SLB N.V. (SLB) Q4 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger Earnings Conference Call. For the conference, all participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions) And as a reminder, today’s call is being recorded. With that, I will turn the conference now over to the Vice President of Investor Relations, Mr. Malcolm Theobald. Please go ahead.

Thank you, John. Good morning and welcome to the Schlumberger Limited fourth quarter and full year 2013 results conference call. Joining us on the call today are Paal Kibsgaard, Chief Executive Officer and Simon Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paal. Simon will first review the financial results and Paal will discuss the operational and technical highlights. However, before we begin with the opening remarks, I’d like to remind the participants that some of the information in today’s call may include forward-looking statements as well as non-GAAP financial measures. A detailed disclaimer and other important information are included in the FAQ document, which is available on our website or upon request. We welcome your questions after the prepared statements. And now, I will turn the call over to Simon.

Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. Fourth quarter earnings per share from continuing operations, excluding charges and credits was $1.35. This represents an increase of $0.06 sequentially and is $0.31 higher when compared to the same quarter last year. During the quarter, we recorded a $0.09 charge relating to a provision of accounts receivable in connection with the client in Brazil who filed for bankruptcy during the quarter. Fourth quarter revenue of $11.9 billion increased 2.6% sequentially. Of this $298 million sequential increase, the vast majority came from the year-end surge in software product and multi-client sales that we typically experienced in the Q4. Oilfield Services pre-tax income of $2.6 billion increased 4.3% sequentially. Pre-tax operating margin increased by 37 basis points to 21.9% largely due to the positive effects of the previously mentioned seasonal year-end sales. Sequential revenue and pre-tax margin highlights by product group were as follows. Fourth quarter Reservoir Characterization group revenue of $3.2 billion increased 1% while margin improved 132 basis points to 31.7%. These increases were driven by traditionally strong end of year software and multi-client sales offset in part by the seasonal decline in the WesternGeco Marine activity and the conclusion of several higher margin exploration projects. Drilling Group fourth quarter revenue of $4.5 billion increased 1.9% while margin declined by 69 basis points to 19.6%. The revenue increase was largely attributable to robust M-I SWACO and IPM activity in the Middle East and Asia area, while the margin decline was finally due to an over less favorable revenue mix. Fourth quarter Production Group revenue of $4.2 billion increased 4.8% as a result of robust Completion and Artificial Lift product sales and pre-tax margin declined by 27 basis points to 17.3% as the impact of stronger…

Thank you Simon. Our fourth quarter results presented a very successful year for Schlumberger was driven by continued growth in the underlying activity as well as strong year end product sales partly offset by the temporary shutdown of our operations in South Iraq in November and we expected seasonal slowdown in our businesses in North America, Russia and China. Fourth quarter multiclient seismic sales were slow in the first two months of the quarter but we saw very strong sales in December driven by high demand for the latest surveys in our library which are based in our unique acquisition and processing technologies. Sequentially overall revenue was up 3% with topline growth posted in all four operating areas while pretax operating margins expanded by 37 basis points to reach 21.9%. Compared to the same quarter last year pretax operating income was up 23%. New technology sales remain strong in all three product groups and this together with further market share gains as well as focused execution and cost control contributed profitably to the quarter’s results. For the third quarter in a row we also posted commendable sequential incremental margins, this time at 36% was generated $2.5 billion of free cash flow boasted by our ongoing efforts to improve asset utilization and reduce consumption of working capital. Our international business progressed well in the fourth quarter with revenues tapping in all time high exceeding $8 billion and representing a year-over-year growth of 8%. At the same time year-over-year margin expanded by 349 basis points to reach 23.5% which is only around 350 basis point compared with the previous quarter peak recorded in Q3 of 2008. Sequentially international revenue was up 3% and margins expanded by 23 basis points. In terms of pricing the international market continues to be highly competitive and…

Thank you Paal. John we will now take questions.

You have made a big push an emphasis on returns on capital efficiency of your previous two quarterly calls in particular and we can see the results now some pretty strong free cash flow as a percentage both of sales and EBITDA but can you talk just a little bit as to how much more efficiency is there squeezed out of the system now? Because you seem to have come quite a long way already.

