Schlumberger's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Seeking Alpha (Transcripts)

Fri, Apr 19, 2013, 1:23 PM

Executives

Malcolm Theobald - Vice President of Investor Relations

Simon Ayat - Chief Financial Officer, Executive Vice President

Paal Kibsgaard - Chief Executive Officer, Director

Analysts

David Anderson - JPMorgan

James West - Barclays Capital

Kurt Hallead - RBC Capital Markets

Michael LaMotte - Guggenheim Securities

Bill Herbert - Simmons & Co.

Angie Sedita - UBS

Ole Slorer - Morgan Stanley

Scott Gruber - Sanford C. Bernstein

Jim Crandell - Cowen Securities

Brad Handler - Jefferies

Jeff Tillery - Tudor, Pickering, Holt & Co.

Waqar Syed - Goldman, Sachs & Co.

Robin Shoemaker - Citi

Turner Holm - Rs Platou Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Vice President of Investor Relations, Mr. Malcolm Theobald. Please go ahead.

Malcolm Theobald

Thank you, Julie. Good evening and good morning from China, and welcome to the Schlumberger Limited first quarter 2013 results conference call. Today's call is being hosted from Shanghai, where a Schlumberger Limited board meeting took place yesterday.

Joining us on the call today are Paal Kibsgaard, Chief Executive Officer, and Simon Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paal. Simon will first review the financial results, then Paal will discuss the operational and technical highlights.

However, before we begin with the opening remarks, I would like to remind the participants that some of the information in today's call may include forward-looking statements, as well as non-GAAP financial measures. A detailed disclaimer and other important information are included in the FAQ document, which is available on our website or upon request. We will welcome your questions after the prepared statements.

Now, I will turn the call over to Simon.

Simon Ayat

Thank you, Malcolm. Ladies and gentlemen, thank you for participating in this conference call. First quarter earnings per share from continuing operations, excluding charges and credits was $1.01. This is $0.07 lower sequentially and $0.05 higher when compared to the same quarter last year.

During the quarter, we recorded $0.07 of charges relating to the currency devaluations in Venezuela. Oilfield services first quarter revenue of $10.7 billion decreased 4.5% sequentially while the pretax operating margins declined 37 basis points. More than half of the $506 million sequential revenue decrease is the result of the absence of the year-end surge in the product, software and WesternGeco multiclient sales that we experienced in Q4.

The remainder of the decrease was largely attributable to the seasonal weather-related slowdowns we typically experience in Q1. Given the significant impact that these seasonal factors had on our sequential performance, our comments will focus on year-on-year changes unless otherwise noted.

Oilfield services revenue increased 7.6% year-on-year, while pretax operating margins declined by 59 basis points. Highlights by product group were as follows. Reservoir characterization, revenue of $2.8 billion increased 8.5% while margins grew by 94 basis points to 27%. These increases are primarily attributable to a very strong performance in testing services on improved offshore exploration activity

Drilling Group revenue of $4.1 billion increased 9.2%, and margins improved by 57 basis points to 17.9%. These improvements were led by drilling and measurements on strong offshore drilling activity across all international areas and the U.S. Gulf of Mexico.

Production Group revenue of $3.8 billion, increased 6.9%, while margins fell by 237 basis points to 15.1%. The effects of ongoing pricing pressure for well services technologies in U.S. land, more than offset by double-digit revenue growth across all other segments. This performance was led by the strong Schlumberger Production Management and subsea product lines. The margin declined for the group was entirely attributable to the impact of the continued excess hydraulic horsepower capacity in U.S. land.

Now, turning to Schlumberger as a whole, the effective tax rate excluding charges and credits was 23.3% in the first quarter, compared to 23.8% in the previous quarter and 23.6% in the first quarter of 2012.

Net debt increased $162 million during the quarter to $5.3 billion, reflecting the seasonal deterioration in working capital that we typically see during the first quarter. During the quarter, we spent $894 million on CapEx and we repurchased 2.5 million shares at an average price of $77.63. CapEx is still expected to be approximately $3.9 billion in 2013, as compared to $4.7 billion, we spent in 2012.

Now, I turn the conference over to Paal.

Paal Kibsgaard

Thank you, Simon. Our first quarter results were solid, driven primarily by the overall strength and progress of our international business, but also by continued margin resilience in North America, in spite of both activity and pricing challenges. All together, earnings per share were up 5%, compared to the same quarter of last year.

Looking at the international markets in more detail, our revenue grew 30% year-over-year, while operating income was up 21% and margin expanded 135 basis points, demonstrating the strength of both, the international market potential as well as our execution capabilities.

