Schlumberger Earnings Call INSIGHTS: Russian Market, Focusing on Operational Quality and Efficiency

On Friday, Schlumberger NV (NYSE:SLB) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Russian Market 

Kurt Hallead – RBC Capital Markets: My question here really relates to the 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, 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? Can you give us a little bit more color around what’s really driving that improvement?

Paal Kibsgaard – CEO: 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 breakup impact came in as expected. So the main downward pressure we saw in addition was the continued pricing and caused challenges in hydraulic fracturing. So whether the non-performance 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 you still bidding lower in the liquids basins as of today. So if you look at both liquids and gas pricing is now about 20% down from the peak. Quite a few of these contracts have not yet been implemented. So I would say 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 are obviously well-positioned to offset the hydraulic fracturing but to what extent we can do it, it’s still a bit uncertain.

Kurt Hallead – RBC Capital Markets: You had some significant great performances in Europe, Russia and Africa. It seemed like it was pretty evenly distributed. In the second half of the year, you mentioned that Russia is going to be our 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?

Paal Kibsgaard – CEO: Well I said that Russia, as we indicated at the beginning of the year, we had identified Russia to be one 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. At the same time in ECA, we had North Africa land and Russia land generally strong growth drivers as well and we maintain those views. All this growth outlooks and expectations, we have to tie-in this all, 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.

Focusing on Operational Quality and Efficiency

James West – Barclays: 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 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 looks like now and of course internationally. I guess if you could perhaps elaborate on what these both internal and external actions maybe and if possible, what kind of additional leadership that could add to your margin profile?

Paal Kibsgaard – CEO: 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 our operations now for a number of years. Actually we started this Excellence in Execution initiative back in 2008, driving quality, and if look at our non-productive time in our worldwide operations at this stage we are now about 50% down compared to where we were, 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. 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 represents a significant part of our cost base and by driving efficiency even in small percentages with such a sizable organization has a quite a meaningful impact to the bottom line. But I would say that most of these or all these projects are multiyear projects and you will see gradual impact over time.

James West – Barclays: 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 in ’13? So I guess what I’m asking is, is there more margin uplift from pricing coming?

Paal Kibsgaard – CEO: We saw some impact of I would say international pricing in the quarter. 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 a 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 is reasonable to believe that this could continue into the second half of the year.