Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Schlumberger earnings Conference call.
At this time all participant lines are in a listen only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. If you should require assistance during the call. Please press Star then zero as a reminder, this conference call is being recorded.
I would now like to turn the conference over to the Vice President of Investor Relations Simon Farrant. Please go ahead.
Good morning, Good afternoon, and welcome to the Summit Limited second quarter 2019 earnings call. Today's call is being hosted from Paris, France, putting yourself or very limited board meeting.
Joining us on the cool pool, Kibsgaard, Chairman and Chief Executive Officer, Simon Ayat, Chief Financial Officer, I know, they're going to push Chief operating officer.
Well you want as usual so let's go through our prepared remarks, after which we'll open up for questions.
For todays agenda, Simon will first for saying comments on our second quarter financial performance.
And maybe I agree he was out results by geography.
Paul will close RMR for discussion of our technology portfolio and our updated view of the industry macro.
However, before we begin I'd like to remind the participants that some of the statements we'll be making today are forward looking.
These matters involve risks and uncertainties that could cause actual results to differ materially from those projected in these statements.
Hi, Def I'll refer you to our latest 10-K filing and other SEC filings.
Our comments today May also include non-GAAP financial measures additional details and reconciliation to the most directly comparable GAAP financial measure can be found in our second quarter press release, which is on our website.
Finally, after our prepared remarks, we ask that you. Please limit yourself to one question and one related follow up given the Q and a period in order to allow more time for all those who may be an acute now I'll hand, the call over to Simon Ayat.
Thank you Simon ladies and gentlemen, thank you for participating in this conference call.
Second quarter earnings per share was 35 cents.
Excluding charges and credits this represents an increase of five cents sequentially.
And a decrease of eight cents when compared to the same quarter last year.
There were no charges or credits recorded during the quarter.
Our second quarter revenue of $8.3 billion.
Increased 5% sequentially, largely driven by our international operations.
Pretax segment operating margins increased by 17 basis points to 11.7%.
[noise] highlights by product group were as follows.
Second quarter reservoir characterization revenue of $1.6 billion.
Increased 7% sequentially due to activity increases beyond the normal seasonal improvements, we typically experience into Q2.
These increases were primarily driven by strong multi client license sales and the higher international wireline activity.
Margins increased 81 basis points to 19.8%.
Due to the increased contributions from higher margin wireline activity and multi client.
Drilling revenue of $2.4 billion increased 1% as a stronger activity in the international areas was partially offset by lower drilling activity in North America land.
Margins decreased 45 basis points to 12.4%.
Production revenue of $3.1 billion increase 6.5% sequentially.
Primarily driven by higher international activity across all the product lines.
Margins were essentially flat at 8% as the improvements in international margins from higher activity was offset by the effect of pricing pressure in North America land.
Kemet and revenue of $1.2 billion increased 5% sequentially.
Margins increased 94 basis points to 12.6%.
These increases were primarily driven by one subsea and surface systems.
The book to Bill ratio or quarterly comment on long cycle businesses was 1.2 in the second quarter.
The one subsea backlog increased to $2.2 billion at the end of the second quarter.
Now turning to Schlumberger as a whole the effective tax rate was 16.7% in the second quarter compared to 15.5% in the previous quarter.
This increase was a result of the geographic mix of earnings.
In terms of cash flow, we generated $1.1 billion from operations, leading to $459 million of free cash flow.
Good performance for the second quarter, despite the temporary delays in receivable collection that we experience in certain regions.
Our net debt increased $335 million.
During the quarter to 14.7 billion.
We ended the quarter with total cash and investment of $2.3 billion.
During the quarter, we spend $101 million to repurchase 2.5 million shares at an average price.
$40.12.
Other significant liquidity events during the quarter included capex of approximately $404 million and capitalized cost relating to SPM projects of $181 million.
During the quarter, we also made $693 million.
Of dividend payments.
Full year 2019, Capex, excluding SPM and Multiclient investment is still expected to be approximately $1.5 billion to $1.7 billion.
Now I will turn the conference call over to alleviate.
Thank you Simon and good morning, everyone.
Our second quarter revenue increased 5% sequentially driven by international equity.
Our international business grew 8% outperforming national retail.
6%, while North America revenue grew 2% sequentially.
I'm pleased with the progress made on protocol to investments many of whom I met during the quarter on my visit to our global operations.
My comments today will include the government business I would start to fall North America operation.
North America consolidated revenue was 2% higher sequentially land revenue growing margin, while offshore who then person.
Political revenue increased 3% due to higher simonte revenue and improve once our duty fracturing fleet.
The nation in response to market them.
These positive factors, however were offset by the spring breakup in Canada, and lower demand for drilling services as a result of the focus on decline us land rig count.
North America land remains a challenging environment.
Yes, your broader focus on cash flow as cat activity.
Continued efficiency improvements I've also reduce the number of active rigs and slightly so far we've got major impact on North bridge.
In response, we continue our returns focus approach that bring new technology and working closely with the measuring the balance.
Nothing is finalizing the development of oncology Mircera resource.
Because these games.
Our competitive advantage in North America land operation continues to be one of the sensation technology and efficiency.
So first efficiency is one area, where we have made significant progress.
One new technology is the Menaflex, all new fluttering free delivery system.
Which significantly it's a multi well pad rigor and reduces non productive time and 60 reason.