Well I mean as you see from my numbers and as you point out, we have stepped our focus on cash generation this year. We have put a lot more emphasis in that throughout the entire management and even it's starting to pay out. Now in the first three quarters of 2013 we generated around $3 billion of free cash flow and in Q4 alone we generated 2.5 billion on top of that which is the new quarterly record right? So the key drivers I think is both, it's management focus on working capital and asset utilization and we want to continue to perform over that into 2014. We indicated that on CapEx next year is going to be around $3.8 billion and the continued growth in the top line and the bottom line and I’m optimistic that reaching further step up the generation of free cash flow. It's essential how we manage our cash flow. Simon do you want to, a few things on that?

So basically if you look at our cash flow generation the last couple of years we suffered a bit from the increase in working capital and the increase in working capital as we have mentioned before was our way of setting up all the Smith acquisition that we made in order to distribute the product further worldwide. The current performance that we have seen is back to normal and I think we will continue to be performing very well as far as the working capital efficiency and as Paal mentioned we are finally got to a point where our CapEx as a percentage of revenue at a manageable level and I think the cash flow generation will continue to be strong as you’ve seen it in 2013.

What is it in your business that gives you confidence that you can take CapEx down while your revenue is increasing? I mean that’s something which sort of no other company has not been able to do.

By coming down to some of the elements that we have discussed around the internal transformation. There is a lot of focus and lot of things we’re doing to guide asset efficiency or asset utilization that revolves around better sharing between locations you know quicker turnaround in maintenance and a better transportation network setup as well. So, yes we’re going to continue to grow in 2014 an we’re taking CapEx slightly down and I think I’m quite comfortable with really different [ph] levels we’re making in the in-line growth with higher than what we anticipate. We have the option of further increasing CapEx but as of the $3.8 billion number that I’m indicating I’m quite comfortable with.

Just little clarification Paal you didn’t sound particularly upbeat about general pricing trends, either in North America or international for kind of commodity and the type of services. Yes you highlighted but in your case if I heard you correctly you had a 5% positive pricing indicator because of technology and again, could you kind of elaborate a little bit on exactly what you mean by that?

Well the revenues were rich indicators basically we talked to revenue we generate for the unit rig activity and but using more revenue earnings well obviously that house [ph] but also by substituting existing basic technologies with new technologies really command the pricing premium that basically helps drive that indicator out. So on average in 2013 that revenue for pricing indicator grew by 5% over 2012 which obviously helps both in the top-line and on the bottom line.

Okay you also highlighted the higher price contracts rolling off, how do you see 2014 kind of the headwind there and the tailwind on your technology and ability to push more value as through products offering.

Well if you look at 2013 it's one of the highest years we have had in new technologies both in new technologies that we were introduced over past years and we track it very (indiscernible) and also the technologies that were introduced in the past five years which we also track very closely. So we have a number of new technologies that came on 2013 and a similar number is not even higher coming up in 2014. So we will continue to leverage what we have introduced in the past year and also augment it a significant number of new technologies coming out in 2014. So I’m quite positive and optimistic that through the new technology introductions we can continue to drive the effective pricing up. Now big contracts like for instance we saw in Mexico recently it's continue to be a big, quite aggressively and competitively on the basic pricing but having a number of new technologies that we’re introducing we should be able to continue to our improve that revenue for rig pricing indicator.

Our next question is from Michael LaMotte with Guggenheim. Please go ahead.

Paal can I follow-up on the comment that you made about the new technology on the fracturing side. You commented the lesson of two things one just fracture stage effectiveness and two I guess in propagation but the technology platform that’s looking to be rolled out this year looks to be more than just fluids involving the hardware et cetera. Can you expand upon that?

With further comments on the Broadband family until we have completed the key testing and the commercialization milestones. The few things I mentioned are around high precision fracturing where we cross address each perforation cluster as well as having finished with which better control to sort of coupling. There will be technologies in this family that will advance those, there might be some other things there is lot of we will talk about that when we have firmed out the key testing and we’re ready to roll it out.

