a maximum amount of attention and I think so far we’ve been quite successful in doing so.

Okay. And then your commentary around the tenders and the FIDs, you’ve referenced both land and offshore, and then on the offshore front, you had some commentary about shallow water. I wonder if you give us some perspective on shallow water, deep water, what are you seeing between shallow and deep on the tenders and FIDs going into next year.

I think it’s pretty evident that the shallow water is going to come back a lot quicker compared to I would say an overall ramp in deep water activity. So this is again partly while we have our focus on shallow water both from a Schlumberger drilling services standpoint, but also teaming up with the jackup providers like Borr to make sure that we are in the forefront of securing the work on these rigs as they start to ramp up.

Okay. And if I may squeeze one last one in here, so your referenced Paal a hardware ownership being critical to your strategy going forward, hardware is very generic term. So I was wondering if you could elaborate little bit more on hardware is it rigs, land rigs, offshore rigs, is it just equipment. So, just wondered if you could elaborate little bit more on that hardware element?

Yes, I agree hardware is a pretty generic term, but I would say that the current ownership that we have of hardware, I’m pretty happy with it. So, we are not going in to take full ownership of jackup rigs or floaters, we are taking ownership of our own internally developed land rigs. But beyond that we want to have relationships with jackup providers and potentially floater providers. But our focus now is on the jackups, and we have no intentions what so ever of going back into full ownership of offshore rigs.

Okay, great, excellent. Thank you so much, appreciate it.

Thank you.

Your final question today comes from the line of Chase Mulvehill from Wolfe Research. Please go ahead.

Hey, thanks for squeezing me in. I guess, first question, could you talk about the production margins in 3Q and the negative impact that you saw from the reactivations. Sounds like that some of that kind of comes out in 4Q, but maybe if you could kind of help us frame that a little bit.

Yes, the production -- I mean, if you look at what is reported the main impact on the incremental margins sequentially for the production group is what we refer to North America land, where we have had a pretty significant ramp up, both in the second and the third quarter. And this creates inefficiencies internally in terms of how we deploy, how we hire and also how we optimize our distribution network for all the products that we need to get into these operations as well. So, some bottlenecks were experienced in the third quarter, and we are basically working through this now and they should generally abate in the fourth quarter and for sure into the first quarter. So, we’re working through these things and I’m not overly worried about it, but there are some things to be sorted out, which we are actively working on as we speak.

Okay, thank you, Paal. One quick follow-up, I’m just kind of following up on Bill and Scott’s question around SPM, when we think about SPM kind of an U.S. onshore, are you trying to take advantage of excess service capacity or is it more about kind of better of penetration of technology. And if it’s the latter, what technologies do you think you’re able to exploit through SPM that are not through your traditional businesses?

I would say in U.S. land it’s generally looking to basically demonstrate what our technology and capability set can generate. So, this is all the way from well placement, drilling efficiency, frac placement and also overall how we complete these wells. So, it's most of these things we have generally talked to all our customers about already. The main thing is the ability to put this together into consistently delivering top quartile wells, which I think we’ve demonstrated through the example that Patrick descried today with SM Energy. So we’re just looking to be more of that and that could be in the form of SPM, but like I said earlier to be in any form of whatever contractual engagement our customers are looking for.

Great. Thank you, I'll turn it back over, thanks Paal.

All right, thank you very much. So, as usual I would like to close with a summary of the major points that we have discussed this morning. First, we have overall past few years created industry’s broadest upstream technology portfolio. Through the Cameron transaction a series of acquisitions, joint venture and partnerships with smaller technology companies and our own research and development efforts we have created an unparalleled technology platform, which is now ready for broad based system integration. Second, our long held views on the oil market are now being reinforced by data points that make us increasingly positive on the outlook and recovery for our global business. And last as the global E&P investments start to recover Schlumberger is uniquely positioned to outperform based on the strength of our technology portfolio, the capabilities of our global organization and the quality and the efficiency of the services we provide to our customers. That concludes our call for today. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.