Operator:
Ladies and gentlemen and thank you for standing by and welcome to the Schlumberger Earnings Conference Call. At this time all lines are in a listen-only mode later we will conduct the question-and-answer session and instructions will be given to you at that time if you need assistant during the call today you may press start then zero and operator will assist you offline and as reminder today's conference call is being recorded.
I'd now like to turn the conference over to Mr. Simon Farrant. Please go ahead.
Simon Farrant: Vice President of Investor Relations:
Thanks Good morning and welcome to the Schlumberger Limited, first quarter 2016 results conference call. Today's call is being hosted from Houston, following the Schlumberger Limited Board meeting.
Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer and Siman Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paal. Simon will first review the financial results and then Paal will discussed the operational and technical highlights. However, before we began with the opening I’d like to remind the participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore 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 measures can be found in our first quarter press release which is on our web site. We welcome your questions after the prepared statements.
I’ll now turn the call over to Simon.
Simon Ayat: Chief Financial Officer:
Thank you Simon. Ladies and gentlemen. Thank you for participating in this conference call. First quarter earnings per share was $0.40 excluding charges that recorded in the first and fourth quarters of last year, this represents decreases of $0.25 sequentially and $0.66 when compared to the same quarter last year. Our first quarter revenue of $6.5 billion decreased 16% sequentially.
While pre-tax operating margins decreased 281 basis points to 14%. These decreases which were driven by continues activity declined and pricing pressures resulted in incremental margins of 32%.
Highlights by product group were as follows; First quarter's reservoir characterization revenue of $1.7 billion decreased 20% sequentially while margins decreased 480 basis points to 19% resulting in incremental margins of 43%. These decreases were largely due to seasonally lower software sales and a fall in high margins exploration activity. Drilling group revenue of $2.5 billion decreased 16% sequentially while margin declined 183 basis points. These decreases were finally driven by activity declines across all areas.
Despite these declines the incremental margins were limited to 27% on strong cost controls Production Group revenue of $2.3 billion decreased 11% sequentially on margins felt by 335 basis points. Primarily on lower pressure pumping activity and further pricing erosion in North America land. These declines offset impart by strong contributions from SPM resulted in the incremental margins of 33%.
Now turning to Schlumberger as a whole. The effective tax rate excluding charges and credits was 16% in the first quarter compared to 18% in the previous quarter. This decrease was largely driven by the significant sequential drop in pretax operating income we experienced in our North America business.
With these reduced overall levels of pretax income that we are currently experiencing relatively small changes in our tax expense line will have the disproportionate impact on our ETR. This can make our ETR more volatile as compared to prior years. Looking forward the acquisition of Cameron is not expected to have the material impact on our overall ETR. However, due to the sensitivity of the overall geographic earnings mixed of the combined business we do expect an increase in the ETR for the rest of the year that's compared to the first quarter.
We generated $1.2 billion of cash flow from operations. This is despite the consumption of 14 capital that we typically experienced during Q1 which was driven by the annual payments associated with employee compensation. As well the payments of $260 million in severance during the quarter. Our net debt increased $1.1 billion during the quarter to $6.7 billion.
We ended the quarter with total cash and investments of $14.8 billion. Cameron had $2.2 billion of cash at closing and we paid the Cameron shareholders $2.8 billion in connection with the transaction. Therefore we effectively started off the quarter with $14.2 billion of total cash and investments.
During the quarter we spend $475 million to repurchase $7.1 million shares at an average price of $67.43. Other significant liquidity events during the quarter included roughly $550 million on CapEx $600 million of SPM investments $170 million of monthly plan and $630 million of dividend payments. Excluding the impact of Cameron, full year 2015 CapEx is now expected to be approximately $2 billion. This amount does not include investments in SPM or .
Cameron's full year 2016 CapEx is expected to be approximately $200 million of which $37 million was spend during the first quarter.
Let me take a few minutes to provide some additional financial details relating to the Cameron acquisition which as you know closed on April 1. In connection with the closing of the transaction we assume gross debt was recurring value of $2.8 billion. During April we repurchases approximately 1.2 billion of this debt. This combined with the effect of the purchased accounting adjustments to fair value to debt, will result in Schlumberger chase pre-tax net interest cost increasing by approximately $15 million third quarter starting in Q2.
We still expect pre-tax synergies to be approximately $300 million over the next 12 months and $600 million in the second year. These numbers consist primarily of cost as of course to revenues synergy in the first couple of years. However we remained most excited about the opportunities for revenue synergies which are very significant are expected to grow considerably in the future year.
Although we are in the process of finalizing our purchased accounting. We estimate the pretax amortization expense as the result of fair value adjustment to the acquired assets will add approximately $65 million on a quarterly basis to all of corporate and other expense line. The transaction will be treated on both an EPS and cash-flow basis within the current year.
As a reminder going forward we will be incurred measured and integration related charges. This will include transaction costs. The cost of integration team one-off purchase accounting adjustments as well as cost to achieve synergies. These tool most significant in Q1 but they will continue for the rest of 2016 and into 2017.
We will separately call out these charges for you as they are incur.