Okay but it's fair to assume at this point that it really is sort of an end to end solution as opposed to a single point solution the way highway was introduced. Is that a fair characterization?

That is fair to assume, yes.

Okay great. And Simon, quick one for you, the working capital frankly I have never seen a $45 billion revenue company use almost no working capital for the course of 12 months. First of all congratulations on that and second one is that something you can expect to continue in ’14 and what have been the major levers that have brought that about this year?

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Okay so when you say back to normal I mean is it still 1% of revenue plus or minus?

That would be yes more or less the case.

Next we will go to David Anderson with JPMorgan Securities. Please go ahead.

So Paal you were talking about your expectation for about I think I believe I heard 6% kind of overall E&P spend, guidance of earnings up double-digits. Can you talk a bit about how much that earnings improvement in ’14 is going to be related to the internal transformation on the efficiency and the asset turns?

While if you look at the solid double digit growth in earnings per share it's kind of a combination of the two (indiscernible). So we aim to grow our foot line faster than the growth in the E&P spend. This is going to be driven by new technology which we just talked about but also the quality of our service and our integration capability. But we all plan to continue to expand margins even in a challenging pricing environment. That’s going to be driven by our execution efficiency and our ongoing transformation in the program. So how much is going to come from each, we obviously have a very clear on view I’m not going to go into the detail probably but I think both of them will be very good contributors.

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Our next question is from Brad Handler with Jefferies. Please go ahead. Brad Handler – Jefferies: If I could I guess follow-up on that if perhaps you can give us some perspective because part of what I think is raised concern among investment community is the lack of contracts recently for deep water rigs for example casting somewhat of a shadow on the what had been the fairly obvious trajectory for a deep water activity growth. Do you have any thoughts on the nature of that and then presumably there is a release of a lot of the contracts that you would envision happening soon?

Brad Handler – Jefferies: Understand, okay. Maybe it's a related follow-up maybe it isn't but the conversation has shifted to sort of an overall level of spending from what had been a mixed conversation a little bit ago but I wouldn’t mind coming back to that the mix of exploration versus development. In your modeling as you see ’14 playing out, so a two part question first is there a discernible mix that you look for and then in a sense the second part of the question is does it matter as we look at some of your what I think are some of your higher margin businesses on the exploration side if there is to be a move away from that, how much can you mention seismic in or seismic was mentioned by your colleague earlier. How much of any of that matter? That mix shift if you see it coming for ’14?

Basically we have a very broad and well-balanced portfolio. So these shifts they might have small impact but overall I’m not overly worried about that going into 2014. With respect to exploration we still see growth in exploration in 2014. It's going to be lower than the roughly 10% that growth that we saw in 2013 but still decent growth. Now in terms of the nature of the growth in exploration we expect this to be more well related again so we’re pretty clear that the flattening of the pricing spend is happening. There has been a lot of data acquired in recent years. So the growth in exploration is going to be more well related than exploration related and well that is that means that it's a more challenging environment for WesternGeco it still bodes well for our Wireline well testing and drilling product line. So of course they called in the balance.

And next we will go to James West with Barclays. Please go ahead.

So Paal I think we have gone beat up the E&P spend numbers globally and it's clear that you guys intend to grow faster than 6%. Maybe if I turn to one of the markets I guess it's been more troubling for the industry which is North America. We’re looking at least at some acceleration or some increase in spend in North America pricing obviously still weakish but do you think with this pickup in activity that’s envisioned, you hit a point where these product lines that had been at a balance can start to come back into balance and maybe pricing is no longer that much of a concern?

Well we would like if that happen but if you referred to the fracturing if I go like fracturing there is still today significant industry overcapacity of horsepower. So at this stage we do not expect the market to reach equilibrium in 2014. Now in terms of activity for North America you expect solid growth in activity on land in 2014 and a lot of this is still going to be driven by further improvements in drilling and fracking efficiency. And as I mentioned in my prepared remarks we do not see any significant combat in in dry gas (indiscernible). So if you look at the trends that you saw in 2013 I think they are continuing into 2014 and North America last is going to be I think more of a same.