Sequentially, revenue was down 5%, due to the normal seasonal slowdown in the Northern hemisphere and the Far East, while operating margin was up three basis points driven in part by strong performance from our IPM and SPM product lines.

In terms of Q1 activity, the international rig count was up 7% versus the same quarter last year. Pricing trends remained stable with revenue per rig continuing to slow but steady progress now observed over the past six quarters. In this environment, we continue to drive high-end technology sales throughout our international operations and we are also actively adding our latest new technology introductions to our existing contract base. New technology sales together with strong execution and operational performance, helps drive both, effective pricing and margin levels.

In Latin America, revenue was up 8% year-over-year, while operating margin was up 123 basis points, driven by strong execution, cost control and new technology sales. As previously communicated, during the quarter, we have had a series of very constructive meeting in Venezuela with PDVSA, and we expect to finalize a new payment agreement in the near-future and we anticipate ramping up activity to meet the current and future needs of PDVSA's development and production plans.

Elsewhere in Latin America, Ecuador posted the highest growth rates in the first quarter, driven by excellent performance in our Shushufindi SPM project. The de-risking of our development plan is now largely complete and we are operating four drilling and two workover rigs. With production levels progressing in line with our plans, the project is set to generate significant value to both, Ecuador and Schlumberger in the coming years.

In Argentina, activity was also strong in the first quarter, again driven by drilling and stimulation activity in the Neuquen basin and from our IPM project in the Vaca Muerta shale.

In Brazil, overall rig count remained flat in Q1. However, we did see activity starting to shift back from work over to drilling for several deepwater rigs. Our main focus in Q1 was on the startup of new contracts. As previously stated, the Brazil contracts were generally bid at very competitive prices for basic technology.

However, given the complex and challenging operating environment, the use of high-end technologies can create significant value for both our customer and for Schlumberger. We are therefore already in discussions to add our latest technologies to the contracts and we will continue to actively introduce new and value adding products and services over the span of these long-term contracts.

In the Middle East and Asia, revenue grew by 21% year-over-year while the operating margin was 125 basis points, driven by strong performance throughout the region. In the Middle East, we again saw the strongest growth in Saudi Arabia, where activity is progressing as planned and in Iraq where operational performance on our IPM rigs was strong. The United Arab Emirates and Kuwait also posted solid growth in Q1, driven by higher customer activity and further supported by market share gains from recent contract wins. In Asia, the normal seasonal slowdown led to lower sequential activity in both China and Australia but this did not prevent both tier markets from posting very strong year-over-year growth numbers. In China, growth continues to come from both complex conventional land developments as well as from offshore. While in Australia, Queensland unconventionals gas activity together with deepwater drilling activity in the Northwest will lead the growth in the coming year. As stated in the January call, we expect strong growth from the Middle East and Asia in 2013 and our Q1 results are so far validating this trend.

In Europe, CIS and Africa, revenue was up 11% year-over-year and the operating margin was up 120 basis points. Growth in the first quarter was driven by Sub-Sahara Africa, where activity was robust throughout the region. Angola was particularly strong for us in Q1 driven by development and exploration drilling as well as Marine seismic operations.

In North Africa growth was limited during the first quarter. While the pending contract issues were generally result security has again emerged as the primary challenge and had a significant impact on activity levels during the quarter. Our customers on now in the process of evaluating future activity plans and the need for additional security measures and we expect activity to remain subdued as long as this process is ongoing. In the North Sea, we saw the normal seasonal slowdown due to winter weather, but activity still showed solid year-over-year growth as the transition from exploration to development and production related work continued.

In Russia and Central Asia, we also experienced the normal seasonal slowdown in activity. Still the region posted one of the highest year-over-year growth rate in the first quarter driven by offshore activity in Sakhalin and by land activity in Kazakhstan. Russia and Central Asia remains on track to be one of our main growth drivers in 2013.

In North America, revenue was down 4% while the operating margin was down 356 basis points compared the same quarter last year. Still at 19.1%, our margin remained significantly higher than in previous cycles, and is a very clear testament to our newly built strength in the North American market. Looking at the North America land market in detail, U.S. land rig activity in the first quarter came in below expectations, although the data showed some increase in total rig count towards the end of the quarter. At the same time, drilling efficiency remained strong, asset utilization improved from the low level seen over the holiday season and lower guar cost provided some relief to pressure pumping margins.

Still the main concern in North America land remains the pricing, where the downwards trend in drilling, wireline and coiled tubing seen in the fourth quarter continued in Q1. In addition, we also saw further downward pricing pressure on a number of hydraulic fracturing bids during the quarter adding further uncertainty to the North America land market outlook.