One last item is how to we will report Cameron going forward. Since the acquisition of Smith five years ago our groups have serve as the primary reporting for SEC purposes. Starting in Q2 Cameron will become the fourth group in the structure, along with our existing reservoir characterization drilling and production groups. Additionally the revenue of these four groups will be combined and reported consistent with Schlumberger's current area structure.
However, this will only be revenue reporting as we were no longer report operating income by area. Paal will further elaborate on the rational for this change. Shortly after this call we will be posting pro forma quarterly financial information in this format going back to Q1 2013, taking you through Q1 of 2016.
And now I will turn the conference over to Paal.
Paal Kibsgaard: Chief Executive Officer:
Thank you Simon and Good morning everyone. Activity fall sharply in the first quarter as the industry displays clear signs of facing a full scale cash crises. We experienced activity reductions worldwide with the rate of disruption reaching unprecedented level. The start to the new year and a new budget cycle represented a further fall in customer E&P spend and we expect the continued weakening in the second quarter, given as a magnitude and the rapid nature of the ongoing activity disruptions.
This outlook is backed by the latest 2016 E&P spending surveys which indicate sharper falls then year figures. Global spending reductions in 2016 are now approaching 25% corresponding to a fall of 40% to 50% in North America and around 20% in the international market.
Our first quarter revenue fell 16% sequentially, -- represents the second deepest quarter the declined we've seen in this counter that has now persisted for six straight quarters. Rig count activity felt in all parts of the world as customers further reduced budgets and continue to exert pressure on products and service pricing while our operation is also separate from product delays and job cancellations.
In North America revenue fell 25% sequentially as the US plant rig count declined by 31%.
By the end of the quarter the US plant rig count had fallen to around 400 representing a drop of 80% from the peak of October 2014 and marking a third phase of a downturn that is the most severed industry has seen in thirty years. The latest fall in activity had been particularly steep as seen by our North America land revenue which is 29% lower sequentially on reduced activity and increased pricing pressure together with the early onset of the Canadian spring break up.
In spite of this downward acceleration in activity our new technology sales remains solid and we also see growing customer recognition for the values of our integrated technology offering. North America offshore revenue were down 18% sequentially driven by lower rig activity and project delays and cancellations. In addition more declined price mix sales so unprecedented low level resulting in a negative operating income of $36 million in the first quarter due to the ongoing amortization of our multiclient.
These growth combined with the dramatic growth in activity and continued pricing pressure across our overall operating margins in North America to fall into negative territory. Throughout quarter we maintained our focus on tailoring costs and resources to activity level while safe guarding our operational infrastructure and technical capabilities we anticipate this approach further reduced our possibility levels however our cash flow in North America are still remained positive.
Turning to the international markets, revenue was 30% lower sequentially as customer budget project cancellations seasonal winter slowdowns and foreign exchange weakness versus the US dollar all impacted results. Fourth quarter international operating margins slips to 21% driven by the significant activity reductions and persisting pricing pressure. The Europe/CIS and Africa area was the worst affected while the Latin America and the Middle-East and Asia areas were able to maintain flat margins compared to the fourth quarter and in total our international sequential incremental that incremental margins improved in the first quarter to 27%.
Looking at the international areas in more details revenue in Latin America declined 9% sequentially while pre-tax operating margins remained steady at 23% driven by proactive cost management initiated in the previous quarter and the start of a new integrated project. In Argentina activity soften further in the first quarter and revenue was also negatively impacted by the weakening of the peso. Activity in Brazil and Colombia continues to be in threefold and was in the first quarter down 50% and 75% respectively compared to the first quarter of last year.
we are executing well on our SPM projects with productions and you should think the exceeding 90,000 barrels per day during the first quarter and we continue to invest actively in our integration project in the country. Revenue in Venezuela was down sequentially but we did see higher activity in the Faja joint ventures compared to the fourth quarter. In Venezuela the rate of cash collection has been insufficient in recent quarters and in spite of -- efforts to get with our main customer we have been unable to establish new mechanisms that address these issues.
Therefore as we already announced we have decided that we will not increase our account receivables balance beyond the level reach at the end of the first quarter. This means that activity level in Venezuela going forward will be aligned with the rate of cash collections from our customers in the country. In doing this we are working in close coordination with all customers in Venezuela to continue to serve with available cash flow and to ensure a safe orderly wind on of operation for the others.
We have been working in Venezuela since 1929 and in spite of this temporary reduction in activity we remained committed to the oil and gas industry in the country going forward. In Europe/CIS and Africa revenues down 18% sequentially while pre-tax operating margins drop by 194 basis points to 19%. The growth in revenue was led by Russia and Central Asia where a weakening of the Ruble and the seasonal winter slowdown both on land and offshore impacted results.
In the North sea revenues are also lower due to customer budget cuts seasonal reductions in activity and also severe weather conditions. While widespread project delays and jobs cancellations in Sub-Sahara and Africa contributed to another significant sequential reduction in revenue in this region. In the Middle East and Asia revenue declined by 11% sequentially while pretax operating margins remained flat at 22%. The sequential drop in revenue was led by Asia with lower activity in China from the seasonal winter slowdown and also by weaker activity in Australia and the Asia-Pacific region as a result of continued customer budget cuts.