And then maybe a perhaps on related follow-up but talking about your technology pipeline it sounds like there is acceleration in new technology introductions. Are these more focused on the U.S. land market as you kind of highlighted some of the stuffs that you’re testing right now or is this global and you just choose to highlight the North America technology?

It's more than up against, I choose to focusing on North America because this is where I think technology will have a significant impact in terms of how the market is going to be shaped going forward. We talked about that on previous calls. We obviously have a broad I would say portfolio of new technologies coming out also addressing the international markets with the range of businesses we all present but I choose to highlight North America land and attracting on the coal.

Our next question is from (indiscernible). Please go ahead.

Paal I appreciate the comment especially on the near term outlook for 1Q and the seasonality, I was curious so if we think about adding back the negative impact you saw on fourth quarter for Iraq. We thought about first quarter Middle-East Asia margins let’s say should we assume that add back of revenue and the attaining profitability at least offsets whatever multi-client excuse me you’re in product sales that you lose traditionally in the first quarter so perhaps maybe revenue flattish margins flattish is opposed to down in Middle-East Asia for 1Q?

Well the question is to if you want to welcome to give you a specific number or go much more in detail. I would say the change the sequential change both in revenues and margins in both environment I think is going to be more and less in line in what you see at an average over the past couple of years. So there are a lot of moving parts in our business and the way we see we do want to at this stage that is going to be more or less at normal seasonal growth that we see.

Okay my follow-up Simon will be for you. I guess with the dividend raise now by looking consensus numbers for ’14 the dividend is coming by a 28% of net income, is there a target range that you guys have as a management team or as a Board that we should be thinking about longer term here in terms of where that dividend potentially can go as a percentage of net income.

You know if you look back on several years now, we look at our dividend every year in January and we decide based on the level of activity, the cash flow where we’re going to be as far as the dividend is concerned. The 28% this is on the higher side and reflect the new level of cash flows that we are at and we will continue to be but there is no target number for the dividend. We will look at it every year and we will reflect basically on the condition of the business and the growth in the cash flow but there is target number.

And Simon do we just, should we view the assumption of debt during the quarter specifically just to fund the share repurchase program and is that something that we should expect to continue and what is still a little interest rate environment?

Frankly we don’t need to borrow to fund the repurchase, we did the borrowing to take advantage of the lower interest rate which as you know kind of climbed the business during the quarter so we did it at the right time and we have some maturing that’s coming in the first half of 2014 which we will use this excess cash to bring it down.

Our next question is from Bill Herbert with Simmons. Please go ahead. Bill Herbert – Simmons: With regards to 2014 I’m not sure if you made mention of this or not yet but with regard to your international margins in ’13 incremental were kind of 40% to 45% in that range for last year. Should we expect much the same in 2014 with regard to international incremental margins?

Well we want to try I can’t promise but we have a lot of drivers that we’re working on to which is kind of you know puts us to try to refuse that. But now it's going to come down to a number of things but the new technology introduction and a further improvement in efficiency and quality are one of the key drivers. So, I can’t promise but we’re certainly going to try. Bill Herbert – Simmons: Okay and secondly back to the first quarter relative to the fourth quarter, if I look at that what you guys have done over the past 5-6 years on average earnings per share is down a low double digit percentage, quarter-on-quarter is that what we should be expecting or modeling for the first quarter?

Well what number did you say? Bill Herbert – Simmons: A low double digit percentage quarter-on-quarter.

Yeah I would say plus minus 10% is the rough, is the average of the past 3-4 years, yeah Bill Herbert – Simmons: Okay so that a buck 20 an buck 21 I know you’re not endorsing a specific number but that’s not necessarily an implausible place to start for at Q1.

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And next go to Angie Sedita with UBS. Please go ahead.

Paal could you give us a little further color on the North American price weakness, obviously we had seasonality in Q4 and what are you seeing in Q1? Is it too earlier to tell or do you think those stay continued price weakness into 2014?

So season for us we would have appropriate impact in pricing in Q1 that’s mainly down to the renegotiation and rollover of all the certain contract that we have. So we believe that a few of them during Q4 with some impact in Q4 we get a full impact of those in Q1 and the other contract as well that will probably impact in Q1 to a certain extent. So that’s dated for the kind of pricing comments that I already made.