Reservoir efficiency is another key issue for customers. We are seeing it really pickup of technologies that help customers design and the broader completion that mitigates overboard franchise well interference.
Two such technologies, our broadband shoot untrue comes in.
Our balance sheet.
Innovative flexible coat technology needs the risk of communicating with our factoring into.
By way.
By the end of June .
Broadband should services has been used on nearly doubled the number of stage when compare to all of 2019.
Who consume and improved stimulation efficiency by MBT fluttering treat in the target was about zone by improving the demand.
In the second quarter, Google Technology Berlin.
Shippers versus the previous quarter and general Motors has when compare to four York's doesn't it.
Yes, although north America land businesses, so faces them grew 5% sequentially and 6% year over year.
This was driven by the factory rental business benefiting from one of the flex technology and integration with one.
[noise] artificial is whats wrong would stick onshore MSP sales growth of 5% from new technology.
And people go through some system that outpace local service delivery.
Offshore North North America revenue increased 10% sequentially, primarily due to strong with surgical rich clown licenses.
While offshore rig count has yet to increase significantly customer interest is high indicating stronger activity coming in the civil and half of the year.
With the North America market remaining shines in the coming months, we continue to protect our operating margin by focusing on our joint execution and operational efficiency.
In the international markets, we continue to witness broad based activity growth.
More than half of the international Joe market posted high single digit revenue growth or better year over year.
This was mainly driven by rig activity, but our performance was also enhanced by capital market activity exiting normal seasonal rebound.
This improving extortion trends of last quarter also continues while offshore exploration review, who buy through the first half of the year. We got a sizable increase is new technology said.
As offshore momentum.
Shuttleworth a rig activity.
[noise] grew by 14% in the south and the productivity strengthening as new project assumption.
Come on international revenue grew significantly over quarter over quarter supported by Liberal edge of the Geo market structure.
This is the fifth consecutive quarter, where the total come on book to Bill ratio was greater than one.
This was also the first quarter since we acquired come along well all four product line, both long and short cycle grew revenue sequentially.
Consolidated revenue the Latin America, ARIA increased 12% sequentially from 21% revenue growth in Mexico, Mexico, and Central America Geomarket.
Well essentially converted downsizing cells had a strong quarter as exposure investment continues to gain strength offshore.
In dilemma Latin America, North America revenue was driven by SPM activity Cotto with Shire project continuing to improve on strong execution on what that's going to recover.
Europe's Yes Africa.
Sorry, our consolidated revenue increased 11% over the previous quarter on the back of seasonal activity recovery in the northern hemisphere, and the rig activity increase in eastern Europe .
You can pull to nickel Europe , Joe market, we're really exceeded expectations by growing 28% sequentially all product line expansion will.
In Russia, and Central Asia, Geomarket, we experienced workforce number when you go on silver recovery with the majority of product lines going moving high single digit or better.
Consolidated revenue in the Middle East and Asia Korea increased 5% sequentially, we saw East Asia, and Australia, Geomarkets underway with 19% sequential revenue growth, mostly driven by offshore team.
Elsewhere in the area the seasonal activity recovery in China was partially offset by lower activity in Malaysia and India.
Yes, Mark was lower on completion of NDS product and in Saudi Arabia, We will increase on sales of duties on completion.
The middle East the four common product lines that are double digits revenue growth.
Driven by increased activity and share gains across the portfolio.
As discussed in our last earnings call. We have initiated a systematic process to address underperforming business units and compact in international markets.
I'm pleased to set up more than to fill up our product line experienced sequential revenue growth in the international markets This quarter and each of them are they expanded their margin.
A few business units, however continue to be highly dilutive to our international margins and well looking at their performance very closely.
We continue to offer our customers result, underperforming complex exploring ways to eliminate ways to joint planning or execution.
Improving terms and condition to avoid unnecessary costs or excessive risk.
Most customer various efficiencies as they see the benefit of increased operational performance and our incurred any concern about securing supply of technology and resource for future activity.
[noise] this focus before the already provide promising visible improvements.
In our international markets.
As international activity increases, albeit from a capex is also prior to rise to all business units with higher returns.
Is there any capital deployment is creating some tightness in the market, which is another catalyst for pricing improvement.
To conclude we continue to see high single digit revenue growth internationally, excluding demo consistent with previous guidance.
At the close of the first half of 2090 international revenues increased 8% year over year, while North America land revenue declined 12% year over year.
These results are in line, probably view of the normalization global PMP spending.
And with that I will turn the call over to.
Thank you Olivier and good morning, everyone.
I will start by adding a few comments to complement the geographical review of the quarter provided by Olivier and highlight how the current market developments are favorably impacting the opportunity set for Somerset.
Let me begin with the macro environment, where the market sentiments remained balanced.
On the demand side. The 2019 agency forecasts have been reduced slightly on global trade fairs, and current geopolitical tensions, but we do not anticipate any change to the structural demand outlook for the mid term.
On the supply side, we continue to see us shale oil as the only near to medium term source of global production growth.
However, the consolidation among north American MP companies is further strengthening the shift away from growth focus towards financial discipline, while at the same time driving increased focus on HSC technology adaptation more collaborative business models and it would also potentially dampened the large variations in investment levels throughout the cycle.