First quarter revenue was also down in the Middle East regions where solid activity in Kuwait the United Arab Emirates and Egypt was more than offset by reductions in the rest for the region. In terms of operating margins the lower activity and pricing pressure seems throughout the area was offset by adjustments to our cost and resource base as well as by further implementation of our transformation program.
Turning now to our technology offerings the Cameron transaction closed in April 1, 2016 and on this state Cameron became the fourth Schlumberger product group joining our rest of our characterization drilling and production groups. We are very excited and pleased to welcome the Cameron employees under the leadership of Scott Rowe to Schlumberger and we are already in full implementation mode of the detailed integration plans we have jointly prepared over the past seven months.
In terms of financial reporting Simon has already explained that we will report Cameron financial results as a fourth global group and also that Cameron's revenue will be consolidated with the rest of the company on a geographical basis under the four reporting areas we currently disclosed. While we at the same time will discontinued the geographical reporting or pretax operating income. So let me explain the reasoning behind this change first the Cameron group is they centrally run manufacturing business. Based around large plants that address global markets and very customer billings around the world is largely separated from where the costs are incurred.
Combined Cameron group revenues with the rest of the company will therefore give a good representation of customer activity for the entire company. However Cameron has historically not allocated out the large central cost based because managing these allocations are associated with significant extra work load. At the same time the traditional Schlumberger business although a different in nature from Cameron is also evolving towards a more regional and central set up as part of our ongoing corporate transformation. Our geographical presence from both the customer interaction and well set execution stand point will never change and we always remains central to how we run the company.
However the overhead structure that is employee to support our day to day customer operations represents a significant part of our cost base which can be dramatically streamline and reduced through the centralization drive of the transformation program. Schlumberger therefore also whether it's a growing distance between revenue build our customers and where we incur a large part of our costs.
Based on this we have therefore decided to discontinue the reporting of pre-tax operating income by the geographical areas. Beyond this we will continue to report orders and backlog for the Cameron long cycle businesses of one Subsea and drilling and for the WesternGeco Seismic business.
Next let me want from financial reporting to new technology. The technical driver behind the Cameron transaction is our believe that the Camergon Technologies will be critical enablers in the development of a new generation of integrated surface and subsurface systems that have the potential to make a step change in both drilling and production performance.
One example of this our land drilling system of the future that brings together purpose is surfaced in down all hardware which is ready to be integrated in to a complete drilling system over seen and managed by a common optimization software that will deliver a step change in operational efficiency.
Cameron brings expertise and technology in the areas our top drives, pipe handling systems, and -- while the new systems will also draw on the acquisition and rig manufacturing JV we made last year. Five engineering prototypes of the new system will be ready few testing in 2016 in Ecuador and the U.S. with full commercial introduction on cracks for 2017. Another example is our new hydraulic factoring system which will be introduced in 2017.
Where we will bring together new hardware technologies and significant process reengineering as well as the common operating and optimization software.
This system was found complete range of surface components such as Cameron's --pressure control and -- systems to get a bit our own -- fracturing clean up and flow back services as well as our latest download completion technology and fracturing fluids. Both of these systems will initially be deployed within our current CapEx budget of $2 billion for 2016 which excels has been reduced by $400 million from our initial guidance.
Our ability to invest through this unprecedented industry down turn on the back of our strong cash flow and balance sheet enables us to capitalize from the current market conditions to gain significant relative strength compared to our surrounding. In addition to our traditional CapEx investments we also continue to invest in new production management projects leveraging our broad subsurface and integration capabilities and example of these is the ultra-project we started off with Ecuador during the first quarter where we are building further on the highly successful -- project which is now its fifth year of operation.
Multi-client-- service is another line of business opportunities we continue to invest in where our current focus is on the exciting-- in Mexico and largely on its floor areas offshore-- beach and South Africa. As have the second quarter we have a total of eight active and the three of these using our unique as a metrics technology.
We also continue to make M&A investments in each technologies that fill gaps in our portfolio building our ability to develop specific new services. We mentioned two of these in today's release with one being Meta Down hole metal-to-metal sea technology for using our completions product line while the other brings expert consulting abilities and support of the expansion of our integrated project portfolio and finally we continue to focus on returning cash to our shareholders through dividends and stock buybacks which combined the market to $1.1 billion in the first quarter.
Turning now to the short term outlook, we expect market conditions to worsen further in the second quarter as customer continue to reduce activity. Excluding the addition of revenue from Cameron this market outlook together with our decisions to reduce activity in Venezuela could lead to a sequential percentage fall in revenue for the second quarter similar to what we saw in Q1.
Cameron revenue on the other hand is expected to be flat sequentially in this environment continue to tailor service and overhead cost to activity level while preserving long-term operational and technical capabilities which will represents a further burden on our operating margins Vancouver in particular in North America.
Our overall view of the oil markets however remained unchanged where a steady tightening of the supply and demand balance is taking place the latest records from 2016 demand growth remains solid while production levels have been largely flat since the mid or 2015. Production in North America continues to fall as declined rates are becoming more pronounce while the mature non-OPEC production is now falling in the number of regions. As we navigate this landscape a number of positive factors making optimistic and confident with respect to Schlumberger future.
