SLB N.V. (SLB) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger earnings conference call. [Operator Instructions] And as a reminder, this conference is being recorded. I'll now turn the conference over to your host, Mr. Malcolm Theobald, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Kathy. Good morning, and welcome to the Schlumberger Limited Second Quarter 2012 Results Conference Call. Joining us on the call from Paris 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'd like to remind the participants that some of the information in today's call may include forward-looking statements as well as non-GAAP financial measures. A detailed disclaimer and other important information are included in the FAQ document, which is available on our website or upon request. [Operator Instructions] And now, I'll 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 $1.05. This is an increase of $0.09 sequentially and $0.19 compared to the same quarter last year. All prior period amounts have been restated, as the Distribution segment has been reclassified to discontinued operations following the sale of Wilson and the sale of our investment in CE Franklin. Oilfield Services second quarter revenue of $10.4 billion increased 5.3% sequentially. Pretax income of $2.1 billion increased 8% sequentially, while pretax operating margins improved by 50 basis points. Sequential revenue and pretax margin highlights by product group were as follows: Second quarter Reservoir Characterization Group revenue of $2.8 billion, increased 7.4% sequentially, and margins grew 223 basis points to 28.2%. These improvements were driven by a seasonal rebound in SIS, combined with strong performances in Testing Services and Wireline. In fact, every technology in the group experienced sequential revenue growth and margin expansion. Drilling group second quarter revenue of $4 billion increased 5.7%, while margin improved 107 basis points to 18.4%. These increases were largely attributable to the Drilling & Measurements and M-I SWACO on robust international activity. Second quarter Production Group revenue of $3.7 billion increased 5.6% sequentially, while pretax margin fell 117 basis points to 16.4%. The revenue growth was led by Artificial Lift, Completions and Schlumberger Production Management. The margin decline was largely attributable to our North America hydraulic fracturing business as a result of the spring break-up in Canada and continued cost inflation and pricing pressure in U.S. land. Now turning to Schlumberger as a whole. The effective tax rate, excluding charges and credits, was 24% in the second quarter compared to 23.6% in the previous quarter. We continue to expect the effective tax rate for a full year of 2012 to be in the mid-20s. However, this can vary on a quarterly basis due to the geographic mix of business. Net debt at the end of the quarter was $6.7 billion as compared to $5.8 billion at the end of Q1. This reflected an increase in working capital requirements to support the current and anticipated business growth. Other significant liquidity events during the quarter included $1.1 billion of CapEx, $681 million of acquisitions, $906 million of proceeds from the sale of the Wilson business and $499 million of stock repurchases. During the quarter, we repurchased 7.52 million shares at an average price of $66.30. CapEx is still expected to be approximately $4.5 billion in 2012 as compared to the $4 billion we spent in 2011. And now, I turn the conference over to Paal.