These effects combined with the recent decision by OPEC and Russia to extend production cuts through the first quarter of the 2020 are likely to keep oil prices range bound around present levels.
Although the markets are well supplied from project sanctioned and partly funded prior to 2015. This source of supply additions will start to fade in 2020 , thereby further exposing the accelerating decline rates from the mature production basins around the world.
In addition, while the number of new F.I.D. approvals in 2019 are likely to increase again for the fourth consecutive year their size a number account for supply additions far below the required production replacement rates.
We therefore maintain our view that international MP investment will grow by 7% to 8% in 2019 at figure confirmed by the increasing international rig count and the growth seen in our international business in the first half of this year.
In contrast, the cash flow focused amongst the MP operators confirms our expectations of a 10% decline in North America land investments in 2019.
This means to welcome return of a familiar opportunity set for summary.
For the first time since 2012 and 2013, we see high single digit growth in the international markets signaling the start of an overdue and much needed multi year international growth cycle.
This growth is taking place in our backyard, where our technology performance and long standing presence is highly valued and where our market share and profitability gives us an earnings potential of two four times that of our closest competitor.
Our leading international market position is built on our scale footprint and extensive technology portfolio and further strengthened by the significant efforts we have made to evolve the company over the past five years, along the following three directions.
The first is our internal transformation program that has modernized our workflows and our organizational structure.
By getting stronger and more professional support functions with cutting edge planning execution and collaboration tools.
This has allowed us to significantly improved utilization of our asset base and reduce our operating costs through improved planning distribution and maintenance.
At the same time, we have been able to deploy our people and expertise more effectively.
All of this has created structurally lower capital intensity of our traditional product lines and lower working capital throughout our technology offering.
This will together improve our ability to generate incremental margins and free cash flow as international activity continues to increase and pricing headwinds gradually become tailwinds.
The second major direction, we have been pursuing is our digital strategy, which is built on the pillars of our cloud based applications platform and open data ecosystem and a broad range of edge architecture solutions.
Altogether. This represents a complete platform ready to support our customers in accelerating the digital transformation of our industry.
After years of R&D investments in line with this strategy. We are now introducing several applications to the market with more to follow in the coming years.
Within reservoir characterization, we recently introduced the Guy our platform at the AG Conference in London.
Gaia uses the power Adelphi to enable explorationists to discover visualize and interact with all available data in the basin without compromising resolution or escape.
In drilling our wonderful platform is the first digital drilling system that is fully designed for integration and automation.
It spans our drilling software applications, the automation ready rig of the future and the range of new downhole hardware that together will redefine the efficiency of land drilling operations.
And spanning production and Cameron, our recently announced NCR joint venture with Rockwell will upon closure be the first fully integrated oil field automation provider focused on production measurement solutions domain expertise and automation.
The third of our focus areas in recent years has been to reduce the capital intensity of our business. After we invested actively to build out the company in the early part of this extended downturn.
Our efforts to reduce capital intensity began with our decision to exit the marine seismic business in late 2017. After our advanced your physical measurement technology failed to deliver the needed financial returns over a number of business cycles and with no improvements and sites.
Another recent example is the divestiture of our land drilling rig business in Kuwait, Oman, Iraq in Pakistan.
Through the Arabian drilling company, a minority joint venture, we have had with our Saudi Arabian partner Taqa format for more than 50 years.
Through this transaction, we will eliminate the need for capital investments into this rig fleet, while maintaining access to the rigs for our integrated drilling operations in the middle East.
We will also follow a similar capital structure, but with other partners for the deployment of the rig of the future where we now have introduced the first rigs into us land.
We have also announced our plans to exit the business related to fishing and remedial services Drillco and Thomas tools that came with the summit acquisition in 2010 as these business lines are capital intensive generate a lower return on capital and are not core to our drilling operations.
Beyond our recently announced transactions, which will produce approximately $1 billion of gross proceeds in 2019. We have also stated our intention is to monetize partly or fully our two SPM projects in Argentina, and Canada to demonstrate our ability to generate value from the assets, we take under management.
And while we have decided not to undertake new SPM projects that involve any period of negative cash flow, we still see a significant opportunity to deploy the technical and commercial expertise, we have developed within SPM to less capital intensive contractual models.
On this basis, we have signed an Mou to work on a large integrated project in in the oil and 11 block offshore Nigeria, where we will act as the technical and project execution partner with funding provided by a third party.
This SPM light project, which involves no Schlumberger capital investment is our preferred SPM business model going forward.
We have also recently entered into a similar SPM light projected to manage the Raleigh field in Bahrain.
In addition to the divestitures and the new SPM light model. We have also structurally lower the capital intensity of our core business over the past five years, where we today run our operations with a capex requirement of around 5% of revenue compared to historic levels of 10% to 15%.
In addition to the major directions I just described our day to day execution focus continues to be on further improving the quality of service, we provide to our customers optimizing the deployment of our resources as we start to see shortages in several basins and to address our underperforming contracts and business units around the world.
Altogether this should enable us to restore profitability to our target levels and also to drive incremental margins and free cash flow going forward.
Let me conclude my remarks with a few comments as we transition to a new chairman and new CEO of Somerset.
Earlier today, we announced the appointment of Mark Papa as our new chairman and Olivia push as our new CEO .