First the magnitude of the E&P investment cuts are now so severe but it's an only accelerate production declines and the consequence operate movements in oil price. Second our financial strength enables us to continue to invest in the range of opportunities across a number of our businesses. Third the massive capacity reduction in the service industry will help restore exist part of the international pricing concessions we have made once oil prices and activity levels start to normalize and last while we have reduced capacity significantly we are safe guarding the core expertise and capabilities of the company beyond our immediate operational requirements. We therefore remain confident in our ability to whether this downturn much better than and our surroundings.
To our global reach the strength of our technology offering the strategic moves we have made and our corporate transformation program we are creating the leverage that will enable us to increase revenue market share and continue to produce superior earnings and margins.
Thank you very much. We will now open up for question.
Question & Answer
Operator:
Thank you and ladies and gentlemen if you wish to ask a question please press star followed by one on your touch tone phone. You'll hear tone indicating that you have been placed in queue you may remove yourself form the queue by pressing the pound key. If you are using a speaker phone please pick your handset before pressing the numbers and once again its star and then one for any questions or comments and we will go to a line of Ole Slorer with Morgan Stanley. Your line is open.
Ole Slorer: Morgan Stanley:
Yes, thank you very much and thanks for good round on the Paul. Our CapEx agree very close with you outlined but despite that at least in Morgan Stanley we have a pretty big debate about the exact timing and the exact impact of these cuts on production. I think U.S. , and the Middle East is getting extremely well understood but be very grateful if you could share your insight, from some of those areas so that role that have land rig counts that have gone down 80% - 90% in many cases but very little data available so what's your sort of take on what's going on -- to so some of the Latin American markets or West Africa or let's say China, if you can give us sort of a high level, a bit of -- mentioning in the specific country or customer of course some insights into what gives you confidence that the markets are rebalancing.
Paal Kibsgaard:
What I would say, if you look at non-OPEC production side of North America it is very clear that it's now in full decline. If you look at non-OPEC production and overall it drops by 930,000 barrels over the quarter Q1, about 50% of this was North America and the other half was international OPEC. The leading driver outside of the U.S. In terms of this production growth is seen in Mexico, Colombia, Brazil, the UK and in China.
So, 930,000 barrels of drop over the course of Q1 is quite significant and non-OPEC production is now already 400,000 barrels a day down year-over-year. So, based on this, we believe that the current over supplying is expected to shrink to almost zero by the end of 2016. In Q4 this year non-OPEC production is now forecasted to be down 1 million barrels per day and year-over-year. So that basically, it increases the call on OPEC from today's level to Q4 by 1.8 million barrels a day which is quiet a significant increase.
So yes we believe and I think we agree with you that's the oil market is in the process of balancing.
Ole Slorer:
That's have some big numbers I mean what where did take in your view eventually the industries going to have to go back to work again because once we've understood on the supply side, prices will take care of that but what will it take in order to stabilize and grow production again, globally given the contraction as you highlighted in service capacity and the lag between investments and or lack of investments for that matter and production.?
Paal Kibsgaard:
I think Ole we need significant increases in E&P investment it is no way you can get around that, but if you look at the space of the return space of the industry today and you look forward to 2017 there limited sources of short term supply that can be brought into market. What can be doing next year is to draw down further on global stocks. There is OpEx fair capacity that's can be put into the market we have in North America land -- and if you look at new investments that are relatively short cycle there are two sources of that it is going to be to conventional land international and its' going to be the unconventional land in North America.
Both of these resource types are relatively short cycle businesses and production coming out of that is just going to be a functional of the investment appetite. So, I think the sources of additional production for 2017 is limited to this items that I just mentioned and beyond that I think we need a wide spread significant increase in E&P investments to get supply back to where it can meet growing demand.
Ole Slorer:
Okay. Thank you very much.
Paal Kibsgaard:
Thank you Ole.
Operator:
We will go to line of David Anderson with Barclays. your line is open.
David Anderson: Barclays:
Good Morning Paul. In the past two time massive over capacity in land service markets and talk about the pricing recovery in the short to medium terms looks really difficult some of these small peers been talking about stack capacity incrementally impaired in North America and maybe so maybe a market little tighter than it looks. So in your mind, as we're trying to think about the lag effect that you've talked about here how does that look for you the outlook come kind of pricing and how that utilization and the capacity can now work together.
Paal Kibsgaard:
For North America.
David Anderson:
Yes in North America, I am just curious if you think that some of this doesn't come back and how that puts into margins.
Paal Kibsgaard:
I think it will be great, if it didn't comeback, but I still think most of it is going to comeback. I think some of it's today's probably isn't operational because it needs maintenance but I think when activity starts to increase, most of these equipment through some maintenance investments can be brought back in and that's why I still believe there is the large capacity overhang in North America land and with the current depressed service pricing we need significant pricing increases to get back into generate profits in North America land and that's why I don't think that price traction is going to be significant in the short term and that's why also I think the earnings contribution is for North America land is going to be that up in time.