In the U.S. Gulf of Mexico, the overall rig count remained strong, but operational delays relating to the change out of subsea connectables on the deepwater rigs had a negative impact on our results for parts of the quarter. However at this stage, we expect these issues to generally be behind us and that the U.S. Gulf of Mexico contributions to our business will be in line with expectations for the year.

In WesternGeco, we continue to operate one deal closely in the Central Gulf, while multi-client sales relating to the Central Gulf, lease sales in March came in well below expectations in the first quarter.

Let me now turn to technology, where I would like to highlight our integration capabilities and the growing value it brings to our business. As our customers continue to look for ways to reduce finding, development and lifting costs, a number of them are now seeking much closer and broader partnerships with us to add up more value from the E&P value chain. This includes more collaborative problem solving for utilizing our complementary expertise and by further leveraging our wide technology offering and broad integration capabilities.

We have carefully built up our integration capabilities over the past 15 years by developing the required distance processes and people competencies and by filling unmatched spirit of teamwork through our metrics organization. In terms of our integration offering, we had a range of business models and profit area with varying levels of integration and contract rigs.

Through our IPM product line, we offer project coordination for contracts offshore exploration and development project, long-term currency contract for land well construction, intervention and production enhancement campaigns for mature fields both, offshore and onshore as well as P&A activity for aging offshore installations.

Today, we operate these types of contracts throughout our global operations, covering all parts of our customer base. In addition to our IPM product line, we also offer a complete field management capabilities to our SPM product line, where we reach the value of our products and services and sometimes cash in return for fee per barrel of incremental production.

Today, our overall integration capabilities represent a key strength and competitive advantage for us in the marketplace, and going forward we will continue to develop these capabilities in order to help our customers extract more value from their oil and gas assets.

Let's then turn to the macro environment, where we so far this year have seen mixed data from the main economies, including China, the U.S. and euro zone, still the overall outlook for 2013 remains largely unchanged from the update we gave in January, both in terms of GDP growth as well as the fundamentals for the global oil and gas markets.

Looking at our industry, the major trends from 2012, are as expected continuing this year. In the international market, we see strong and consistent growth in key regions such as Sub-Sahara Africa, Russia, Middle East, China and Australia, and the customer activity in general progressing in line with our stated expectations.

In North America land, the outlook remains uncertain driven by lower than expected rig activity and by further pricing weakness. Cold weather and flattening natural gas production has led to longer than expected storage withdrawals in the U.S. in the past couple of months, however this is yet to result in an increase in dry gas drilling activity.

In this environment, our entire organization remains focused on growth, margin and earnings out performance throughout our global operations. This commitment and drive is starting to have a direct impact on our results as seen by the following three facts. First, our international leadership position in terms of operating margins and shareholder income is as strong as ever, and our international leverage in terms of operating income is approximately 70% of the total.

Second, following the restructuring of our land business, we have recently taken the lead in terms of operating margins also in North America.

Third, we have, on average, delivered double digit growth in earnings per share over the past few years and we are, as previously stated, looking to extend this trend in 2013.

These results, combined with the collective motivation of the 1,200 Schlumberger employees to do even better going forward, gives me a lot of confidence in our future ability to outperform and to provide superior returns to our investors.

Thank you very much. I will now hand the call over to Malcolm for the Q&A session.

Malcolm Theobald

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

Question-and-Answer Session

Operator

(Operator Instructions) With that, we will go to the line of David Anderson with JPMorgan. Please go ahead.

David Anderson - JPMorgan

The oil price weakness has really been weighing on these energy stocks clearly. I know you touched on it in your remarks there, but when you look at the fundamentals of the oil market right now, has anything changed really, as you have been looking at the fundamentals? Is anything getting you concerned regarding outlook? Or is it really basically the same as you saw it 90 days ago?

Paal Kibsgaard

Well, at this stage we haven’t really changed our outlook. We have obviously seen the recent drop in brent prices which is mainly driven by the recent macro numbers and also seasonally lower demands but we still expect very strong support around the $100 per barrel. As the amount picks up from the seasonal low in Q2. So as overall, we have not really changed our view (inaudible)?

David Anderson - JPMorgan

Are any markets out there particularly vulnerable to a slowdown or is there still more than enough cushion here that you don’t really get too concerned here?

Paal Kibsgaard

No, I am not overly concerned. I think with (inaudible) both on WTI and brent. At this stage, I think both, at current levels, both the international activity as well as North American liquids activity is pretty solid at these levels.

David Anderson - JPMorgan

Okay, and could you just touch a little bit more on the Middle East, just to expand to some of your comments there. Last quarter, I believe you said you were expecting the rig count to get to about 170 rigs. Do you still think that? Is it higher? Is it lower than that? Also if could touch on how much of the incremental demand is coming from unconventional gas?