I have spent the past decade, as COO CEO and more recently as chairman of Somalia, and while it has not necessarily been the friendliest of decades in terms of the business environment. It has been a fantastic journey and a great honor to be trusted by the responsibility to lead this amazing company, which is made up of the best people in our industry.
One of the most important duties of assisting chairman and CEO is to ensure an orderly succession process to the next leader, which in my mind involves several key responsibilities.
The first of these is to pick the right time to step down.
After a decade at the top of the company with the deepest and most challenging downturn in our history behind us and with the international upturn starting to take shape. Our therefore asked our board to start a succession process exactly 12 months ago.
The second responsibility is to fully support the board as they run the search and selection process for the leadership succession.
In this respect I provided input to the board on a broad range of topics, including candidate assessments.
The third is to support and guide the incoming CEO as he or she gradually takes over as the new leader of the company and it has been a pleasure managing side by side with Olivier over the past six months.
And the last responsibility is in my mind to walk off the stage as soon as the successor is ready to take over.
This provides the needed freedom and space for the new CEO to drive the changes he or she sees fit which is the overarching goals of any change in leadership.
This is why recommended to the board that are do not stay on as chairman.
I will still be attached to the company for a period ready to to be an advisor to mark and Olivier as required but beyond that I will step completely in to the background.
In closing I would like to thank the entire investment community for the enjoyable and constructive working relationship we have had over the past decade.
I would also like to thank my management team you are all amazing and also the board of directors, our entire organization our customers.
And our partners for their support.
I would in many ways Miss being part of all of this but it's now time to move on to the next chapter. Thank you. We will now open up for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press Star then one on your telephone keypad, you will hear a tone, indicating you have been placed in Q you may remove yourself from the queue at any time by pressing the pound key our first question is from James West with Evercore ISI. Please go ahead.
Hey, good morning, guys.
Good morning, James.
Congratulations on a 22 year run it for Brazil, including 10 years at the top and the modernization of the transformation of the company well done and Olivia Congratulations on your appointment as CEO .
Thank you. Thank you.
So Olivier I guess, you're up now so.
As you take over here from Paul and Paul I wanted a number the the initiatives that have been underway over over his tenure and structure. The last several years during the downturn could you, perhaps give us somewhat of an outlook go or some some guidance on how you see your strategy unfolding over the next several years what are the kind of the key points or at least some preview of your strategy I know you're going to outline that more detail later on this year, but if we get a preview that'll be great.
Hi, James.
I think you will understand my short term priorities clearly to complete the transition reform.
And to focus on execution during upcoming weeks on the unknowns as we go into free to write your opportunity set that this new market outlook presents to us.
I will gradually communicate element of the strategy. During the next few months and quarters. We met you on deployed initially with the leadership team going into 2020, I don't think is appropriate.
For the year to deploy and scale. These preferred area possible nuttiness setting in a set up that would be more appropriate so that could develop and then expose all of you to the wider derive arguing going fall.
Okay understood and then maybe a follow up a lot of the recent adjustments within slumber J have been the move to a more capital light structure to drive returns higher.
Paul out one of the several these transact recent transactions should we expect more of this in the future or has the asset base or the the business.
Mix and portfolio been cold enough at this point or is there more to come.
I think first I think this is nothing really new web sort of that two or three years ago and Green initiative, the DC in larger scale with.
The Westerngeco transaction about a year you on outflow I think we are sort of the management team agreed that we need to look at critically at every business, we own and look at the return on assets and return on capital and then the user.
A proactive approach do you anticipate the news every opportunity that exists in the market to diversified or do and run it differently and allows us it should at the very close the two of them. The read the RIDEA deal with NBC Middle East and the Acentia as I believe that it was not this area for the asset, but it was more for creating a unique.
Joint venture and change the market, where we stop there I think.
It will be dependent upon the market conditions, one and two on the result offer some element of the strategy, but clearly we will continue to look at every way we can improve our return on the capital return on equity and improve.
Improve LLC for the company So Thats a trust the trust me in process on this for the future.
Very good thanks Olivia.
And next we go to line of Angie Sedita with Goldman Sachs. Please go ahead.
Good morning, good afternoon guys.
Good morning, Andy Hi, Hi, I Echo James his remarks, certainly congratulations Paul on entering the next chapter of your career and we really enjoyed very much working with you and your willingness to meet with investors in the street right really appreciate it.
Thank you Andy.
So I think the the first question for me is to me or Paul or either one of you. Both is I think it's it's really interesting to see this announcement with Mark Papa as chairman of the board.
Sure but is this the first time that are not exactly has been named chairman first slumber J and it'd be helpful to hear the rationale around the decision is a corporate governance is that a focus on us land markets or.
General strength of Bob.
And is this a long term position or is this an interim position.
But I wouldn't read too much into the into the details of this.
I think the board is following pretty much the same recipe as when I took over there was there was a split of the the office Chairman and CEO also when I took over.
My previous answer our CEO .
Stayed on a bit longer but also we had another and non executive chairman Tony ice axe staying on for a couple of years after that as the chairman as well.
So as of this election is a is basically down to what the board has decided and display to the offers at this stage is the same as what we did when I took over and what the board decides to do going forward I think will be will be up to the board.
Okay. Okay, that's very helpful.
And then.
Then maybe for Simon is what a lot of discussion on free cash flow and the dividend I'm sure you've heard this as well.
Maybe you can give us.