David Anderson:
And as we can talk about the incremental and how those look for you, that can held up remarkably well here but you also talked about preserving your core capabilities. Are we getting to the end of cost cutting here and would you expect that maybe a little worse here before it starts in the corner.
Paal Kibsgaard:
Yes you are right. It is increasingly difficult to maintain the incremental around that 30% mark. We did 32% even with the massive surprise we had in the first quarter but yes we are getting to the point where some of our technical capabilities which take a long time to develop we are going to and close and not cut them to be in line with current activity levels but with that said on the field capacity we continue to tailors that to ongoing activity levels this can be rebuild within I would say those 12 plus minus 12 months while we are currently on going is the detail review of our overhead structure to see whether there is an opportunity to bring that further down but that will be done to serve the next of couple of quarters it would be basically finding a way to we can that burden more permanently but to do that it requires significant review and that's the process we are currently going through at this stage.
David Anderson:
thanks you.
Operator:
Thank you our next question comes from the line of Angie Sedita with UBS your line is open.
Angie Sedita: UBS:
Thanks good morning guys. Good morning Paul. So there is been a lot discussions about the market place about people the challenges with people and if you could give us a little bit color on what steps you've taken to retain your top talent both internationally but also more importantly in the US and then your thoughts on your ability to bring these new people back in or bring back your old people back and when things expect turnaround in 2017?
Paal Kibsgaard:
Okay maybe I can just clarify one thing first so if you look at our reported headcount numbers we had the reported at the end of Q4 95,000 people and we reported 93,000 people at this stage which indicates that we another 2,000 people during Q1 we actually released another 8,000 people during the first quarter so we have now reduced our workforce by around 42,000 people from the peak in 2014 so the delta here is that we are now counting around 5,500 contractors which was previously not considered part of our permanent headcount. So our drop was 8000 in Q1.
To your question around how we are managing this, we are obviously rightsizing field capacity continuously. This capacity we can build back relatively quickly probably within 12 months. But even in the filed capacity we have introduced a program called incentive of -- and here for our senior field engineers and for key operational people we are giving them basically half and annual salary pay 20% of front when they take this leave of absence and 30% of the salaries paid when they are return back after 12 months and we have several batches of this intensive wise legal absence where we can call people back in the coming 12 to 18 months. So that's the key part of how we preserve some of our core operational expertise and then on the over right and support structure we continue to look at rightsizing that but in this our technical support organization which I which takes a long time to develop we are also in -- that to make sure that we have these available as we get back into growth mode.
Angie Sedita:
Okay great. That's very helpful and then you mentioned and you gave a little bit of color on your preservation of your core capabilities, but also a greater willingness about market share what's profitability and the little bit more color there particularly on the US but an internationally as well and your referenced obviously still from pressure on revenues and margins going into Q2 and can talk a little bit more how that plays out for the next quarter to on the margin side.
Paal Kibsgaard:
Q2 is going to be another very tough quarter. So the significant dropped in activity that we saw during the first quarter is always in trailing over into Q2. In addition to that we're going to have the impact on Venezuela to deal with. So again we are expecting a significant percentage drop in revenue going into Q2 which again will make it difficult or challenging to maintain the incremental margins around 30% although we are going to continue to decline right.
What we see in certain markets and certain basins in North America and also certain markets international that activity is coming down to basically critical marks types of levels and at that stage it is not only about focusing in on cost reductions and managing margins, we are also considering what the startup cost again would be in the event we have to start everything down. So in certain cases we are carrying I would say contracts and operations losses for certain regions where we believe that's the better investment than actually shutting down and then having the lag in time and significant cost to star things back up again. But this is a review we do for every country or every base on the continues basis what's the benefit of taking that office where to shutting down and then making the investments later on to start back up again.
Angie Sedita:
That was actually very helpful. Thank you, Paal.
Paal Kibsgaard:
Thank you, Angie.
Operator:
Thank you. Our next question comes from the line of James West with Evercore ISI. Your line is open.
James West: Evercore ISI:
Thanks. Good morning, Paal.
Paal Kibsgaard:
Good morning.
James West:
So, I don't think we have much of the debate here with Evercore ISI and oil prices, but I'd loved to gets your thoughts on prices, given that you've said recently in public documents you're looking at kind of medium for a longer I guess what do you see is medium for longer and then my follow-up would be what is that mean for activity improving for your businesses.
Paal Kibsgaard:
Our view on the medium for longer the backdrop for that statement is I think that is the pricing level that the industry trend and you have to live with and it's probably the pricing level with some of the core also believing it's a reasonable target although they have not told us so that is our assumption.
So in that environment there is still a big job for the industry to make sure that we can bring cost per barrel down to make project valuable in this pricing ranges as well as having enough projects to generate supply that meets future demand. So it is an opportunity for a Company like ourselves to work closely with our customers in collaborative ways where we look at jointly with them driving cost are systems and production up from the that they have and I think by having this focus there is an opportunity for the industry to be quite successful in the medium for longer scenario but we cannot continue to operate in the same way that we have done in the past. So we see significant opportunity for Schlumberger in that type of scenario but it require us the industry to change both in the level of collaboration between customers and the service industry as well as new investments in more efficient processes better quality and very importantly total system innovation to drive performance.
