Ladies and gentlemen, thank you for standing by. 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. Instructions will be given at that time.
As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Simon Ferrant, Vice President of Investor Relations. Please go ahead.
Good morning, good afternoon, good evening, and welcome to the Schlumberger Limited Third Quarter 2019 Earnings Call. Today's call is being hosted from New York City, joining the Schlumberger Limited Board meeting held here this week. Joining us on the call are Alire Lapush, Chief Executive Officer and Simon Ayatt, Chief Financial Officer. Our earnings call will take a slight different format. We've shortened our prepared remarks in order to leave more time for your questions.
Olivier will start the call with his perspective on the quarter, after which, Simon and I will give more details on the financial results. Then we'll open up for your questions. As always, 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 our results to differ materially from those projected in these statements. I therefore refer you to our latest 10 ks 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 Q3 press release, which is on our website. Now I'll turn the call over to Olivier.
Thank you, Simon. Ladies and gentlemen, good morning. I would like to add to the earnings release my comments on the quarter before covering some of the points critical to our business. First of all, as you have seen in our release this morning, we have taken a largely noncash $12,700,000,000 charge. This charge reflects the impact that market conditions have had on the valuation of our goodwill, intangibles and fixed assets.
None of this changes our ability to generate strong cash flow as this quarter has once again demonstrated, giving us flexibility to navigate the more uncertain market landscape. Simon Hayek will discuss the charge during his remarks. I will now comment on our Q3 operational performance followed by the short term outlook and conclude with a brief update on our strategic implementation. Our Q3 results were very positive in a mixed market environment driven by strong international performance. The international margins improved, and we delivered more than $1,000,000,000 in free cash flow.
Additionally, we recorded the best ever the best ever quarterly safety performance for the company, an outstanding achievement setting new safety performance benchmark for our industry. All in all, a very solid quarter aligned with our performance vision and our focus on returns. I'm very pleased with the results, and I'm proud of the Schubertje team that delivered this performance. The financial results this quarter were driven by the strength of activity in the key internationals market. Some activity peaked in Russia, the CIS and the North Sea.
The Far East and Asia regions also saw strong growth, and new products began in Sub Sahara and North Africa. Only Latin America revenue was lower on reduced activity, in Mexico and Argentina. In North America, we experienced strong offshore sales offset by minimal growth on land. One steam activity was modestly higher, recovering from the spring breakup in Canada during Q2. Towards the end of the quarter, however, we saw lower pricing and increased gaps in the frac calendar as customer work programs were constrained by cash flow.
North America Land Drilling revenue was essentially flat despite rig count reductions as our feed for base in technology access approach on equipments sales and leasing helped offset declines. Cameron results closed in line with expectations. This included robust operating margins, building on sequential growth in most international regions, which were offset partially by declining activity in North America at the end of the quarter. Our international performance this quarter was very solid with a high double digit basis point improvement in our margin on the back of 3% second show revenue growth. More than twothree of our product lines and geomarkets posted both sequential revenue growth and margin expansion, leveraging in particular the favorable offshore and exploration activity mix and the deployment of new technology.
At the closing of this quarter, half of our international geo markets have posted year to date double digit revenue growth. This improvement in international margins was achieved despite the lingering and sustained effect of a handful of contracts that are highly dilutive. Without the effect of these underperforming business units, our growth in international margin will have been even greater. We are making progress engaging with our customers on those contracts, working collaboratively to improve terms and conditions and to enlist their support to improve our operations. As part of this plan, I have been taking personal actions during the last few weeks and anticipate visible progress during the coming months quarters.
Margin improvement and stringent capital deployment are both part of our increasingly retail focused approach under the new capital stewardship element of the strategy. As international activity increases, our deployment of CapEx will be further prioritized towards the business unit with higher returns. This action, together with increasing activity, is starting to create some tightness in the market, which is a catalyst for pricing improvement. Now I will move on to the short term outlook for our business. Based on our Q3 year to date results and our outlook for Q4, we still expect full year high single digit international revenue growth, excluding Cameron.
Sequentially, however, Q4 will include the seasonal activity decline in the Northern Hemisphere, and we anticipate only muted year end sales. We are also closely monitoring the situation in Ecuador following the recent events and are preparing for further decline in Argentina. In addition, we expect seasonal weakness in North America as the Q4 develops. We're anticipating a year end slowdown in North America similar to last year due to operator budget constraints. However, this year, the activity reduction has started earlier than last, and we anticipate the sequential decline in Q4 to be more pronounced than last year.