Paal Kibsgaard

Okay, well if you look at the Q1 performance in Saudi, that was, as I mentioned, quite strong for us. The total rigs at the end of the quarter was now up to 140. We are still maintaining the number of 170 rigs by year-end. So really no change to the Saudi outlook. It is progressing pretty much in line with what we were expecting. What was the second part of your question?

David Anderson - JPMorgan

I was just curious as to how much of that incremental demand that you are seeing is going to go towards unconventional gas or the tight gas that they are going for these days?

Paal Kibsgaard

Okay, so I would think 2013, that is still going to be quite limited. There are pilots ongoing which we are involved with but in terms of overall rig count and activity levels, these are still quite small in the overall picture in Saudi. So not a significant part in 2013.

Operator

We will go to line of James West with Barclays. Please go ahead.

James West - Barclays Capital

Paal, one quick question and a follow-up which maybe a little bit longer but do you still expect 10%-age type international activity growth this year?

Paal Kibsgaard

Yes. That is roughly where we see. There is no real change to what we said in January. About 10% increase in international E&P spend.

James West - Barclays Capital

Okay, perfect. As a follow-up, so if we think about international pricing, you obviously cited six quarters of increased revenue per rig. One of your competitors this morning cited Saudi and the ramp up there as a potential catalyst to create an inflection point. I know one of your other competitors has talked recently about, this is the time now to raise pricing. Are you seeing evidence from competition in the market? I know you guys have been trying to push pricing for a while here, have you guys seen evidence that your competitors are now on board with this and starting to push price internationally?

Paal Kibsgaard

Well, if anything, I haven’t seen any significant change in behavior. I think we have moved on from the nonsense pricing that we saw a few years back. But apart from that, no dramatic change in behavior from the main players as far as we have see. We have continued to be able to drive revenue per rig which is kind of the overall pricing indicator. That has to do with new technology sales, it has to do with efficiency and it has to do with the overall quality of our operations. But in terms of this pricing, other than testing pricing on small and medium sized rigs, but a reasonable success, there hasn't been any dramatic change and we still don't foresee any major inflection in 2013 based on where we stand today.

James West - Barclays Capital

Okay. Very helpful. Thanks, Paal.

Operator

Thank you. We'll go to line of Kurt Hallead with RBC Capital Markets. Please go ahead.

Kurt Hallead - RBC Capital Markets

So, just to follow-up on that question, you know, there are obviously indications that with the tone on the international market as at least from what I can pick up drastically improved over the course of the past couple of quarters as it relates to the outlook. Schlumberger has been in a strong international position for quite some time, and I think your margin this quarter kind of demonstrate that progress.

As you go forward, are you picking up though that there is any increase and sense of urgency at the customer base and have you envisioned Schlumberger continuing to maintain the wide margin differentials that you have enjoyed over the last 10, 15 years?

Paal Kibsgaard

Well, first of all, I mean, we are maintaining our positive view on the international market, which stems all the way back from last year, right? For reference, last year, we grew revenue by 16% and operating income 31% on the back of an 8% growth in recon and this is really the kind of numbers we are aiming for again this year.

So, overall, we haven't really changed our view on the international market, we're just consistently focusing on it and we consistently delivering in that marketplace. And, in terms of protecting our market differentiation, our market lead, I mean that's what we have been doing over the past 5, or 10, or 15 years, but there is nothing really new there. We view that through the leverage of our size, our infrastructure, our local [rates] and the fact that we've in these markets for 50, 60, 70 years, and also the fact that we have a strong focus on execution both, from an efficiency and a quality standpoint.

So, there's really nothing new in terms of how they are going about it. It is just progressing quite fine in our view.

Kurt Hallead - RBC Capital Markets

Okay. Then just as a follow-up. I know, investors were trying to get their arms around the joint venture that you did with Forest, last week. Just wondering if you might be able to take this opportunity to give the perspective on that and with my understanding being the key element here you are trying to increase or accelerate the uptake in technology in the U.S. market relative to where you've already seen internationally, so I wonder if you provide additional color on that?

Paal Kibsgaard

Yes. That's fair. So, if you look at our SPM, we have been pursuing production for a number of years and today we are earning about 10 of these SPM projects worldwide and these are generally fee per barrel contracts with no working interest. Now, in recent years, we have invested significantly in the shale workflows and shael technologies, and it is all about taking a much more scientific approach to drive production and recovery.

Now, our approach is used extensively in the pilot projects in the international market, however as we talked about before the offtake is quite slow in the U.S. with the exception of some key customers, so we wanted to do was to create an SPM project in the U.S. to really have a showcase and be able to demonstrate our capabilities.