Color around the outlook for free cash flow into the second half of 2019 is it reasonable to think that it could be.
Similar to 2018 levels in the second half for two and a half billion 2.9, I think it was last year and in that context, the importance of the dividend and the dividend coverage, which is roughly 1.25 times.
Okay. Thanks, Angie, let me just elaborate a bit on the cash as you notice in the second quarter.
We performed better than last year we.
Although we expected better actually we were some delays in.
Collection in certain geographical.
Regions.
But.
That put us at six months level or better than last year, we expect the second half to even be better than last year as well.
As you know we own was performed during the second we consume liquidity during the the first half because of working capital and we are improving during H two of every year and this year is not going to be an exception we will continue the trend.
And you will see that this thing we're very confident on what our plans shows that the.
The cash flow in the second half will be great.
Healthy.
And this takes me to this issue of the dividend coverage and return of capital we obviously.
We haven't been producing enough cash to cover the return on capital but.
We we know that this is a priority. This is an objective.
And we comfortable by that this level of cash flow free cash flow will be reached and we will be able to cover our commitment to the return of capital to the shareholders.
Okay, and then if I could slip one more in I mean with Paul denial announcement.
On his resignation, it's only natural think about the CFO succession, while we clearly lot of your time and we'd love to hear if there is any background on an air Paramount heir apparent and just general timing.
Well I would I will make the bold statement and say that.
Simon I will most likely retire at some stage a date hasn't been set yet and I think the date will will be set in between Olivier assignment and the board and the succession will be carefully planned and we will inform the market when we are ready.
Great. Thanks, I'll turn it over.
And next I go to a question from Scott Gruber with Citigroup. Please go ahead.
Yes, good afternoon to you all and I'll reiterate the dual congrats to both you pour into you Olivia.
Thank you. Thank you Scott.
And Olivia I realize it's early days, but just following up on Jane's is a strategy question. No question, we often get from investors is.
On one of them is this considered a core for slumber J in and.
How do you think about that business going forward within the the portfolio within the context of trying to reduce the capital intensity of the overall portfolio.
Yeah. Good question, Scott I think first and foremost I think one thing to remember is to spread into the North America land market.
Just to be to ignore and I believe that.
Our ability to extract value.
Work for our customers to a technical challenge and create efficiency for industries critical. So that's the reason why I think we are still in the market invested in technology to extract value and.
Amit our customer expectation there.
Going forward, we will use the term.
Look at the way we run this business and we got the Optionality.
Going forward all of doing it differently, but for now I think.
We are in the in this business to make it a business. We have made improvements on efficiency. We are working more closely with the international boys that are going in the in the basin also refer some large independents.
As energy efficiency and the impact began begun right now the feature is the future and we will determine on on the outlook of the market what is our position and.
Smart about what you think is a decision.
The managed the capital allocation accordingly.
Got it and a follow up on idea ourselves a bit surprised to hear some weakness in the ideas portfolio. During the quarter can you just discuss what happened in this segment. During the quarter was this just a speed bump is there something more to be concerned about here.
And then given the outlook Friday EPS in the second half how do we think about the outlook for the drilling segment.
In the second half of the year I think the original expectation was for overall revenue growth and drilling for the year of around 10% in an incrementals of 20% to 25% how should we think about those two items for the rest of the year.
Yes, let me first come back onto the onto the Q2 drilling performance as a p. two or three things played at the same time.
Actually internationally Exerial SDK companion ideas.
The the product line performed very well and have the growth internationally and Cougar margin.
Unfortunately, this was offset by the significant activity a drop in North America, both coming from the breakup and coming from lower rig activity by first person into the land.
Combining this leads the total ideas sequential.
It was actually lower than in Q1, and this is due to three things first.
Yes, Mark we completed a project next India as an activity that is linked to the public and last we had only flat.
Revenue or flat activity quarter on quarter, so so sorry.
He is asking for us to get compact and well in this area piece, where we are on the performance those as any project, we are focusing on improving all on quarter performance looking earnings.
And trying to improve from these two.
Accelerator on go.
This basket are conditioned Saudi we add geological when condition and operational issue that both combined Gee creates a setback for execution, but spend quite some time reviewing the team I've been with the team on the ground and I'm pretty confident that Judy team as understood. The gaps both technology and operational execution and that will gradually see from one of our performance in that is to get compact in Saudi and.
Converge into the ambition, we have which is too rich and be accretive from this execution today drilling a margin.
Do you think that margin convergence Kim can happen by the end of the year.
Okay. We will review the progress during the first quarter and planning to send back and be with the team sometime later this quarter to review progress and then we'll add that time review, which election, we bake it from the industrial.
Got it appreciate the color. Thank you and congrats again.
Thank you.
Next we'll go to line of Kurt Hallead with RBC. Please go ahead.
Hi, good afternoon in Paris.
And Paul I'll talk about the same path there I really appreciate your your accessibility and are you, but on the absolute best secured in a very very difficult environment. So kudos to you and look forward to what your what your next next gig is going to be and Olivier Olivier welcome aboard and look forward to get to know you work with you.
So kudos on both fronts. Thank you.
Yes.
So.
I guess my line of questioning here, where maybe focus on some of the operational dynamics and I was wondering.
Weather.
Paul Olivier either either one can you speak to the progress that you've made so far and improving the margins on the underperforming international contracts.