Thank you, Simon. Second quarter results continue to strengthen, driven by a solid growth in activity and by consistent focus on the quality and efficiency of our execution. In the international markets, overall revenue grew by 9% sequentially, while margins were up by 161 basis points. Activity showed strong sequential growth, both offshore and in key land markets, while service capacity tightened further, in particular, in the areas of seismic, wireline and drilling services. We continued to test pricing on smaller contracts during the second quarter with good success, and for some customers, we also secured work at pricing premiums due to the quality and consistency of our performance. In Latin America, revenue grew by 5% sequentially, while margins were up by 79 basis points. We experienced strong growth in Mexico, driven by IPM activity on land and by our Wireline and Drilling product lines offshore. During the quarter, the second round of production incentive contracts were awarded, where we, in partnership with Petrofrac, won the contract for the Panuco block, covering 4 oilfields in the north of Mexico. In Ecuador, equity -- activity was up significantly as we started operations on the production incentive contract for the Shushufindi field. The project mobilization has been flawless, and the work program is progressing on schedule. In Brazil, activity remained flat during the quarter. However, a number of new rigs are being commissioned, and we are ready for activity to ramp up in the second half of the year as the rigs become operational. There are still a number of large bids outstanding, which will likely be awarded in the coming quarters. In the Middle East and Asia, revenue grew by 7% sequentially, while margins were essentially flat. During the quarter, we saw further growth in rig and rig-less activity in Saudi Arabia, and we also saw a noticeable pickup in activity in the United Arab Emirates. In Iraq, activity growth in the second quarter was limited as predicted, while we went through a very active bidding period. Building on the execution track record we have established in Iraq over the past 18 months, we secured most of the key new contracts awarded. Resources for the new contracts were successfully mobilized during the quarter, and we are positioned for good growth in Iraq in the second half of the year. In Asia, China posted strong sequential growth on land, driven in part by seasonal pickup in activity. We are also seeing increased demand for our high-end services, as well as for IPM, as our Chinese customers embark on more complex land projects for both conventional and unconventional resources. In Australia, we saw strong seasonal pickup in offshore activity in the second quarter. The offshore growth is set to continue in the second half of the year and be further complemented by additional land activity in Queensland and start-up of a new project in Papua New Guinea. In Europe, CIS and Africa, revenue grew by 14% sequentially, while margins were up 356 basis points, driven by strong activity and execution. The North Sea posted significant sequential growth, both on the U.K. and Norway side, with continued good exploration activity and strong growth in development. In Libya, activity continued to ramp up as new rigs became available, and we returned to double-digit profitability during the quarter. Sub-Sahara Africa growth was driven by high exploration activity in Mozambique and Tanzania, as well as strong exploration and development work in Nigeria and the Gulf of Guinea. In Angola, activity remained more or less flat this quarter, but we expect both exploration and development projects to continue to ramp up during the second half of the year. In Russia, we saw seasonal pickup in activity, both in Sakhalin, the Caspian and Western Siberia. And based in the current outlook, Russia remains on track to be one of our fastest growing markets this year. In North America, sequential revenue was down 2% and margins were down 208 basis points. The results were impacted by the Canadian break-up and the U.S. land hydraulic fracturing market, but were partly offset by our other U.S. land businesses and by our activity in the Gulf of Mexico. In U.S. land, the overall rig count remained more or less flat, while rig moves from the gas basins to the liquids-rich basins continued. Pricing and activity for our Wireline, coiled tubing, and Drilling businesses in U.S. land remained stable. The impact of the Canadian break-up was in line with expectations, and the Canadian rig count was, at the end of the quarter, at the same level as last year. In the Gulf of Mexico, deepwater activity grew in line with our outlook for the year and our operational performance remained strong and consistent, while multiclient sales were flat sequentially. As we predicted, the downward pricing trend in the hydraulic fracturing market continued in the second quarter and also spread to other liquids basins. During the quarter, hydraulic fracturing margins declined further as a function of lower pricing and higher product costs. Let me now turn to some of the technology highlights for the quarter. In the Reservoir Characterization Group, WesternGeco introduced the IsoMetrix technology, a new class of marine services that measures the wavefield in 4 components, using a new streamer called Nessie-6. The output data corresponds to towing conventional streamers less than 10 meters apart, turning a 12-streamer vessel into the equivalent of 144. The result is the industry's first real 3D seismic measurement, and the resolution of the data is like moving from a 2D X-ray to a 3D CAT scan. IsoMetrix will be able to extend the role of time-lapse 3D surveys, enable wider tow patterns that record superior data for exploration, as well as eliminating the need for dense streamer spreads. This summer, we will also release the latest version of our new reservoir simulation software, INTERSECT. Schlumberger has collaborated with Chevron for over a decade to build, test and deploy INTERSECT, and Total has recently joined the collaboration as a full partner. INTERSECT represents significant advances in physics modeling and use of parallel computing to better represent complex subsurface structures. It also includes a more advanced and comprehensive field management framework. In the Drilling Group, we introduced the NeoScope logging-while-drilling service, which eliminates the need for chemical sources by using pulsed neutron generator technology. The NeoScope service offers a full suite of sourceless formation evaluation measurements, as well as well placement and drilling measurements that help optimize the drilling process. During the quarter, we also bought the remaining shares of the Russian company Radius Service, after having been a minority shareholder for the past 7 years. Radius Service is the market leader in engineering, manufacturing and service of downhole motors and drilling tools in the Russian land markets, employing around 1,000 people and operating in all major oil and gas producing regions of Russia. In the Production Group, we introduced the Mangrove stimulation design software that enables better decision making for well completion and fracturing programs. The software helps optimize perforation and stage design for horizontal wells using reservoir measurements and also includes fracture network predictive models. Developed on the Petrel software platform, Mangrove users can access the shared earth model to facilitate program designs for all types of reservoirs, including unconventional resources. During the quarter, Framo Engineering secured another major contract, this time for the Shell Draugen Field in the North Sea. As the clear leader in subsea boosting and metering, Framo now represents one of our fastest growing business units, with around 75% annual growth in 2012 and with a backlog at record levels. Let's then turn to the macro-environment, where the continuing Eurozone crisis, coupled with the disappointing numbers from China and the U.S., has led to downward revisions of the outlook for GDP growth and oil demand. High production output from OPEC also led to a period of crude inventory buildup during the quarter, which, together with fares [ph] or lower demand, brought Brent crude prices briefly below $90 before recovering. At the same time, global spare capacity for oil is at the lowest level for 5 years and there continued to be risks of potential production disruption from geopolitical events. The situation in the global economy remains unsettled, and it seems increasingly clear that the present macro uncertainties will remain for a considerable period of time. In this environment, we believe Brent crude prices, in general, will be supported around current levels, although they could be subject to periods of considerable volatility. Continued macro uncertainty coupled with price volatility could make customers more cautious in terms of future activity plans. However, in the international markets, we have seen no signs of this so far. We maintain, absent a future significant setback to the world economy, our stated view that international activity will grow in excess of 10% this year. In North America land, liquids-based activity continues to grow, offsetting the drop in natural gas activity and keeping the overall U.S. land rig count more or less flat so far this year. However, a WTI oil price in the low 80s with continued market uncertainty could impact the rate of growth in liquids activity in the second half of the year, although we have not seen any signs of this so far. In terms of natural gas, we expect the U.S. dry gas rig count to level off around 500 rigs until the current production overcapacity is consumed. In the midst of the uncertainty, we maintain our focus on what we control, which is the planning and execution of our work. To further extend our leadership in execution, we are currently undertaking a number of multiyear programs that cover a wide range of internal and external activities. These, together with our international strength and our balanced portfolio in North America, should enable strong relative performance going forward. Thank you very much. I will now hand the call over to Malcolm for the Q&A session.