Moving on to the macro and medium term view. The market environment remains challenged with limited visibility, particularly in view of the global trade concerns that are challenging growth economic growth and the rate of oil demand growth. At the same time, the U. S. Production growth rate has declined for the last 8 months, and it is expected to drop further in 2020 as a result of the reduced activity this year.
Therefore, and absent of a recession, the prospects for international activity growth remain firmly in place. In this market context, our approach to North America Land is under evaluation for both the medium and the long term. We are already scanning to fit the 1 stimulusness, and we will be stacking fleet as the market contracts during the
Q4. At the
same time, a strategic review of this market is well underway and will be completed during the Q4 for execution early next year. This gives me the opportunity to update you on our strategy execution. Last month, we presented 4 key elements of that strategy that included leading and driving digital transformation in our industry, developing fit for base in solutions, capturing value from the performance impact for our customers and fostering capital to achieve. Performance is at the heart of this new strategic direction. We are already off to an excellent start on digital.
We presented our vision of the E and P industry to 800 customers and technology partners at the Global SIS Forum in September. There, we demonstrated our firm commitment to an open digital environment that we believe can unlock further customer performance. This form marks a new chapter for the digital future of our industry. The interest from our customers and digital partners was far beyond our expectation and is already translated into sizable opportunities. The Centra JV is also an important part of our digital strategy, and the announcement of its closing reinforces our leadership of and commitment to the industry digital transformation.
We're also making progress with our new Fit for Betin strategic approach. In the release today, there are multiple examples of fit for basin technology, all of which drive our customer performance, such as Neosea, our bit scalable system and Aegis, drill bit technology. In addition, in North America, I'm pleased to report early success of the technology access strategy with sales and leasing of rotary steerable tools. This is a new channel that access a new market where our participation was previously minimal. Also in North America, our flagship project with Oxy in the Avantime Basin is now operating at scale with continuously improved operational efficiency, setting new frac records in the Delaware.
The value being created is shared through a marine commercial model and is a good example of our new strategy performance model approach. Finally, as an update to our SPM strategy, we have made progress in our divestiture of Argentina assets as we have few offers in hand that we are reviewing with the anticipation to finalize with the other party during the upcoming months. Since taking the role as CEO for Schlumberger, I have made a point of visiting many of our customers, our people and our locations. The reception by our customers, both for our engagements and strategic direction, has been very positive. The enthusiasm of our people has been highly motivating, and their commitment is evident.
The industry is acknowledging the need for higher performance in a new year. All in all, I'm very pleased with the initial steps of our strategic execution and with the internal and external alignment with our vision to become the performance partner of choice in our industry. I will now pass the call over to Simon.
Thank you, Olivier. Ladies and gentlemen, thank you for participating in this conference call. 3rd quarter earnings per share was $0.43 excluding charges and credits. This represents an increase of $0.08 sequentially and a decrease of $0.03 when compared to the same quarter last year. During the quarter, we recorded $12,700,000,000 of pre tax charges driven by market conditions.
These charges primarily relate to goodwill intangible assets and fixed asset impairments. As such, this charge is almost entirely non cash. Details of the component of this charge can be found in the FAQs at the end of our earnings press release. These impairments were calculated as of August 31, 2019. Accordingly, the 3rd quarter's results benefited from a $27,000,000 reduction in depreciation and amortization expense.
Approximately $21,000,000 of this $27,000,000 monthly reduction relates to the production group. The remaining $6,000,000 is reflected in our corporate and other line item. The after tax impact of this 1 month reduction is approximately $0.015 in terms of EPS. Our 30 quarter revenue of $8,500,000,000 increased 3% sequentially, largely driven by our international operations. Pretax segment operating margin increased by 113 basis points to 12.8%.
Highlights by product group were as follows: 3rd quarter reservoir characterization revenue of $1,700,000,000 increased 6% sequentially, while margins increased 149 basis points to 21.8%. These increases were primarily driven by strong international wireline activity and higher WesternGeco MultiClient license sales in North America. Drilling revenue of $2,500,000,000 increased 2% driven by stronger drilling activity in Russia, China and Australia. However, this was partially offset by lower revenue in North America land and Saudi Arabia. Margins were flat at 12.4%.