The Forest deal became an opportunity, and initially we aim for the traditional SPM contract model here that wasn't workable for a variety of reasons, so the working interest was really only solution to get the deal done, but it was much more of a consequence rather than the objective, so this is a one-off deal in terms of taking working interest and we have no plans or pursuing this type of contract model further and it's really key for us to demonstrate our capabilities within the shale technologies and shale workflow and get a higher return on the significant R&D investments we made in to this area, so that is the whole rationale for the dea.

Kurt Hallead - RBC Capital Markets

Okay. Appreciate the color. Thank you.

Operator

Thank you. Next question is from Michael LaMotte with Guggenheim Securities. Please go ahead.

Michael LaMotte - Guggenheim Securities

Thanks. Good morning. Paal, I'd like to follow-up on the SPM model, in particular what differentiates it from IPM and integrated or bundled services that your competitors might provide? You mentioned fee per barrel, but what are the true characteristics in addition to the revenue model with respect to the breadth of services and the ability to leverage the technology?

Paal Kibsgaard

Well, if you look at the SPM model, we will then take full control in terms of operation and decision making when it comes to the field development, or rather it's a some set of a field or a complete field. In the IPM modules, the overall decision making is still generally governed by the E&P Company. So in the SPM module, we get to decide where to drill, how to drill, how to work over, and how to further invest in to the field.

In the SPM module, we will risk the value of our products and services in general and in some cases, also risk cash in to the deal. But predominantly it’s the value of the our products and services. So that means if we create incremental production, we will get paid and we will get paid also an upside view on what we have invested but if we don’t deliver incremental production then, obviously, that is our problem. So its mainly the overall risk profile of the deal combined with the fact that we have complete management control of the operations within the SPM deal structure.

Michael LaMotte - Guggenheim Securities

You mentioned terms of another 10 projects globally right now which suggests to me that we are still pretty early in the evolution of this concept. Do you have an idea as to how big this market could be or just from a resource limitation within Schlumberger, how big it could get over the next two or three years?

Paal Kibsgaard

Well, it is a part of our business which we are looking to grow because it is highly accretive to our margins, if you look at the portfolio we have. At the same time, it is resource intensive. The whole sales cycle is quite long. Also we are very careful in terms of evaluating the project that we get ourselves into. So we are interested in growing it in our traditional SPM module. But it is an area where we can afford to hurry slowly. So there is nothing that we are looking to ramp dramatically.

Michael LaMotte - Guggenheim Securities

Okay, but is it fair to say that 10 projects could 20 in the next two to three years? Is that the trajectory that we seem to be on?

Paal Kibsgaard

Probably not 20. If you look at reasonable size project, we might look to add two, maybe three, a year. I would say that’s probably the maximum at this stage.

Operator

Thank you. We will go to the line of Bill Herbert with Simmons & Co. Please go ahead.

Bill Herbert - Simmons & Co.

Quick question on North American margins. Given the magnitude of the drop in multiclient sales expected seasonally, coupled with the Gulf of Mexico issues in Q1, I would have expected margins to be a little bit more poorly behaved and yet, they were only flat to down. Wanted comments for that Brazilian, just quarter-on-quarter.

Paal Kibsgaard

Well, I think its still three things. Canada had a reasonable quarter. Decent activity there and the breakup happened towards the end of the quarter as we were planning. Gulf of Mexico, although there were delays in the deepwater operations, also posted quite a strong quarter overall, although it could have been better. Then its all about the approach we take to U.S. land. Particularly in pressure pumping, we are not receiving share. We are looking to protect margins and we are focusing very much on utilization and only taking on contracts that meet a certain return for us. So its how we manage U.S. land and then we have decent performances in both Canada and the Gulf of Mexico although multiclient sales were down quite significantly, sequentially.

Bill Herbert - Simmons & Co.

With the reversal of the operational delays in Q1 in the Gulf of Mexico, also taking into account breakup in Canada for the second quarter, what should we expect for North American margins in Q2? Still flat to down or could it be better than that?

Paal Kibsgaard

Well, I would lover for them to go up, just to say that. But you point at the main items here, right. So we would have continued pricing challenges on U.S. land. At the same time, as we will have the Canada breakup, those are the negative and then its just a matter of how well we can manage within the overall U.S. land operations as well as the progress we will make further in the Gulf of Mexico. I don’t expect a significant improvement in margins in Q2. If we can hold them around where we are I would be quite content.

Bill Herbert - Simmons & Co.

Okay, and then a point of clarification. With regard to your narrative on your SPM business model, if I understood you correctly, you basically take full operational control and that’s the distinction between that and IPM basically. On the Forest arrangement, if I read the press release correctly, Forest will continue to be the operator, is that correct?