Thank you, Paal. And we'll now open the call for questions. Kathy?

[Operator Instructions] Our first question will come from Kurt Hallead with RBC Capital Markets.

So my question here really relates to very good sequential improvement in North America, despite the significant headwinds in the frac market as well as the seasonal downtick in Canada. Gulf of Mexico was flat. Seismic didn't really contribute much. So really, I was surprised by the strength of your other businesses in U.S. land. And given your outlook for the second half of the year, do you think it's reasonable, even in a flat rig-count environment, that Schlumberger can continue to show sequential improvement in the back half of the year, both in revenues and margins in U.S. land? And can you give us a little bit more color around what's really driving that improvement?

Well, just to clarify, the Q2 performance, we had very good performance in the Gulf of Mexico, the rig-related businesses, while the multiclient sales were more or less flat with Q1. So I would say that the Gulf of Mexico had a positive impact on the overall results, while multiclient sales were basically flat. Now we also had steady activity in pricing in the Wireline and Drilling businesses on U.S. land, while the Canada break-up impact came in as expected. So the main downwards pressure we saw in addition was the continued pricing and cost challenges in hydraulic fracturing. So whether the nonperformance from our side on U.S. land is sustainable, I think it's too early to say. I think it's going to be mainly a function around what the rig count is going to be. I think it's very clear that the hydraulic fracturing margins are going to continue down in Q3. We are still bidding lower in the liquids basins as of today. So if you look at it, both liquids and gas pricing is now about 20% down from the peak, and quite a few of these contracts have not yet been implemented. So I would say the liquid -- the margins in hydraulic fracturing is coming down. And to what extent we can offset that will obviously be a function of continued activity in the Gulf of Mexico, and we are heading into the hurricane season, which also brings some uncertainty. So we're obviously well positioned to offset the hydraulic fracturing, but to what extent we can do it is still a bit uncertain.

Okay, great. And you had some significant great performance in Europe, Russia and Africa. It seems like it was pretty evenly distributed. In the second half of the year, you've mentioned that Russia is going to be your fastest growing market. How would you characterize the North Sea and Africa relative to Russia as you head into the back half of the year?

Well, I said that Russia -- as we indicated at the beginning of the year, we had identified Russia to be one of our fastest growing markets. What we said was that within ECA, sub-Sahara Africa offshore and the North Sea offshore would be significant growth drivers. We continue to see them as strong growth drivers in the second half of the year. And at the same time, in ECA, we had North Africa land and Russia land generally as strong growth drivers as well, and we maintain those views. Now all these growth outlooks and expectations, we have to tie in this whole, overall macro uncertainty, as I mentioned in my prepared notes. But overall, the market progressed in Q2 as we were expecting in the international market, and ECA, I think, did slightly better than what we were expecting.

Our next question comes from James West with Barclays.

Well, I wanted to ask you a question about one of the comments you made towards the end of your prepared statements. You were talking about, I guess, in the press release and your comments, about the solid execution for the quarter, which was pretty obvious in the numbers. And you highlighted additional actions to really extend this leadership position. You already have, of course, industry-leading margins in North America, it looks like now, and of course internationally. And I'd like, I guess, if you could perhaps elaborate on what these both internal and external actions may be, and if possible, what kind of additional leadership that could add to your margin profile.

I'll give you a brief outline of what they are. So generally, they are focusing on both operational quality and operational efficiency. So I think we mentioned earlier that we've had a strong focus on the quality of operations now for a number of years. Actually, we started this Excellence in Execution initiative back in 2008, driving quality. And if you look at our nonproductive time in our worldwide operations at this stage, we are now about 50% down compared to where we were when we started off back in 2008. And this is driven by the engineering and manufacturing of our products and making these more reliable. It's also driven around the investment in training and competency management and also a very strong focus on project preparation and process discipline. What we have augmented this Excellence in Execution drive with recently, or more recently, is the initiatives around operational efficiency or cost management, right? So this revolves around global supply chain and category management. We have a significant part of our organization occupied with shared services and transactional activities, and also things around asset utilization and global distribution. So all these elements, given our size and our footprint and our reach, represent a significant part of our cost base. And by driving efficiency even in small percentages with such a sizable organization, has a direct -- quite a meaningful impact to the bottom line, right? So -- but I would say that most of these or all these projects are multiyear projects, and you will see gradual impact over time.