So as our first share during my prepared remarks, I think we initiated some initially on the earlier this year to focus on both the composite and the very specific underperforming business units and.
Hopefully doing reviews, but also making actions to change the flex and or to work with the customers in pools. So yes. We have made we have made progress nothing a few business units our contracts that were popular duty of transfer into neutral or accretive during the quarter and this is a.
Visible as a as I said more than to fill of our pipeline of expense growth doing internationally during the during the quarter and all of them expensing growth adds actually.
<unk> expense improved margins.
Quarter on quarter, which I believe is a is a first for Brian for Q4.
Nothing is due to some of these.
Heightened focus onto this underperforming business units. So no it's not over we see that a few you since you need or contract or execution. Our outerwear, we are not satisfied and I think you're well recognize this.
We have all eyes on the on this issue and we're working with the team to Googles.
Absolutely with customers. So that we grew our performance and continually will gradually improve our margins going forward.
Okay I appreciate that color. Thank you for that and then my follow up question would be.
Can you give us some general insights on what you see in terms of pricing trends for your drilling related business lines and Frac business lines in the west as well as what you what you've been experiencing lately or after pricing outside North America.
Well first starting with North America, Cindy the pricing is today.
Ill be depressed environment, both due to the weak activity decline.
That you have expense for the last few months combined with the excess.
Our capacity that still fit in to the North America business now this being said with the right technology with the right value creation with the right. The efficiency, we are capturing either performance or two particularly setup.
The pricing mix data fees fell level and we have seen that in our assess technology in the North America, we have seen that as a mansion in so phase Menaflex. We have seen this into some very specific dedicated fleet compact that we have with one steam and this help us mitigate the exposure to the spot price market that keeps going down in the market.
Now my Compass internationally, while the market is not uplifting.
The price on on the large tender for sure and we still see.
Very much the highly competitive and balanced across.
The goal is shifting some spot geography beat offshore, albeit in more remote geography, with the right technology beaten exploration, albeit in drilling for difficult webs and difficult condition, we are selling to obtain a base and upgrades on our pricing condition or simply getting the mix that is more favorable to our margins and as such as I've commented before several product line internationally I've had.
Quite robust full true.
In the last quarter.
Thank you appreciate that.
Next we go to the line of Bill Herbert with Simmons. Please go ahead.
Good morning.
You expect basically that you expect the market to.
I mean balanced [noise].
When.
One can make a case, which is shared by the by I think both the a and L. pack.
That non OPEC supply. They are certainly 2020 is going to significantly outpace global demand growth.
Call on OPEC is going well or.
And the only thing keeping oil prices, where they are as a combination of rational guardianship on the part of Saudi and GC C. On the one hand.
And embargo than corn oil in the form of on Venezuela. So so walk me through your thesis is to why you think the market stays balanced.
Well, let me let me check on that one so so overall, we're pretty saying is that the balance between demand and supply as we see today, we don't see it changing dramatically as we as we go into 2020 . The main issue I think around the the oil price today is the is the negative overhang around trade and what the implications of that is going to be for the medium to long term. So I think in in our assumptions. We expect that there will be some type of resolution to this that it's not going to go on for a for a long time.
And Ah that we that we will not have a structural change to the global demand outlook on the supply side as I said in my prepared remarks, we see a gradual in or full of all the supply additions from the projects that were sanctioned and largely funded prior to 2015 and this will have further expose the accelerating decline that we see in the in the more mature production base you can look at Norway UK.
Nigeria, Indonesia, Mexico.
And and so forth and you will see there and even the the non pre salt in Brazil, you will see that there is significant declines taking place there and I think with that we don't see a major tailwind on non OPEC production outside the U.S. in a in 2020 and we'd also the lower investment that was in the U.S. and there will be growth in 2020 into U.S., but I think it's going to.
Show, a decelerating pace and that's why when you combine all of these things we believe that the current situation is a is roughly where we will find ourselves also in 2020 .
Okay, well time will tell and I hope you're right.
The second question is with regard to.
Use on the third quarter, if you could talk about that your comfort level with street estimates et cetera. Thank you.
Well there.
Yes, I think just to to give a little bit for life on this so we do anticipate a similar earnings step up sequentially during the fourth quarter.
And as such we believe that the current street estimates are achievable, however, with no visible site.
Indeed, we expect the momentum in international growth and the relative margin expansion to continue that's a that's what you have seen.
And we do anticipate also the loss on the cartilage outlook to remain challenging.
As a result of securing the sustained putting pressure on limited or no activity increased capacity for growth.
So not in all were resorting to the gals ship.
Okay. Thank you.
Thank you.
Next we'll go to the line of Sean Meakim with JP Morgan. Please go ahead.
Hi afternoon, everyone.
I want to go back I wanted to circle back to the dividend. This is something that we discussed with you at our conference in New York last month, but it seems worth addressing here in this forum as it's a common investor question. So Olivier could you maybe speak to your commitment to the dividend as you step into the sea and Simon if we can maybe look beyond 19 could you walk through the levers that are at your disposal to cover the the $2 dividend with earnings and cash flow. If we end up in a lower for longer scenario in terms of how that how the macro unfolds.
So let me first reiterate what I said, indeed to the Investor community back in New York is that Oh, we are committed and I'm personally committed to the dividend will not be the first you have to sit back on these commitments so come to me and count on the team and the commitment we have.