James West:
And Paul have you seen that collaboration come through during this down cycle you seen more emphasis from your customers to actually collaborate more with you.
Paal Kibsgaard:
There are some signs of it James but I wouldn't say it's prevalence or significant at this stage and we obviously very interested in starting it we have some small projects going on with some key customers. In sharing to our customers well they are in a very, I would say a significant cash concepts this phase in which they priority for them will have to be to navigate that through before that are changing the business model. But I think there is an openness and willingness when seems capital here to moving towards more collaborative in relationships and we are certainly ready to lead that.
James West:
Thanks Paal.
Operator:
Thank you. Our next question comes from the line of Jim Wicklund with Credit Suisse, your line is open.
James Wicklund: Credit Suisse:
Good morning guys.
SL
Good morning.
James Wicklund:
A little bit of the shift, ask to you is about 25% to 30% of your operating income these days are coming from offshore and primarily deep-water work, and I am in Washington at the meeting and the consensus here seems to be that deep-water is going to decline over at least not begin to recover for at least the next couple of years. You all have given us a great deal a view and guidance the onshore outlook, can you talk little bit about the offshore outlook?
Paal Kibsgaard:
Yeah I think it's fair to say that in terms of significant new project being sanctioned offshore, I think that is not going to be the first area that our customers are going to start putting money into, so, I think it's fair to say that the land part of the global operations will see higher investments before the offshore and in particularly the deep-water part. Now, to the percentage of our revenue and earnings we haven't disclosed what deep-water and offshore is, but I would say that the current operating income beginning from this part of our business is I would say significantly or massively reduced from what it was in more of a stable operating environment did you talked in '14. So a lot it's I believe we have already taken. It still means that we have off side potential when these investments start but we also have a very good preference in both in North America land and even more so in the international land conventional markets.
So in any situation where the investments are coming and they will have to come we are very well positioned to capture our share gain and generate earnings growth from the onset of increase and then the offshore and deep water comes later on and expression coming after that we have several new phases that can our growth in the coming 2, 3, 4 years.
James West:
Okay Paal I appreciate that and my follow up if I could when we talk about international, conventional and domestic unconventional able to here just from customers spending patterns that onshore US and the independent will probably comeback first will there be much of a delay and if so how much between recovery in North America and the recovery on international conventional land.
Paal Kibsgaard:
I think it's good question, James. I think if you go on historical ways of responding I think it's right to say that in previous small and large downturn in North America players have been quicker and had more investment of appetite you fast. I think the situation at this stage is so more different there is a potential significant supply challenge over the next couple of years and part of this it we will have to be addressed through international increased supply. So I think a numbers of the players within the Middle-East I think Russia land in reference that they are all have the capacity I think to invest more and have their short cycle impact on production.
Now whether they would view that and I think is a still to be seen, but I think given the potential challenges of supply I don't think North America by itself is going to able to handle it. It will have income from other sources as well in which they I think this time around you'll probably see a soft response in my view from the international conventional land business as well.
James West:
Okay. Thank you very much.
Paal Kibsgaard:
Thank you.
Operator:
Thank you. Our next question comes from the line of Bill Herbert with Simmons. Your line is open.
Bill Herbert: Simmons & Company:
Thank you. Good morning.
Paal Kibsgaard:
Good morning.
Bill Herbert:
Paal I was curious of to your views with regard to the threshold oil price required to drive 2017 international E&P capital spending growth?
Paal Kibsgaard:
Yes. I think it's going to be it's going to be drag those. I don't think it's going to be one magical number yes I think more important -- for brands being already in the mid-40s is the positive sign. Still we maintain our view is that is going to be a lag between oil price and increases and significant increases in E&P spend and I think that our customs will take a cautious view that how much they are going to spend as well given the balance sheet state all of many of them and also the significant kind of volatility that you might also see going forwards.
So I think it was the gradual come back all the investments at oil prices increased. We believe over the course of the second half of this year and then it's going to be I think a function may be of how severe the supply situation is going to be. I think that's might be a good guide in addition to the movement of the oil price, because supply is clearly weakening I think it's going to be much safer to increase investments going forward as well in which case the appetite might come up together with the oil price. So I think our customers will take it balance, but conservative view initially and I think the appetite might increase as we see -- really impact on supply is going to be as the rest of this year evolves.
James West:
I guess the question is that in the event that we continue to get an improvement in oil prices although the rate of improvements slows over the back half of the year that it begins to crystallize that were on a sustainable path to recovery. Do we need considerably higher oil prices from this point to drive decent E&P capital spending growth internationally 2017 or is it sufficient that we're on a recovery path and resource orders continue to believe that the direction is higher and not lower.
Paal Kibsgaard:
It's difficult to generalize but I think your statement around the past I think is going to be critical as well as the part of supply and the part of the -- oil price like I said it's difficult to come up with one specific number I think the various customer the customers within these groups will have different views of when they are getting comfortable to invest but I think both aspects the oil price movements and the supply trends is probably what they are going to look at when they make decisions. But overall as I said earlier on the call E&P investments will have to come up in order to address the surprise challenges we see in 2017 and onwards.
James West:
Okay thank you.