Okay, okay, that's very helpful. And then just one follow-up on the pricing side. You elaborated on gaining some pricing traction in the market and getting a premium for some of your services. Did we see the benefits of that in the second quarter? Is that going to be second half and '13? So I guess what I'm asking is, is there more margin uplift from pricing coming?

Well, we saw some impact of, I would say, international pricing in the quarter, right? So I indicated in the Q1 call that we saw pricing sentiment starting to turn more positive. And I think that trend continued during the second quarter, also driven by strong growth in activity, which leads to further tightening of capacity. We continue to test pricing on these smaller contracts with actually quite good success rate during the second quarter. And also, we saw more technology sell-up within the existing contracts, which has a quick fall-through to the bottom line within the current quarter, right? I would say the other key thing that we observed during this quarter is that the high offshore rig rates and in projects with tight project schedules, we see our customers elevating their focus on operational excellence and willingness to actually pay for it, right? And this enabled us, in some cases, to win contracts at very good pricing premiums due to the quality of our performance. So Q2 was a step in the right direction, provided that the macro uncertainty doesn't have a negative impact going forward. I think it's reasonable to believe that this could continue into the second half of the year.

We'll go next to Ole Slorer with Morgan Stanley.

Paal, I have to just get a little bit more color on that very last thing you said there, win contracts with -- despite considerable pricing premium. Could you just elaborate a little bit? Is this -- how wide and what technologies? And where do you see this ability?

Well, in the contracts where we manage to secure a contract at pricing premiums, a lot of this has -- revolves around, I would say, Wireline and the Drilling segments. So this is -- in terms of the number of them, I mean, it's not prolific around the world yet. But at least we see a correlation between higher rig rates and more focus on operational excellence from our customers, where the actual pricing they pay for our services versus the negative impact of poor performance from the services they buy, they put a lot more focus on that.

Whereabouts -- any geographic nature to this? Any area where this is more common?

Now, you would typically see this in highly complex offshore type of operations around the world...

[indiscernible] your competitors make some very aggressive claims with respect to market share gains, whatever. Are we seeing certain competitors not being able to perform? Is that it, people are out of capacity and not able to execute what they have taken? Or are there other reasons?

Well, I don't know what the drivers behind their results, but I would just say that we continue to replace our competitors on key projects and on key rigs. So this whole focus around operational integrity and quality is, I would say, is now become quite a significant market share driver. So we've been quoting this D&M replacement ratio number over the past couple of quarters. And that number, again, this quarter, was 39 to 6. So we replaced our competitors 39 times. We were replaced 6 times. So that ratio is maintained. And I would say that the driver behind that is being able to perform within the contracts that you initially win. So the key is to win the contract on reasonable pricing to allow you to invest and perform. That's really the only way to maintain the contracts in the international market.

And you're doing that with incremental pricing power?

Oh, yes, we are not going in to replace our competitors at their pricing or at the average pricing. We need a premium to do that.

Just then to my real question, which was actually more about North America. Did you get helped sequentially by multiclient sales or any other kind of factor that artificially -- not artificially, but more one-off type kind of goosed up your North America margins?

No, multiclient sales in North America were flat sequentially. So we had strong performance in the Gulf of Mexico in terms of the deepwater operations overall. And that obviously helped, but it wasn't -- there wasn't a significant boost. We were hoping to see a significant boost around the June lease sales. That did not really materialize. So multiclient sales were flat sequentially. So there weren't really anything exceptional in North America this quarter.

And then finally on IsoMetrix, I mean, you're creating quite a stir in the industry now with this technology. Can you talk a little bit about the testing phase implementation of this technology adoption? I presume given this is, I think, the biggest R&D project in the history of Schlumberger, you want a big -- you want to be paid for it. So what do you think the customer willingness will be to pay up for something that is traditionally viewed as a commodity?

Well, it's a bit early to say what they're willing to pay for. You're right in saying that this is one of the biggest engineering projects we have undertaken as a company. And with those kinds of investments and with the value that this technology is going to bring, we obviously want to be paid a fair price for that in relation to what value it brings. So our plan for this year is that we are going to run one vessel with the IsoMetrix streamers on -- or the Nessie-6 streamers on, and then we will do a ramp-up next year. We haven't really finalized the plan for CapEx investment in this for next year, but I'm quite confident that we are going to be able to get a good pricing premium on this technology in the market.

Your next question is from Bill Herbert with Simmons Company. William A. Herbert - Simmons & Company International, Research Division: Continuing with the seismic theme, Paal, positive outlook extolled by everybody and yet the WesternGeco backlog was flat quarter-on-quarter. How do we reconcile those 2?