Paal Kibsgaard

Yes. Forest will continue to be the operator. When I say operational control, we don't take on operating ship in any of these deals, but we have a much more of a say how we go about developing these fields, so there's always some dialogue with the E&P company who maintains operator ship, but if you look at it from a well construction type of contraction in IPM, where we are told where to drill and we just go by drilling the well, there's much more of a dialogue around the entire development plan within an SPM project and we have a lot more of it say in how they go about development.

Bill Herbert - Simmons & Co.

That's helpful. Thank you very much.

Paal Kibsgaard

Thank you.

Operator

Thank you. Next question is from Angie Sedita with UBS. Please go ahead.

Angie Sedita - UBS

Paal, so you noted, and one of your [peer] mentioned earlier today and then you noted that you don't believe that the Saudi activity will lead to a pricing inflection in 2013. It was also mentioned that Saudi activity could lead to higher activity by neighboring countries later this year and going into 2014, higher activity than already today. Any thoughts there?

Paal Kibsgaard

Well, like I said before, the overall Middle East area is looking quite strong, so you have Saudi Arabia, you have Iraq and also you have Kuwait and then the UAE, which are also quite strong in terms of year-over-year activity and how that business is progressing, so don't get me wrong. I would love to see an inflection in pricing in 2013. It's just that I am not at the stage where I can promise it at this stage.

We will continue to cut pricing and to try to move things along, because in our view there isn't a lot of spare capacity out in the international market at this stage. It's just that to predict that inflection, which we all have been waiting for quite a few years. I am not ready to do that yet.

Angie Sedita - UBS

Fair enough. And given that this work is gas work is oil as it was in last cycle, how do you see the service intensity even though there is tight gas and unconventional, so how do you see the service intensity of this growth in rig count versus what we saw in the prior cycle?

Paal Kibsgaard

Are you talking about Middle East?

Angie Sedita - UBS

Yes, and Saudi specifically.

Paal Kibsgaard

Yes. Well, I think the service intensity in Saudi and also the neighboring countries there is quite strong both, in gas as well as in liquids. There's a lot more deviated, again, extended reach in horizontal wells both for gas and liquids, so I think overall service intensity is strong and it requires high end technology and very solid operational performance, which again thanks to our strength.

Angie Sedita - UBS

All right. Then there is unrelated follow-up on the one Forest JV with Cameron. Any further insights on when we'll have details on the structure? When the deal will close? And then has the team determined how long do you think it will take to develop your own subsea separation unit?

Paal Kibsgaard

Well, in terms of when we are looking to close the deal, we were hoping to do in Q1, but it's going to now slide into Q2 as you see. Our goal will be try to close in June. We're just getting the final regulatory approvals from various countries. We have most of it sorted out by now, but we are relatively confident, we will get it closed in Q2. At that stage, we will then put the organization in place. There has been some limited discussions with Cameron on how that is going to be, so I think we should be ready to hit the floor running s soon as we get the deal closed during the quarter.

And as to when we will get a new technology to introduce and so forth, I think it's a bit premature for me to comment on that at this stage. Other than that, we will have quite aggressive R&D plans for the JV. We have some significant objectives that we want to achieve, but I think I'll hold on from commenting on that at this stage.

Angie Sedita - UBS

All right. Fair enough. I'll turn it over. Thanks.

Operator

Thank you. We'll go to line of Ole Slorer with Morgan Stanley. Please go ahead.

Ole Slorer - Morgan Stanley

Thank you. Just certainly a higher level question, on your press release, there you've mentioned that growth in North America oil production has been offset by other non-OPEC producers seeing declining production limits expect spare capacity to remain around current levels. Could you elaborate a little bit on this statement, try to put some numbers around it if you feel confident about that?

Paal Kibsgaard

Well, if you look at spare capacity now, I believe it's ticking around 4 million barrels, right? So, we expect it to be around this level in the near-term barring any major macro events. If you look at the balance of supply and demand, the overall demand growth projected for this year is about just short of 1% or 800,000 to 900,000 barrels a day. Offsetting that demand growth is mainly the continued growth in North American production, and we don’t expect any significant growth in the non-OPEC production outside of North America. That leads to core in OPEC and more or less unchanged. That is the main balancing that we are looking at this is stage which is similar to what we talked about in January.

Ole Slorer - Morgan Stanley

In a historic context, so would you say that this is a constructive backdrop or is this a backdrop which could lead to some other business?

Paal Kibsgaard

Well, if you look at 4 million barrel of spare capacity on about 90 million barrels of production, it is around 4% and it is still about 1 million barrels below where we stood prior to the Libya conflict, right. So I don’t think this is an excessive spare capacity. I think its, if anything, probably relatively tight.