Paal Kibsgaard:
Thank you.
Operator:
Thank you. Our next question comes from the line of Waqar Syed with Goldman Sachs. Your line is open.
Waqar Syed: Goldman Sachs:
Thank you. Paal you mentioned that international pricing concessions as given would start to go away as oil prices rise I guess that's what you said would we start to see that at $60 per barrel brand or do we need higher prices to see those pricing concessions go away.
Paal Kibsgaard:
Well I wouldn't tie to the specific oil price that would more tie to activity levels. I think that's what's going to drive our pricing and that's again we see a lag between the new and old price and the E&P investments in our activity but I think if there is a starch of a third -- a noticeable optic in international activity I think some of this pricing concessions that have been made we should be able to get part of them back and in fact in many of our contracts the conceptions we have made our either time limited or they're tie to oil price figures as well.
So based on all of this we believe that some of the pricing at least we will get back.
Waqar Syed:
Okay, great, and then secondly my follow up on your SPM investments how was the returns on your SPM investments relative to that overall corporate trends and are they higher or lower and then how does that differential change through the cycle.
Simon Ayat:
I am going to take this question Waqar so, normally our SPM investment and our review of this projects they are superior to our normal activity. That's the reason why we have developed this track of business and in case even a during the cycles its giving us a big line of activity that produces higher margins and higher returns but you have to remember that this is a long term projects and in the beginning our the model that it is a negative cash flow which turns into a positive cash flow after a while so, over a cycle yes it is better return and better margin.
Waqar Syed:
Now you invested almost about $600 million in the quarter in SPM how does what are your plans for the remainder of this year in terms of SPM investments?
Paal Kibsgaard:
So I think if you look at both before quarter and the first quarter of this year the FTM investment is have being higher than what you seen before and we expect the second quarter to go back into a more of a level that you see proceeding these two latest quarters.
Waqar Syed:
Okay, great. Thank you very much.
Paal Kibsgaard:
Thank you.
Operator:
Thank you. Our next question comes from the line of Jud Bailey with Wells Fargo. Your line is open.
Jud Bailey: Wells Fargo:
Thank you, good morning, Paal if I could ask you, you mentioned briefly in your prepared comments that you could the way the markets going you could see revenue in the second quarter potentially declined by the same on as the first quarter. It sounds like Latin America withstand or reason can be worst because of Venezuela. Would you see a materials difference amongst the regions in revenue decline to get to the same percentage decline or is there more of shift to one area or the other in terms of the decline in revenue from 1Q to 2Q.
Paal Kibsgaard:
I think if you look at the four areas you will see again that significant dropped in North America purely based how they has failed over the course of Q1. In Latin America as you point out, we will have a significant impact on Venezuela where we are in the process of tailoring activity to the rate of collections which will mean a fairly significant dropped in activity in Venezuela in Q2. And then just for the record I just not excuse towards to say that our receivable balance in Venezuela at the end of the first quarter was around $1.2 billion and our revenue in Venezuela was less than 5% of the total for the first quarter and also for the full year of the last year just to give you some perspective of the situation there. Then going to the ECA and to MEA I don't have the details of the projections here but I think you will see similar type of the revenue headwinds also going into the second quarter there as well.
Jud Bailey:
Okay that's helpful. Thank you and then I guess trying to thing about decremental margins on a similar revenue decline do we think we can perhaps get little better decremental or does Venezuela cause decremental I know you deteriorate a little bit from what you are able to do in the first quarter.
Paal Kibsgaard:
Yes. We do laid out he ambition of trying to keep decrementals around 30% you think the start of this downturn in which was a lot easier to do five, six quarters ago than what is to do currently and obviously when you have shut down over significant operations in the large country like Venezuela it is much more difficult to deal with because -- in Venezuela we are going to keep a large part of our local organization employed and on the payroll as we go forward and also we keep our entire asset base in the country to make sure that we are ready to go back and serve of our customer there once cash flow is available to the payer. So certainly this efficient that we are making now which are somewhat headwinds to decrementals, but I would say that our ambition is still to try to fight these out and deliver at least to 30% decrementals of the -- promise with.
Jud Bailey:
Thank you Paul I appreciate it.
Paal Kibsgaard:
Thank you.
Operator:
Thank you. Our next question comes from the line of Kurt Hallead with RBC Capital Markets. Your line is open.
Kurt Hallead: RBC Capital Markets:
Hi good morning.
Paal Kibsgaard:
Good morning.
Kurt Hallead:
-- one down so far Paal I was wondering you mentioned few things about the international the call on international oil coming from the international market. Part of that coming from OPEC and then you also indicated Russia. Can you give us a little bit more color around Russia there is seems to be a lot of discussion in the marketplace that needs to Russia or Saudi in particular can increase output from where they are currently your comments seem to be counter that lead point so can you just give us some views on Russia in particular?
Paal Kibsgaard:
Well I think if you look at Russia throughout this downturn activity has been very strong and they have done I think done a good job from the audience -- to keep production up between 10.5 million and 11 million barrels per day so, in spite of the challenges we have in Russia where the Ruble and then the overall situation there we've seen strong underlying activity and a very strong focus from the country and from the industry in the country to maintain and even try to increase production like so, I think 200 investments obviously Russia had significant oil and gas reserves and to increase investments if there is an appetite to do that I still see Russia has the potential to increase production yes, going forward.