I don't think our backlog was flat. William A. Herbert - Simmons & Company International, Research Division: It was flat to up. It wasn't up markedly, I don't think, I mean, perhaps -- yes.

Okay. Well, I don't really have any specific comment on the backlog other than we maintain quite a positive view on the outlook for the market. If you look at the Q2 results, they were pretty much in line with what we were expecting. We took the opportunity to reposition some of our vessels and also to do some dry dock maintenance of them. But beyond that, utilization was quite good. Looking forward to Q3, we are now fully sold out, and we're actually also already 60% booked for Q4. So the main question mark this year has actually been, "Are we going to avoid the seasonal lull that we typically get in Q4?" And at this stage, I think we have a reasonable chance of avoiding that with being so much booked already. William A. Herbert - Simmons & Company International, Research Division: Great. And then were -- was seismic, in the second quarter internationally, was it additive to margins, to overall international margins in Q2?

We don't really give details of this, right? So I would just say that the -- there was a good progression of seismic performance between Q1 and Q2. But in terms of specifics on margin and percentages, we don't disclose that. William A. Herbert - Simmons & Company International, Research Division: But that should continue in the third quarter, especially with a strong North Sea season and also beginning to get traction on your P&L with regard to pricing. I mean, is that fair?

I think that's fair, yes.

We now have a question from Jim Crandell with Dahlman Rose. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: Paal, I'd like to ask a different question about the seismic business. Is -- how far out can you see now for tightness in marine seismic supply, demand? What is this meaning to pricing currently? And then -- so the last piece of that is, what are your plans in terms of adding new marine vessel capacity to the market?

Okay. Well, if you look at our visibility in terms of bookings, beyond Q4 we don't really have any clear visibility on how the quarters are going to shape up. But I would say this year looks strong. If you look at the total market of high-capacity vessels today, total market is around 62, out of which WesternGeco has 16. So we are seeing that there is overall new-build from several of the players, of which we have 2 new-build vessels coming online in 2014. So our view on new-builds is twofold. We will add capacity if we can get the needed utilization. But we also have a vessel replacement program, which is basically retiring some of our older vessels and replacing them by new higher capacity ones, right? So depending on where we are in 2014, when the these new vessels are becoming available, we will make a call on actually whether we extend the life of the ones that we have or we actually retire them and maintain capacity flat. So it's all about ensuring utilization in marine seismic. And beyond that, we obviously want to make sure that we capture some of the upside of activity, if that was to materialize. But at this stage, I would say that we have a positive view on this year, and provided that there's no dramatic change to the overall market, that should spill into 2013 as well, most likely. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: How is pricing on new contracts, Paal, for -- that you've been able to sign for start-up in Q3 and Q4?

Pricing is similar to what I said in the Q1 call. We are bidding more or less 10% up year-on-year. You will still find in Q3 that you'll have a mix of contracts bid last year and contracts bid this year, right? So you won't have that full 10% impact on the P&L, but overall again positive sentiments on seismic. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: Okay. And then just my follow-up question, Paal, is you and particularly others have mentioned the price competitiveness of the deepwater LWD and Wireline markets. And, I mean, it's ironic to me, in a way, that the segment offering the highest technology should be among the most price competitive parts of the market. Can you see this changing over the second half of the year with even more new rigs starting up? Or do you think that this, I don't know, could be the new norm for the couple years, that this segment is just going to be highly price competitive because, maybe, of the desire of some of your competitors to maintain/increase market share?

Well, I wouldn't generalize competitive pricing in the overall deepwater market. If you look at our position in the deepwater market, whether it's for Drilling & Measurements or Wireline, this is where we have the highest pricing and the highest margins of these type of businesses. So in some of the large contracts revolving around this, there might be quite competitive bidding. But overall, our deepwater business for both of these segments is highly accretive to our margins.

We now have a question from Bill Sanchez with Howard Weil.

Paal, I just want to circle back again on the -- to see if you could put some context around the small contracts comment internationally, and maybe just, for us, what that means for Schlumberger as we think about these contracts kind of as a percentage of your revenue internationally, because I think the market really focuses a lot on the large competitive bid tenders. But my understanding for you is that, really, that's a relatively small part of kind of the international global picture, if you will, in terms of from a revenue contribution. So I was hoping maybe you could talk a little bit about the smaller contracts and how that affects your revenue stream. And also just talk about, within this pricing comment, do the contracts, typically on these smaller contracts -- are they shorter term in nature internationally than what is typically believed as being 2, 3-year type contract terms in the international market in general, so you get quicker terms on these smaller contracts as we think about pricing escalation opportunities in future quarters?

Well, if we start off with the first part of the question. The large contracts, as you say, or the ones that have been quoted in previous quarters, they make up, I would say, less than 20% of our overall contract volumes. So they are significant in terms of their size and duration, and they're often very strategic to secure. But as an overall part of the volume, it is not that big, so -- which means that it's the smaller contracts that make up more of a significant part of our international portfolio. The duration of these contracts vary a fair bit. It could be one well; it could be one project. So it's a bit difficult to quantify exactly what the average here is, right? But generally, they will be multiyear, typically, unless you're just bidding for one particular exploration well.