Ole Slorer - Morgan Stanley

Very good. Secondly, you mentioned the ability to upsell technology. We have all seen the headline numbers. Let's use Brazil, as an example. So do you expect this fully to offset some of the pricing pressures on recent contract signings? So let's say Latin American margins, do you expect to be able to hold those margins at this level?

Paal Kibsgaard

Well, I cant guarantee it quarter to quarter, but I would say that for all these large contracts that we have been talking about for the past year and not just in Latin America but globally, we have overall plan in terms of how we bid for the basic technologies which are generally comparable to our competitors. Then beyond that, for these medium to long-term contracts, we have a plan on what new technologies will be introduced and added to the contract base. Based on these technologies which will bring significant value to our customers but also to us, we are quite confident that we can make these contracts that were really quite competitively bid in to quite viable contracts for us over this time of the contract term.

Ole Slorer - Morgan Stanley

So when we think about margins, if you look at your North American margin, very impressive level at the moment, more or less in line with your international margins, when do you think you will exit the year? With higher North American margins or a bit higher international margins, relative to one another?

Paal Kibsgaard

It’s a good question. If I was going to make a bet, without really committing to it, I would say I still expect our international margins will be higher than North America, in terms of the exit of this year.

Operator

We will go to line of Scott Gruber with Bernstein. Please go ahead.

Scott Gruber - Sanford C. Bernstein

Coming back to the motivation for the Forest deal. You have the appetite for technology in the US onshore is always been low but has there been any degradation to that demand? Have the E&P's, as they move in to the harvest mode to the shales and now that conventional service pricing is lower, has that actually diminished the need for technology in the U.S.? Is this the response to that?

Paal Kibsgaard

No, I don’t think its going in that direction. I think what you will find is that in the past, we haven’t really had a significant focus on developing new and high-end technologies that had, I would say, a significant application in North America. Now, over the five years, with the renewed focus we have on North America, we have a little more in to these type of technologies and what you are looking for now is just to try to accelerate the penetration to get return on these investments. So, there is no, I would say, reversal of the technology uptake. It is just that we have a much broader, and I would say, much more interesting technology portfolio with applications in North America and we are quite eager to get these technologies further into the marketplace.

Scott Gruber - Sanford C. Bernstein

Great, and then turning back to the macro picture. Paal, you mentioned that the backdrop today remains constructive even with the a bit of declining crude price. One of the top concerns we hear is how long can Schlumberger can tend to grow at something close to 10% in a world of flat crude prices? How do you think about the medium-term outlook for growth over the next the, call it, three years? If crude prices are flat, can you still pose topline international growth that comes close to 10%?

Paal Kibsgaard

We are still confident that we can do that. I think that there is obviously several ways that we are pursuing this. We, obviously, are present in every market around the world, so we have a kind of a very broad, broad opportunity, but one thing I think will be quite interesting from our side is that if you assume that crude prices are going to stay flat as you indicate, then I think it's going to be need for our customers to look at driving more costs out of the E&P value chain, and I will say integration, which I talked about today has the potential to do that and also overall quality and efficiency of operations, which and in many cases comes down to the size of the operation is also going to be key, so I think we have hit on several, I think, unique enablers that will allow us to be a very interesting partner for the E&P companies in terms of helping them drive overall costs out of their system and then basically and lot more activity for us and more hope for us.

Operator

Thank you. We'll go to line of Jim Crandell with Cowen Securities. Please go ahead.

Jim Crandell - Cowen Securities

Okay. Good morning. Paal, I know that Schlumberger is a company that of course pays a lot of attention to its market shares around the world, in formation the valuation. I was a little bit surprised to hear one of your two major competitors on their call this morning say that in LWD, MWD, they are the market leader now in revenues in both, the Gulf of Mexico and Norway, A, would you agree with this? And, B, is this something that you have a plan to reverse?

Paal Kibsgaard

Well, Jim, there's nothing to reverse. If there's anyone who is the leader in LWD, in any place around the world, that's Schlumberger. I don't think I am really going to engage further into that question.

Jim Crandell - Cowen Securities

Okay. I was surprised when I heard their response, but anyway. Secondly, could you specifically talk about the Petrofac joint venture? And, where you are in that and additional work that could be forthcoming there?

Paal Kibsgaard

Yes. So, we are still engaged with Petrofac in evaluating in SPM type opportunities around the world. We are still actively in dialogue with them. There's a number of prospects that we are pursuing. The overall sales cycle for these projects is quite long and the project we are looking at with Petrofac is also whether it's a balance between what is required from the subservice, which is our strength as well as what is required from the services, which is obviously their strength, right? But, that whole corporation agreement is still very much intact and we are still engaged with them in pursuing global opportunities.