Production revenue of $3,200,000,000 increased 2% sequentially, primarily driven by strong international completions activity. Margin increased 148 basis points to 9.1%, primarily driven by improved international margins from higher activity. The reduction in depreciation and amortization expense as a result of the 3rd quarter impairment charge accounted for just under half of the margin improvement. Cameron revenue of $1,400,000,000 increased 3% sequentially, primarily driven by 1 Subsea Margins increased 29 basis points to 12.7%. For the Cameron long cycle business was 0.8 in Q3.
The 1 subsea backlog increase decreased to $1,800,000,000 at the end of the 3rd quarter. This decrease reflects a canceled project in the North Sea. Now turning to Schlumberger as a whole, the effective tax rate excluding charges and credits was 16% in the 3rd quarter as compared to 16.7% in the previous quarter. We generated $1,700,000,000 of cash flow from operations during the Q3. Our net debt improved by $347,000,000 during the quarter to $14,400,000,000 We ended the quarter with total cash and investments of $2,300,000,000 We received $250,000,000 in cash just after the quarter as a result of the closing of the Sensia joint venture.
During the Q3, we issued 3 tranches of €500,000,000 notes each. The first due in 2024 at 0%, the second due in 2027 at 0.25% and the 3rd due in 2,031 at 0.5%. These notes were subsequently swapped into U. S. Dollars with a weighted average interest rate of 2.5%.
During this quarter, we also repurchased $783,000,000 of our outstanding 3 percent notes due in 2020 and $321,000,000 of our outstanding 3.625 percent notes due in 2022. These actions have served to improve the company's capital structure. During the quarter, we spent $79,000,000 to repurchase 2,200,000 shares at an average price of $36.64 Other significant liquidity events during the quarter included CapEx of $413,000,000 and capitalized costs relating to SBM projects of $194,000,000 During the quarter, we also made $692,000,000 of dividend payments. Full year 2019 CapEx excluding SPM and MultiClient is expected to be between 1.6 $1,700,000,000 And now I will turn the conference over to operator for Q and
A. Thank First, we go to the line of James West with Evercore ISI. Please go ahead.
Hey, good morning, Olivier.
Good morning, James.
So Olivier, as you exited the Q3, could you describe what the market conditions were? How we should think about the Q4? It sounds like sequentially down. And then also how is 2020 in your view starting to shape up?
Yes. No, let me comment on this, James. So I'll separate my comments between international North America Land specifically. So first, on the International side, I think similar to what we see every year, there is a seasonal effect in the Northern Hemisphere due to the winter season that affects primarily Russia, to a lesser extent, China and the North Sea. And we see an effect every year on the reactivity and our revenue that we collect from those regions.
So this is not unusual. We don't expect any more impact than we have every other year, but I think this is something to account for. We typically, on year end, also have year end sales of product equipment, and we believe this will happen. But this will be, as we have seen in the last 2 or 3 years, fairly muted and yourselves as the operator will remain cautious on their BGS in preparation for 2020. On the flip side, on the North America land, as I did comment in my introduction remarks, I believe that the rate of decline will be at the risk to be higher than last year as for two reasons.
The usual holiday season break in the winter, I think, is looming. But also, we have seen that the budget exhaustion and discipline on operating within cash flow has led operator to cease operation earlier than they did last year. We have started to get notice of operation gap from September, The rate of this decision has been accelerating. So we expect as a consequence that the rate of decline quarter on quarter in North America might be higher than last year sequential decline. Now turning into next year.
I think absent of a major as I commented, a major recession or a major event, geopolitical or economic event, we foresee that the international growth will remain in place, albeit possibly at a different lower rate possibly. But we believe that the strength of offshore activity, deepwater or shallow, will not cease overnight and will continue to support 2020 international growth. When it comes to North America, it's too early to call. I believe that the market is still lacks visibility, and we can only comment on the rebound in Q1 that is a usual rebound from the holiday season that we foresee happening with strengthening of activity from January and possibly strengthening of pricing, but this is too early to call.
Okay. That's very helpful, Olivier. And then with respect to the charges that were taken during the quarter, understanding they only helped EPS by about $0.01 a half here, What drove the timing here of the taking these charges, especially kind of midyear, why not end of last year?
James, Simon Ayat here. I'll take this.
Hey, Simon.
Basically,
during there are 2 events that took place in the Q3 that made us look at closely at the carrying value of our assets. 1 is the new strategy by Olivier, which has been publicly announced and discussed, and we'll continue to develop it as we go forward. The other one is the market valuation that we have seen. Although we have touched lower points before, I'll take the second reason first and then discuss the first one. Although we've seen lower valuations before, but during the Q3 were more consistent and frankly very low point unfortunately.