Okay. And I guess maybe this question is for Simon, just is a question on Geco. It's been for several quarters since you all have broken out what the revenue contribution is in absolute terms from Geco. I think the last time you guys were reporting on a quarterly basis, it was running on an annual basis somewhere in that $2-billion to $2.5-billion range. I mean, still given just the tailwinds in that business and the optimism around it, are you all able to size for us, Simon, where that revenue stream kind of stands right now for Schlumberger as a whole?

Well, you can assume that it is growing slightly. It is more or less what you mentioned, but the growth is reflective of the rest of the business, yes.

Okay. And you'd say it's probably growing at a higher rate -- a higher top line rate than maybe some of the other businesses.

It is higher than some of the other businesses, but overall, it's reflective of what we are experiencing with the Oilfield Services.

And we'll go next to Michael LaMotte with Guggenheim.

And, Paal, I wanted to follow up on your -- you've mentioned uncertainty a few times with respect to outlook, and yet when I think about the volume of business in the second half and even into early '13 that's offshore, you've got pretty long-term commitments in terms of operator commitments to the rigs. Can you, perhaps, clarify what you mean by uncertainty? Are you really speaking to black swan event, something like we saw in '08, or something more -- a more marginal degradation?

Well, I think it's all relative, right? I would just say that the -- in the event there is a significant event in the global economy, whether that is linked to China or Europe or it could be geopolitical, that could have an impact on -- even on shorter term activity, if cash flow comes into question. But I agree with you. In international markets, a significant part of the contract base is longer term and generally should be robust. But we saw significant volatility in the second quarter in terms of the global markets. And that volatility could bring some more caution into some of the -- some of how the operators, how they plan to go forward with activity. Now we have not seen any signs of change or any difference in plans versus what we had a quarter ago. But I think there is significant market uncertainties in the global market, and I think it's just prudent to point that out.

Okay, fair enough. And the Excellence in Execution, help me delineate down 3 tracks in terms of what you're doing on internal processes with respect to procurement and supply chain management. There's also the focus on field efficiencies through the asset-light model and even selling and leasing queue as opposed to using your own crews. And then the technology route, like the highway or if we go back in time, something more like Platform Express, where I'm going with this is perhaps if you could maybe allocate what you think in terms of contribution by each of those 3 buckets and give us a sense as to whether this is really something that can continue over time, or whether it's something that's going to be quite lumpy and dramatic in one period and then stabilize and stair-step.

Well, I would say all 3 elements, whether this is, like you say, technology -- I mean, technology has always been a key part of how we generate value and how we [indiscernible]. And the 2 other ones, which are more the shared services and supply chain part, as well as the field operation and utilization, the latter 2 has, I would say, still significant upside given the size of our global operations. So these multiyear programs I'm referring to, I believe they will be meaningful over time. But they're not going to have any dramatic quarter impact this quarter or next quarter or so forth, right? It's going to be part of a continuous improvement process where we put a lot more focus, and I would say scientific approaches, into some of the other parts of the company rather than just the technology that we develop and that we deploy for our customers. So there is significant upside in terms of how we run as a company for those internal aspects. And these are initiatives and programs that we are going to be carrying forward for the next 3, 4, 5 years, and they would have a gradual impact in terms of our results.

So it sounds pretty uniform across all 3, if I could sort of rephrase it. And the kind of trend that we've seen, which suggests 150 plus or minus basis points per annum, is reasonable to assume going forward.

Well, I'm not going to give you any margin other [ph] than [indiscernible]. You knew that, didn't you? But I would say that we are continuously focused on driving our margins up, whether that is pricing, technology or these other efficiency programs.

We have a question from David Anderson with JPMorgan. John David Anderson - JP Morgan Chase & Co, Research Division: A question on Latin America. Paal, you guys seem to be in a really great position relative to your competitors down there. Just hoping you could help me understand a little bit more about the growth opportunities you see evolving over the next 12 to 24 months. I guess, there's 3 areas in particular -- and correct me if I'm wrong, but it seems like there's 3 main areas for you guys. First is production management contracts. You just announced another one starting up in Ecuador and the Mexico contract. Second would be Brazil, kind of how the pre-salt is evolving and all the contracts letting out. And the third would be Argentina. Obviously, what's going on with YPF and kind of the uncertainty around there. Could you just kind of address those 3 areas for us and how you see them evolving, please?