Jud Bailey:
Okay.
Paal Kibsgaard:
And I think to your comment on Saudi as well obviously Saudi is shifting on several million barrels of spare capacity which they can't put into the market if they though to use to.
Jud Bailey:
Right, and then just quick follow up on Cameron fully understand your business plan and business model integrating the hardware with the reservoir dynamics what is been the uptick on that have you had some definitive successes on selling that business model to the oil companies as of yet.?
Paal Kibsgaard:
I think it's still early days that is on that I think the overall concept I think is widely accepted at this whole focus on total system innovation going forward combining hardware with sensors instrumentation and software controls is this way the future for the industry, so I assuming it's early days we have seen some traction in one Subsea which obviously been at this for several years already and also things around the rig of the future system I explain I think it will be quite interesting when we also rolled out on you system in 2017 so we have a lot of investments already going on which means it's not going to be a year before you see the impact of what we are talking about I think this already I would expect it to be already some impact in '16 and even also in '17 as we introduced these new technology systems.
Jud Bailey:
Alright that's great appreciate that color.
Operator:
Thank you and we have time for one last question and that will be from the line with Scott Gruber with Citigroup your line is open.
Scott Gruber: Citi Group:
Yes thanks for squeeze me in and good morning.
Paal Kibsgaard:
Good morning
Scott Gruber:
Paal. In the release you highlighted that you're cautious regarding adding capacity, North America once recovery begins which I think you highlighted reflects a cautious stands regarding your views towards long-term over supply that's profitability. But on the other hand it appears that you have a good ability to take shares in US given the financial stress being experienced your smaller competitors can you just walk through that strategy a little bit more regarding balancing market share US land and extending US business what initially would be in margins why not be aggressive during the initial recovery in terms of reactivating equipment to take share and have greater share when profitability levels could improve later on?
Paal Kibsgaard:
Great question I would say a general philosophy is that we do not like contracts that are dilutive to earnings so basically using money isn't something that the I really want to get into now we take on contract at this stage of the cycle that are dilutive to earnings per share if we believe that being back is going to serve us long-term from a share standpoint or from keeping our capabilities to intact as we kind of work through the top of the cycle. So in terms of being cautious in adding by capacity if we are talking about being in the black and basically they are making profits I have no issues at all and releasing capacity and I am going for share, but if the share is associated with negative earnings that something going to cautious and we are going to stick to basically preserving capabilities and infrastructure as long as pricing levels at that stage but I think as you soon as you get into the black we are quite seems to unleash the old effect capacity we have available to gaining shares.
Scott Gruber:
And then it's my understanding that those fractures in the US on utilized today even when active. Do you have an idea roughly how much more you can expand your frack local in US with without actually reactivating spreads.
Paal Kibsgaard:
The strengths we have today are actually quite well utilized, because if you have with the current pricing level if you have full utilization on top of it, it is -- from a profitability standpoint. So at least we have an operations are actually today recently well utilized. So there might some upside in capacity on it but I wouldn't say significant we would have to reactivate new capacity in order to take on significantly more work.
Scott Gruber:
Great thanks.
Paal Kibsgaard:
Thank you very much. So before we close this morning I would like to summarize the most important points that we will discussed. First, our industry is now in the deeper financial crisis on record with profitability and cash flow at on sustainable levels for most oil and gas operators. These are traded an equally dramatic situation for the service industry.
Each -- quarter for the past 18 months has both increasing custom E&P spend that I have led the foreign activity and lower demand for oil products conservatives. This is the toughest environment we have seen from 30 years and it is likely to get even tougher before the market turns. Second, so far in this downturn we have successfully manage the very challenging commercial landscape, our balancing margins against market share and aggressively reducing capacity and overhead costs.
In parallel to continue to focus and how to best preserve the long term technical capabilities of the company. This approach together with the benefits of our ongoing transformation program has enabled us to outperform our surrounding and protect our financial strength. And third, the current market present significant opportunities for company that has built the required capital and strategic bandwidth that enables them to invest. In this respect so far in this downturn we have closed our largest ever acquisition made a series of small of our third significant investment in specific technology -- and invested in integrated service and projects that will boost our financial performance going forward.
We are also actively investing in pre-funding multi-client tightening surveys that will underpin the return to solid expression activity in several regions around the world and we also regard to protection of our technical capabilities and build our immediate operational needs as an investments in our future growth. In summary, we are in convince that the tightening of the supply demand balance is well underway and while the operating environment remains tough the market presence the range of opportunities which we build continue to actively pursued. Thank you very much for listening in today.
Operator:
Thank you and ladies and gentlemen today's teleconference will be available for replay after 10.00 AM today until mid-night May, 22nd. You may access the AT&T teleconference replay system by dialing 1800-475-6701 and entering the access code of 385-312. International participants placed out 320-365-3844. Those numbers once again 1800-475-6701 or 320-365-3844 and enter the access code of 385-312.
That does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service you may now disconnect.
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