That forced us to look at our goodwill and intangible carrying value. As you are aware, most of the goodwill and intangible comes from 2 major 2010, we did the Smith acquisition, which is was almost 100% paid by stock. We issued 138,000,000 shares at that time. And then Cameron in 2016, where we paid almost 78% in stock. The book value of those two acquisitions were booked for Smith at $56 per share, for Cameron at $72 per share.
As such, our carrying value of the goodwill and intangible, it's inflated given where our current valuation is. And this has taken very long analysis, pretty scientific actually, and we reached to this number. Why it is in Q3? Because it is a Q3 events. We record things as they happen.
We don't we're not influenced by timing. Yes, normally at the end of the year, you do a more thorough review. But given the changes we've seen in Q3, we did this thorough review in Q3. The other items that you've seen, which is mainly fixed asset impairment and mainly in OneStim North America is a reflection of our actions toward this activity. As Olivier mentioned, we're looking at this activity.
We have excess capacity there. And we've taken the decision that this is impaired. We don't see it as reactivated in the near future and we took the decision to write it off. So I covered the reasons behind it. I know I answered more than what you asked, but I wanted to make sure that everybody understand our approach and why it is a Q3.
It's not just because we have a change of mind. It is a reflection of real issues that took place in the Q3.
Next, we go to Angie Sedita with Goldman Sachs. Please go ahead.
Good morning, Olivier. Good morning, Angie. So I appreciate the color on the international markets and a little bit of a follow-up there on the pace of growth for 2020. I know it's early, but do you still feel comfortable with mid single digit revenue growth in 2020? Or is it still a bit early to tell for sure?
And then also, I guess I would add to that the asset sales that occurred in 2019, the impact on both revenues and margins?
Yes. Let me take the first and then address the second one. So I think to be accurate to the mid single digit rather they're in a low or high, I think it's too early to pull and call at this point. Not that we don't have good visibility, but I think the customer are still in the process of setting their budget for 2020 and are observing the macroeconomic factor that you all know about. And I think we have to be cautious here.
We believe that the continuum of offshore activity and the momentum that the industry has set there is not clear to stop, particularly on the deepwater side. But I think some other region or some other basin will be more at risk of a decline in activity or decline in budget for next year. So it's theoretical, but clearly, we see growth in international next year. So when it comes to the impact of the announcement announced divestiture, so we have 3 divestitures underway. 1 is already closed, the Sensia divestiture has been closed 2 weeks ago.
The second one relates to a diversity of assets to JV that we own with ADC. And the third one relates to drilling and tubular accessories, tools, fishing that we are divesting. So when you look at the impact of these 3 on a yearly basis, the revenue will be a short 2% of global revenue as an impact when combined the 3 when the 3 will be completed, closed and exited. And the impact on the earnings will be $0.01 to $0.02 for the year. So Simon may want to elaborate a bit more, but that's the impact on a full year basis.
I just want to explain that 2 of the transactions or the divestitures are basically creating JVs or one is creating the JV of Sentia and the other one enhancing the JV of ATC drilling in the Middle East. So we're losing the revenue and the reason we're not losing as much in earnings because we will have a higher pickup our equity participation in the 2 JVs. And the third one has a really minimal impact on the profitability. And therefore, as Olivier mentioned, it's a $0.01 to $0.02 per year impact on margin. However, the revenue is a larger impact, less than 2% of the total thing.
Okay, perfect. That's very, very helpful. I appreciate the color. And then I guess a little bit further on the international side, thoughts around the pace of margin growth for 2020, given your initiatives on the transformation digital and obviously these asset sales as well, but and then these contracts that you're trying to address in the Middle East. So just talk about margins for next year on international and the pace?
So I will not comment on the target. I think the target is not set. The ambition we have is to continue to grow and expand our margin internationally. And you have seen a bit comment that we had a high double digit basis points improvement during the quarter. I will continue to look and work using the strategy to execute two parts of margin expansion for the following years.
So if you look at it from a very high level, there are 3 buckets that we see. The first one relates to our ability to resolve some of the underperforming business units, the highly dilutive contracts that are lingering and impacting our results. We have made some progress, not to the pace I would have expected necessarily on being very ambitious this year, but I think I'm confident that we have a path to improve this that will impact ourselves next year. Similarly, in the first bucket, I will put continue to execute using our new modernized platform of operating system. And I think we are setting a 2 year rollback to complete our transformation internationally.