Yes, sure. So I can take you quickly around the main countries there, right? So if you look at Mexico, I think Mexico has, so far this year, been one of the main drivers for Latin America for us. And going forward, we see further rig additions on land and shallow offshore in the second half of the year. Pemex is evaluating the Eagle Ford south extension as well and there are some both shale gas and shale oil pilots upcoming there, and we are engaged there with our shale workflow. As we mentioned in the prepared remarks, we also won the Panuco block, together with Petrofrac, in the second round of production incentive contracts. So overall, Mexico, with both the IPM activity, the individual products and services we do with Pemex, as well as these production incentive contracts, provides a very strong basis for growth and performance going forward. If we jump to Brazil, we see deepwater rig counts growing in the second half of the year. It's been relatively flat-ish in both Q1 and Q2, as a number of new rigs were arriving and being commissioned. So there's still, I would say, strong growth likely to take place in Brazil in the second part of the year. And a key, again, in Brazil is going to be linked to the outcome of these significant bids that are still under evaluation from Petrobras. In Argentina, we also maintain, I would say, a good activity outlook, driven by both the shale gas and shale oil, as well as on the conventional. There's some short-term uncertainty as the situation around YPF settles, but I would say that medium to longer term, our view on Argentina is still positive. And then the other one that we -- I think you referred to is Ecuador, where we are very pleased with how the start-up of the Shushufindi SPM project has progressed. And the activity in Ecuador, both on this project, Shushufindi, as well in the general market there, is going to continue to ramp up in the second half. John David Anderson - JP Morgan Chase & Co, Research Division: If I could just go back to Brazil. Have you seen much of a change in how Petrobras is going about their business with a new CEO, Graças Foster, in place? I mean, is there a sense that pricing might be getting a little bit better? Is there a sense that maybe technology is going to be more of a focus? What are you seeing out of them, kind of late -- over the last 6 months or so?

Well, I wouldn't say that there has been a significant change in how they go about doing their contracting. I would say that is generally because most of these bids have been in process throughout that period, right? So if there's going to be any change, I would expect that to maybe be in the next round of things, although they haven't really indicated anything. So I think the way they're going about their business in this bidding round is similar to what they've done in the past. John David Anderson - JP Morgan Chase & Co, Research Division: So really no change in pricing. Pricing still kind of challenged right now. You're hoping to get in there, show them -- show you can do the performance and hopefully the next round, you get better pricing. Is that the strategy?

Well, we always, in any bid that we submit, we will bid it at the level that we can make the contract into a productive contract for Schlumberger and our shareholders. So there's a plan of how we can perform within the contract in terms of execution. And also, we have a very rich technology portfolio in terms of what we will introduce over the next coming years. And some of these Petrobras contracts could be off to, what, 6 to 8 years, right? So there's a significant new technology component of these contracts as well going forward. John David Anderson - JP Morgan Chase & Co, Research Division: And these bids, you're expecting to be awarded -- is it third quarter time frame for some of these bids?

Well, Petrobras hasn't really given us any timeline, so we will await when they announce.

We now have a question from Nigel Browne with Macquarie.

I just had one question, more product related. I wanted to know in terms of North America and internationally how impactful was your Artificial Lift and rotary steerable product line? And then, following on that, what is your estimation about the penetration of rotary steerable drilling systems in North America versus some of the more conventional techniques?

Well, we don't really provide details of -- by segments. If you look at Artificial Lift, that is part of the Production Group. So really, the only detail I can refer you to is the Production Group results. And furthermore, we don't provide specific details around technologies as well, and rotary steerable being one of them. I would say, though, on rotary steerable in North America, our new PowerDrive Archer technology, which we have introduced recently, has been, I would say, tailor-made for the North America land market with the high build rate that it can provide. So I would say that the penetration of rotary steerable in the North America land market, at the back end of that technology, should go up from our side. But beyond that, I won't be able to provide you with any more details.

Okay. But even anecdotally, are you seeing any sort of leading indicators or queries around electric submersible pumps in North America at all?

On land?

Yes, on land.

On land, generally, there are other type of pumps employed in the North America land market, if you're referring to unconventional, not really ESPs.

Okay, so it's still a rodless market predominantly.

Predominantly, yes.

We now have a question from Doug Becker with Bank of America Merrill Lynch.

Paul, you reiterated your expectation that international activity would grow in excess of 10%. If we take a look at the Baker Hughes rig count, it's implying a first half increase of around 5% year-over-year. Just trying to get a sense, is this consistent with a very aggressive ramp in the second half of the year? And is that Schlumberger's expectation? Or is there just a measurement difference in what you're looking at versus the Baker Hughes rig count?

I think it might be a slight measurement difference. I think you'll see that the offshore rig rate will be, at least the way we see it, will be up more than what the land rig rate -- sorry, land rig count is, right? So you will have more growth in offshore versus land. And the impact of the offshore is, obviously, significantly higher to our -- both our revenue and our margins, right? So I think you need to break it down to offshore and land.

Makes sense. And since we have pretty good visibility into the offshore rigs, I mean, is there a potential that this significant ramp in the offshore rigs, we finally see the scales tipping in favor of the service companies for pricing power? Or is it because this growth is pretty well anticipated, still the slow grind higher?