All right and then on the overcapacity kind of in reference to James question certainly going to be able to, the capacity in 2014, is your thoughts that we will certainly see that in 2015 as well based on the market condition as we see it today?

Well I think I will focus my comments on ’14 for now and things can move fast in North America land but we’re pretty confident that we will not reach equilibrium in 2014.

And then as I’m really a follow-up on Mexico, congratulations currently on the market share gains. Some color there on when you expect to mobilize equipment or actually start activity in Mexico and then comments on Mexico longer term. Obviously expectations for the region are fairly high, is it still too early to tell how meaningful Mexico will be or are you becoming more confident on Mexico?

As I’ve said in my prepared remarks the early indication for these (indiscernible) we will have a pretty solid market share gain. Now these contracts are not finalized yet, they will be finalized during the first quarter. We expect to mobilize the additional resources that we need to take on the additional work during Q2 and that we will get into kind of full operation on these contracts in the second half of the year. So we still see H1 [ph] activity to be somewhat challenging partly due to the (indiscernible) slowdown but I think H2 [ph] will be better for us given the market share gains. Now with respect to the and as you recall obviously the net profits for the industry in Mexico but the earlier impact on our activity will be 2015.

Our next question is from Jim Crandell with Cowen. Please go ahead.

Well the Chinese companies CNOOC, PetroChina seem to be estimating a lot lower growth in E&P CapEx in 2014. Do you expect that as well and can you characterize which is just being in terms of the awards and business coming out of the Chinese companies?

Well we continue to see strong growth and activity for us throughout in China on land and this is driven by both conventional price gaps and there are certain expense (indiscernible) right, so partially this is through the market penetration for us. There is lot better demand now for our new technology, for our fracking expertise and also for our further management capability. So I still the overall I still think China as one of the fastest growing geo-market for us in 2014 as it was in 2013. I have a pretty positive outlook on China for the coming year.

Okay and then my follow-up is if you could comment on Brazil you had some cautionary comments about Brazil. I assume you’re forecasting a lower level of business out of Brazil. If that’s true what kind of drop do you see in business there for either drop in the market or drop in business for Schlumberger in 2014?

I would say overall rig activity we expect to be flat in 2014 which is going to be another challenging year. Exactly what’s going to happen (indiscernible) I’m not going to going reach out there but it will be a challenging year you know coping with the frac activity which is obviously lower than what we were expecting going back 12 to 18 months.

And we will go to Jeff Tillery with Tudor, Pickering, Holt. Please go ahead.

I don’t have the detail for those available (indiscernible). So I can’t comment on them and follow-up maybe Jeff.

Okay and then how should we think about from a top down standpoint measuring the progress Schlumberger makes on some of the cost and efficiency initiatives in ’14? Do we just watch that through the margin line or through incremental or what’s an external measuring sticks we can use to judge you by?

Well I think both the margin probably is going to be a good measure of it, it think also it will have some impact on our ability to generate the free cash flow. So I think both of those are good yardsticks to look at.

We will go to Scott Gruber with Bernstein. Please go ahead. Scott Gruber – Bernstein: Just one quick one from me, Simon can you provide some color on the CapEx trends in North America versus rest of the world and where you’re spending it down equally or is it weighted toward one region?

It's really in-line with the rest of the world. I mean you know last year it was lower because obviously the pressure pumping is consuming less as we have consumed some of the excess equipment. Exact figure I don’t know ready with me but I will follow-up with you on this.

But there is you know I was thinking of the international side there is no bigger drop on the international side versus domestic at this point?

If you look at 2013 we obviously stayed back significantly in North America due to basically hardly any CapEx required for pressure pumping. So I think what you see going into 2014 is an more even increased North America versus international and obviously we included in North America to growth of Mexico where we see had price significant growth and these services are also quite capital intensive.

And we will go to Jud Bailey with ISI Group. Please go ahead.