To the operating margin improvement and working capital improvement to make it to make it the city and the reality is doing for a while.
Okay. Let me, let me just repeat a little bit what I said about the cash.
She is.
Was the performance that we have achieved the first six months and what we anticipate in the following six months.
And helped a bit by the divestitures that we have announced we're going to cover everything and overall reduce our net debt.
Slightly but we will.
Which.
In other words.
We will reduce our net debt, which has a borrowing and we wouldn't be able to cover.
All the commitments.
The dividend and the continued.
The buyback that we are performing on a quarterly basis to avoid the increase in the share count as a result.
The.
Stock based compensation.
Now I'm going to go and.
And confirm on our expectations for next year.
Next year.
2020 hour forecast today that the dividend.
Wouldn't be covered through a the generation of cash from operation.
And.
We wouldn't be able to to to cover the again the dividend and we will continue with this more.
Buyback so the commitment to dividend as Olivier mentioned historically.
There is no question about us maintaining the dividend and I think given our forecasts and what we see the way we gone to conduct the <unk>.
The working capital and the investment in the projects, we will have ample cash to.
To to cover.
Very good. Thank you for that I think thats, an ongoing the divestiture, let me let me finish on the divestiture, you'll have a threed divestitures, which are close to a billion dollar.
And what we what we anticipate what we included in our scenario for this half is at least two of them will be completed in the second time.
Thank you for that and it's very well received.
We we haven't spoken on Cameron yet and so.
I was hoping to get a little more of the outlook there.
Maybe confirmation from your perspective that we've we've hit a trough in the margins in the first half of the year, perhaps in the first quarter.
In the release there are some nice contract wins with Chevron and shell I noticed.
How do you view, how do you market share and sub sea, and perhaps and pricing as well as integrated projects are becoming a bigger part of the demand mix there.
Well good question. Thanks.
I see further come on the group continues to perform very well.
I think you have seen a long cycle business school to be caused you to increase backlog now run access of 2.7 billion that are mostly from subsea and the short cycle as well as continuing to maintain share in North America, and they're getting share internationally, so you're seeing that mix.
Includes increasing share internationally for the short cycle and maintaining share and the rebounding from the activity looks like a rebound is combining to help us.
With not only growth, but also margin improvement.
Over the past so I think the margin, yes, I think we have made that come on that we believe the margins Rockies BNS.
And I believe that this is roughly the case and I think we are we see going forward steady growth read on the backlog that the that the long cycle of accumulated and build on the gain on the international growth as you have seen international growth was.
Across the full product line in Q2 sequentially. We expect this to continue in the second half and this is built on the leverage of the.
Your markets franchise that have started to take place and is getting a tailwind to the come on organization now more specifically to subsea.
Im very pleased with the engagement and the relationship and the alliance we are with.
Subsea seven.
We have actually in connection with this we have received the equivalent I trust clearance and as such we have accelerated our elevating allowance to now having dedicated management joint management structure that overseas not only the engineering, but also the pursuit of new opportunities to get the product and the execution of project.
Doing well doing integration. So it was up to which I think you may have seen it where quite quite successfully in the last few quarters will gain again against competition integrated the joint product and I think the feedback that I've received personally on the customer on that.
Okay, Zack and his team have received from the from the customers excellent will form the execution.
But also as we presented wanting to the customer we also offer them, an optionality to choose us independently and.
Go with you go to surf package or the SPX package.
So I'm confident that this integration will continue to be a success for both company and I'm very confident that we regard the onesubsea leadership they have on the tie back.
Compression and execution tactical they have they are the execution company subsidy, what I've seen particularly edge on the on subsea subsea processing Green compression. We have seen the recent award function on a longer in the in Norway against major I will add that cement our leadership into subsea processing system that have the availability and the delivery of the category that it comes because in a while so they would align and I'm confident.
Very interesting thanks Olivier.
And our next question is from David Anderson with Barclays. Please go ahead.
Hi, Good morning, Olivier just question on the offshore side I think you had said in your remarks that this shallow water business was up 40%.
In the first half year year over year was also really more curious on the deepwater side 40 recounts of 2020 rigs or so this year beginning of this year.
See more if I'd exploration activity is is lining up for sort of an inflection as deepwater part the market, which is so important to Schlumberger business is that a 2020 event is it too early to tell kids kind of help us understand kind of how the deepwater markets framing up for you.
Yes. Thank you first for correcting the number or maybe I missed this but he was 14% one 4% shallow water rig activity.
That this continued growth the deepwater is seeing less growth of rig activity at the moment.
More single digit yet we are seeing if I'd, there's quite a number of it that are lining up in the in the third and fourth quarter of this year that will translate into growth and acceleration on deepwater as you expect in two.
Into next year now the upshot is that large I think is very suited on deeper on the on shallow both in middle East and in Indonesia, and deepwater is seeing the bounds of activity in the in the West Africa at large so our physical regional this is this a level.
As I did comment in my prepared remarks the.
Offshore exploration is.
Is up more than 30% year on year, a year to date on this but if it's very much.
Right. So the deepwater activities more late cycle increase that we see from the second half and into next year.
Great.
Thank you a completely different subject North America Im sure Youre getting bombarded with the talk of VP capital discipline like everybody else's.