Jim Crandell - Cowen Securities

Okay. Good. Thank you.

Operator

Next question is from Brad Handler with Jefferies. Please go ahead.

Brad Handler - Jefferies

Good morning. Could you please speak to, well, I guess the following issues that relates to the second quarter? So, in the non-North American markets there's this traditional seasonal recovery. And if I look at the last second quarter, you had 9% sort of sequential revenue growth and 40% type of sequential incremental margins. And I guess, I am just curious whether or not there are some dynamics that happened in the first quarter in this year that might make a progression look different in the second quarter of this year.

For example, the progress in SPM, which might make the seasonal pickup a little less dramatic or Latin America that might be the case, but if you could speak to something in that dynamic and give us some perspective on the second quarter non-Am, that would be helpful.

Paal Kibsgaard

Well, in terms of Q2 consensus, you know that we don't give guidance, and looking at this chart, we are doing that, right? But I would just say that, generally, there's nothing dramatically different in our business today than what you saw a year ago. We expect good seasonal improvement in our earnings per share in Q2.

As I mentioned several times during the quarter, international looks solid and I think the main uncertainty continues to be the market evolution in the North America land and the main headwinds there are going to be continued pressure on U.S. land in terms of pricing and the calendar breakup, but overall we expect to see kind of a good seasonal improvement in earnings per share in Q2.

Brad Handler - Jefferies

Fair enough. Okay. Thanks. An unrelated follow-up please, just happen to notice significant pickup in working capital in Q1, which looks like it is stem from a sizable reduction in payables. Could you speak to that a little bit? What was driving that and perhaps give us some visibility on how cash might flow from working capital for the balance of the year?

Paal Kibsgaard

Well, I will hand that to Simon.

Simon Ayat

So, as you mentioned, Q1 normally is a bit of a pressure on our working capital. One of the reason is actually the year-end compensation for our employees that is related to incentives and bonuses that takes place in Q1 funding of pensions and others. So this is a major deterioration that took place on the working capital. As far as the rest of the year, we expect to have a pretty good performance on collections as we call this during the year. CapEx, as I said, is $3.9 billion. We will continue to buy back to compensate for the increase or the stock reissue in relation to the stock-based compensation. So now we think that going forward into the year, the cash situation will improve.

Brad Handler - Jefferies

Okay, and then just to clarify, I think I just heard you say, your starting point philosophy on share repurchases to cover what will be issued in shares as comp?

Simon Ayat

Correct and, as we always said, any excess cash over a period of time, we will return it to our shareholders. But the bottom level will be to compensate for creep in the number of shares., yes.

Operator

Thank you. next question is from Jeff Tillery with Tudor, Pickering. Plase go ahead.

Jeff Tillery - Tudor, Pickering, Holt & Co.

I guess, you are in China. You highlight China in one of your recent investor presentations. Could you help us think about, for one, size in the market for you guys today, the growth rate you guys are achieving. You have given us a little snapshot on Iraq recently as well. Any color you could provide on China would be very helpful.

Paal Kibsgaard

Well, China, for us is one of our fastest growing gear markets. We are seeing a lot more opportunity emerging here over the past one or two years. The offshore business, we have always been strong in and that continues to grow but we see a lot more opening up of the land business, partly in terms of complex conventional land developments where we are working with our traditional Chinese customers but also as the shale is opening up to a lot of nontraditional customers. They is significantly higher market potential for us even in that market. So are we are quite, I would say, bullish in terms of the overall growth potential and the growth rate that we expect coming out of China. That’s why we, over the past 12 to 18 months have been trying to, I would say, improve or extend our position in the country and we continue to invest into the business here, both in terms of capacity but also how we JV and partner with local players. So overall China is way up there with the highest growth regions that we expect in the next couple of years.

Jeff Tillery - Tudor, Pickering, Holt & Co.

The other one, Paal, if I had was just around Venezuela. Whe release and you reiterate today discussed ramping up of activity, could you just give us some color on this, anything on order of magnitude or timing? Is that a late this year event? Will there be any incremental disclosure around receivables here in the Q1 10-Q?

Paal Kibsgaard

We are not going to disclose anything further on receivables beyond what we did in January. Our collections have improved in Venezuela during the quarter. As I mentioned, we have had a very good dialogue with Petroleos. They are keeping it here as we are expecting to finalize this payment agreement in the near future. We are basically ready to ramp up activity to meet the needs of Petroleos. The magnitude of that, we are still discussing. They have a significant resource base in Venezuela. They have the need for our products and services and when we get this payment agreement in place, we are very much ready to support with that they need.

Operator

Next question is from Waqar Syed with Goldman, Sachs & Co. Please go ahead.