I wanted to follow-up on Latin America that was difficult market for Schlumberger and for the rest of the industry in 2013 although you still have to grow margins. With the Mexico work ramping up, with Argentina growing how much of a pickup in growth can we see in 2014? If you grew low single digits in this year or last year rather is that a market that can grow high single digits with Mexico coming back and Argentina growing or is that a stretch?

Jud we typically don’t comment on details kind of growth outlook for either but I would say that we’re aiming to grow in Latin American in 2014. What level I can’t really comment on.

And just another question, you were able to like as I mentioned grow margins pretty nicely despite a difficult market in Latin American last year. You mentioned cutting cost in Brazil given your cost structure down. Can you comment maybe on how to think about margins in Latin America for 2014? Does it stay kind of soft until activity in Mexico starts to pick back up?

Our next question is from Robin Shoemaker with Citi. Please go ahead. Robin Shoemaker – Citi: Paal you mentioned that you’ve seen price weakness across most product lines in North America. I wonder among all your product service lines and drill bits and fluids and LWD, MWD et cetera where are you seeing relative pricing stability in contrast to areas that are weakening?

In North America.

In North America, yes.

Yeah I think for both of the product lines we’re seeing continuous pricing challenges. I would say the only one that has kind of stood out as a positive and that’s very much driven I would say new technology introduction is actually a good thing. So but the other ones given the market conditions are all facing pricing challenges.

Okay and you highlighted artificial lift as an area of focus in the shale play. Now obviously a lot of the and the lot of the shale plays that have lower productivity wells, ESP Technology is not generally employed. So what is Schlumberger solutions that you’re working for lower productivity wells?

Well what we have done over the past couple of quarters which I had in my prepared remarks is basically that we are both in number of smaller Broadcom [ph] companies for the key liquids shale basins both in the U.S. and Canada. So our plan is to combine the offering from the biggest Broadcom [ph] companies with our existing artificial lift business and then the objective is then to provide a life of well lift solution to the customer base. So we will do that by looking at what is the idea of lift or ESPs and lot of technologies to optimize production and we’re going to obviously leverage our production adhering expertise and our ability to monitor and integrate the production based on from these wells.

Our next question is from Edward Muztafago with Societe Generale. Please go ahead.

I did have one follow-up question on sort of the incoming rigs and specifically as it relates to the Gulf of Mexico. There has been a little bit of chatter recently that while there is a fairly large influx of rigs coming in and we may see a little bit exodus out of the Gulf as well and I guess what I’m wondering is on a net basis does the exodus you know sort of the lower specification, shallower water rigs have material effect on Schlumberger or you know do you think that because you’re little bit more deep water focus does that say on that’s less of a concern?

Well when I comment on the Gulf of Mexico my comments are generally focused on deep water which is obviously a large part of one operation and so while there might be some offshore rigs we’re still quite optimistic in terms of the rig projections and the results for the Gulf of Mexico or deep water in particular for 2014 and that’s what I’m basing the outlook on.

And then this is kind of a follow-up to the revenue per rig discussions in North America, you know obviously one of the things that we have seen as the well count go up fairly dramatically in relation to rigs and so I haven't run the numbers I’m hoping maybe you will have but if we were to actually look at sort of revenue per well, is it probably a better metric. Do we see the same sort of trend between Schlumberger revenue as you would with rigs but maybe to a lesser degree that is the technology upscale has driven some atypical improvement in that metric.

So for the revenue per well in North America land I don’t have that data available at this stage. I would still say that that’s probably you know not up as much as the 5% in terms of global revenue, international revenue that I was referring to. So there is continuous negative pricing pressure in North America. So I would say revenue per well is probably more challenged than revenue per rig over a quarter.

Okay that’s all the time we have for questions today. So now on behalf of the Schlumberger management team I would like to thank you for participating in today’s call. I would like to also personally thank you for your support. John will now provide the closing comments.

Thank you. And ladies and gentlemen this conference is available through replay. It starts today at 10:00 AM Central Time, will last for one month until February 17th at Midnight. You may access the replay at any time by dialing 800-475-6701, international parties please dial 320-365-3844. The access code 306544. Those numbers again 1800-475-6701 or 320-365-3844 and access code 306544. That does conclude your conference for today. Thank you for your participation. You may now disconnect.