Well and I know you don't know exactly how the year is going to play out, but fourth quarter activity kind of looks like it could have been similar to last year is that how you're preparing your business right now for sort of the cadence of spending in North America to look similar to last year and if so what does that mean does that mean that you are prepared to mort stack more equipment. How do you prepare your business for that type of market, which could potentially fall off in the back part of the year.
No you are correct that the assumption. We're also taking a thing we do expect and anticipate that the combination of seasonal slowdown on budget exhaustion, we create a trough in the fourth quarter as we have experienced last year, but will be followed most likely buyer strengthening and non activity in Q1.
Across the quarter hour. So we are prepared for this we are going it last year will be a driver will be.
Yeah, certainly stacking some equipments will be going and doing what is necessary to.
Through two with some this disruption, but we are ready for it.
Agility is one of the one of the focus of the team both.
Normalization to responding to the market trough and peak so what we'll do that again this year.
Great. Thank you Olivier So we look forward to hearing from you later this year on your broader strategy. Thank you.
Thank you.
And next we'll have auto question from Jud Bailey from Wells Fargo. This is our last question. Please go ahead.
All right, Thanks, and good afternoon to you guys.
First of all Paul it's been good working with you over the years and good luck.
On the next chapter for you and Olivier I'll I'll say also congratulations to you as well.
Thank you.
Yep.
My question I guess Olivier just thinking a little bit bigger picture on North America, given the outlook that looks like the U.S. market definitely need to grow but maybe for the next couple of years. How are you thinking about getting margins higher in that business, you kind of talk a little bit about what its down a little while ago, but what about just North America more broadly how do you how do you drive better margins in that business and in this market where year over year, maybe sloppy, you're also having to navigate through pretty pretty severe seasonal swings as well quarter to quarter.
No. That's a challenge of your face and I think the way we are addressing this is two fold first focus on our own.
Okay efficiencies.
And on productivity and I think we have deployed the symbol.
Several parts of businesses them. These dollar tools and technology that improve our own surface efficiency that improved the way, we operate deploy equipment and run a remote operation in the North American basis, and that has over time proven to be.
Putting through and helping to protect our margin.
Now the second aspect is a visible efficiency or addressing the gap of.
Technology that the customer looking for to address some of the technical challenge and the specifics of Banchile interference.
And all those specific performance compact that some of the major are ready to engage us with so pray on both a continuing execution on productivity efficiency monetization.
Which has already gained a lot of.
Pull through and aligning more we've some critical customers potty around the technical challenge or around one began like we did with oxy novelty new Mexico around performance based on part and then using and leveraging our system performance to extract the margin. Both this will be played one to protect.
Our cost structure and to be more quality than the one uplift and capture some of the value we focused and so this will.
We protect and increase our margin going forward.
Okay, all right I appreciate that and then my follow up.
He is on the third quarter commentary I think I believe you said.
You are comfortable with where consensus is and I wonder just to understand a little bit better does that envision.
Like a recovery a little bit better margin trajectory from the drilling business, which stepped down this quarter took the hit third quarter consensus do you envision that that you're drilling margins are probably more in line with where you would have expected them earlier in the year, because obviously about margin progression and how you're thinking about that in the various segments.
Absolutely I think the mix, we believe the difference or did.
Similar trajectory for international I would expect that some of the setback we had in the second quarter result themselves and the activity mix will present itself sort of opportunity for drilling to perform slightly better next quarter.
Okay, great. Thanks, I'll turn it back.
So let it doesnt romance. Thank you very much so before we end today's call I would like to first few closing comments.
Firstly I want to reiterate my one of our precision two oldest familiar humphries will contribute to last quarter success.
I'll sit on performance, so one quarter performance with both solid.
On earnings and cash flow generation.
The backup for both international and offshore market recovery, partially offset but it does have some challenge in North America land market.
We need to respond very well to these phenomena setting leveraging our international footprint of technological strength.
Our efficiency and performance execution with most of pipelines Andover, posting material revenue growth quarter on quarter.
Our elevated focus on service quality underperforming business units and Quickparts additional capital location.
I've also as of the margins improvement internationally.
Additionally, we are working closely with our customers to inflect more but for most amazing complex and we are currently planning the mobilization of the upcoming activities in response to increased concern about two to supply a resource and technology.
Looking forward, despite the fears of global trade and geopolitical tensions.
The current activity trends look set to continue well into the second half of the year with a next quarter driven by strengthening activity on increasing international spend whereas we don't spend the North America land market to provide not only from pricing pressure and little or no income on productivity.
We believe that these market conditions continue to align very well with properties not trained partly on our ability to generate much differential earning potential and we expect that the momentum initiated during the second quarter to continue during the remainder of the year.
Finally, I would like to express my sincere thanks to Paul for his support and guidance during the past six months, while recognizing the contribution yet made to the company for the last decade.
As a privilege to work side by side with bordering most of the last 10 years and I've been very impressed by his unique leadership skills.
And his ability to steadily transformed the company in a very difficult buyers and prevention measure for future success at the heater for new growth cycle internationally.
I believe in particular that the monetization platform of digital technologies are shipped the block during the last few years, we represent the foundation upon which we will develop our next chapter with an increased focus on cash and returns.
I look forward to continuing don't gizmos, the investor community during the quarter, we pull up to see many of you during the energy conference early September .
Thank you for your attention and bus Division three school.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.