Well, as I was referring to earlier, there is a tie between higher rig rates and more focus on operational excellence in the way our customers select their providers. So I would say that higher rig rates tied to utilization will potentially create more potential for us to raise prices and to get some of the value back for the strong performance that we deliver.

And then switching to Europe, Africa, CIS. I just want to get some sense for the sustainability of revenue and margins there. A very strong quarter. I haven't heard anything that would suggest that we should see any type of pullback in the third quarter. I guess execution is always an issue. But is there anything that would suggest the second quarter revenue and margins aren't a good base to be thinking about going forward in Europe, Africa, CIS?

No, I would just say, with the exception of the overall macro caveat that I've referred to a couple of times, there is nothing exceptional in the results of ECA this quarter. So if the activity remains on track the way we have predicted it during the year, this should potentially continue in the second half of the year.

Are there still synergies associated with the Eurasia, I guess I'll call swap? Or have those largely been realized at this point?

Well, the overall integration of what we received versus what we sold is more or less done, so that part of synergies and the transaction is done. The other part of this is that this has given us access to significantly more land rigs in Western Siberia, to the point that we are extremely busy on land in Western Siberia, and we are actually struggling at this stage to have enough capacity to serve all the rigs. So there is still, I would say, performance upside surrounding the transaction we did with Eurasia as we continue to ramp up to cover all of their rigs.

We have a question from Robin Shoemaker with Citi.

I want to ask about the investment you made recently in Anton Oilfield Services as a strategy for China. But more broadly, in what countries or markets you think that having stake in a local service company is the route that -- one of the major routes that you'll use to grow in that market?

Well, if I attack the second part of the question first. I think in the high-volume markets, the key high-volume markets around the world, there is often a benefit of owning or having interests in local companies, mainly because they know the local conditions, and in some cases they have technologies that are more custom made for the local environment, right? And we have some of these companies in North America. We got them with the Smith transaction. We have, over time, acquired a number of these types of companies in Russia. And we have now taken a stake in this company in China.

Okay. So let me just switch my other question back to North America. In terms of -- I think most of your fleets are -- your fracturing fleets are working in the term market as opposed to spot contracts. But is there a tendency over time for fewer term contracts to be signed, more fleets working in the spot market? And is there a level of pricing at which you would idle -- have -- prefer to have your fleets idle as opposed to working in -- at very low spot market rates?

Yes, so today, we operate roughly around 80% in terms of term contracts. The remaining 20% will generally be fleets that are in between, I would say, in between work. So generally, at this stage, we'll be happy to go more or less to 100% term contracts the way it is set up. Is there a limit as to what pricing we would take on? I would say that we are not really in the business of taking on loss-making contracts. So that's where generally we would draw the line at this stage.

Okay. And do you have any idle fracturing fleets in North America now, or purposely or due to market conditions?

Well, if you look at what we've done in North America, we have completed the repositioning of our fleet and we have stopped further CapEx additions. And what we have done in addition to that, we have parked the excess pumps that we have at this stage. And the reason why we have excess pumps, we're not running fewer crews than what we did 3 or 6 months ago. But with the continued transition of activity from the dry gas basins to the liquids, the number of horsepower needed on a liquids job is significantly lower than what you need on a dry gas job. And that's why you -- while you run the same number of crews, you will have actually excess horsepower. And that's really what's driving the oversupply in the markets. So we have parked those pumps because we have no need for them.

And our final question will come from Michael Urban with Deutsche Bank.

On the international side, good rundown of a lot of the markets, and it seems like most international markets are strong, if not accelerating. Are there any markets out there that are still weak or underperforming or maybe not where you'd like them to be?

In the international market?

Yes.

No, not really, nothing that stands out. I think we have -- we see good performance versus the overall plan that we put in for this year throughout, more or less. So no, there's nothing that really stands out.

Great. And then finally on Russia, specifically, you've highlighted it as a very good market for you, and it seems like you're continuing to invest in the market. Are you -- is that more a function of just the higher volumes and the higher activity levels you're seeing? Or are you beginning to see better technology uptake there? I kind of think of Russia as maybe a little bit more volume driven, lower technology, perhaps with exception of things like Sakhalin.

I think, historically, you're right. And largely in the Western Siberia land market, it is relatively low technology or local technology still today. But there is -- I would say there is a continued drive to upgrade some of these land rigs to higher capacity. And this provides a lot more opportunity to deploy more high-end technology, right, so -- which for instance, the transaction with Eurasia, where we have significantly opened up the rig footprint that we have available to us, as the technology needs grows on these rigs that they over time get upgraded, that is again a significant opportunity for us to drive [indiscernible] deployment on the, I would say, the basic footprint of Russian technology that we have acquired over the past decade.

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

Thank you. And, ladies and gentlemen, this conference will be available for replay after 10:00 a.m. today through midnight August 20. You may access the AT&T executive playback service at any time by dialing 1 (800) 475-6701 and entering the access code 246811. International callers dial (320) 365-3844 using the same access code, 246811. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.