And I look forward to have also some pull through on that operating model with efficiency
or self help, as we call it,
impact on our margins. And next bucket is obviously the I will call it the digital and or the technology access, trying to replicate some of the success we have seen in North America overseas in technology access to 3rd party regional players for accessing our technology and using it in lower CapEx intensity market. And digital, where we expect that the outcome of what we have just done last month and the momentum that we have gained to the industry will give us an increased share of the digital market and as such, will be contributing to our margin. So last will be further long term outlook on the performance model and other horizon of growth that we will disclose later. But I believe these 2 buckets will clearly impact the next 2 or 3 years.
But it's difficult to say at this moment that I have the ambition to grow the international margin next year indeed.
Thanks. I'll turn it over, guys.
Thank you. Thank you.
Next, we go to David Anderson with Barclays. Please go ahead.
Hi, good morning Olivier. So on your Fit for Basin strategy, you're obviously you're focused on the North American business right now. And after writing down assets during the quarter, you talked about more of a strategic review in the Q4. We're talking about 2020 numbers, but it's kind of hard to get there with all these changes happening in North America. I was wondering if you could just kind of just lay out a little bit kind of what you guys are looking at, like what parts of the North America business are under the strategic review?
And should we expect kind of a broader retrenchments in certain parts of the U. S. Land business next year?
No, very good question, Dave. So as we have explained during the strategy presentation back a month and a half ago, we are doing a deep review of the entire business we are operating in North America Land. And this is not only one thing, but every part of our business there. And the first thing we are doing is we are doing a scale to fit approach to the market view, meaning that we are not going after scale. We are going after what we believe is fit for every business in every basin.
So this is what we are in the middle of doing as we speak for 1 segment each of the basin where we operate and for each of the product line where we are currently operating in the North America land. So we are that's the scale to fit approach to our strategy to review the outlook, to review our market position, to review our strengths, anticipate the technology and opportunity with customers and making a decision at that point on how to treat this portfolio and move forward with a reduced portfolio, more fit to 1 or multiple basins as opposed to all basins or make a decision to change our business model to go for technology access, selling our technology as opposed to operating our technology. So lastly, the approach we are taking as we speak, we are complementing it by recognizing that there are some technologies that we have developed that are highly successful, and we continue to feed our technology team with what is needed to differentiate in Besi create a performance impact. And you have seen some of the release of the and the success we have had have helped us actually maintain, if not last quarter, slightly improved our margin, excluding impairment effect in North America Land due to the effect of this technology success.
So we will continue to take us technology, and we are looking at our portfolio of business units in North America and making decision to exit or continue and expand or move to a new business model. So too early to say. But yes, all options are on the table, partially for the one thing as it is certainly, as you know, a dilutive business to our old business in North America.
Kind of a slightly different question on North America. You highlighted some offshore strength, which was bit of a surprise and granted it was from seismic here, but you made a few comments about offshore sort of being a support for the market next year. You highlighted international there. I'm just wondering if this is a harbinger of things to come for offshore in general. And just trying to tie that into the lower Subsea Cameron orders this quarter, how do you see that trending over the next few quarters?
It sounds like you're somewhat optimistic on offshore, but I don't want to put words into your mouth there.
So let me comment on this. So the view I have is that the offshore market is a market that doesn't contract and expand on a monthly or on a quarterly basis. It's more steady and is more a longer, long cycle, and that's particularly true for deepwater. So we have seen growth recovery, slow recovery of deepwater for the last 18 months. We have seen faster recovery of the shallow in the last 12 months.
So we believe that some of this fundamental will stay in place. Now it's not necessarily long term, it's early to call, but to the mid- and medium term, it is the case. So I believe that the momentum that this market has is yet to stay for the foreseeable 6 to 9 months. Beyond that, it's too early to say. The FID and the rate of FID for subsea have not necessarily slowed down.
I think some of them have been delayed for technical reasons, but we expect some of the key FID to be approved in the later part of this year early next year. The subsea or 1 subsea low booking this quarter, I think, is a matter of scheduling of how and when this booking come in seconds. We are still having a book to bill ratio year to date, largely above 1 for 1 Subsea. So we're still confident that the Subsea recovery is still in place and will continue to unfold.
Okay. Thank you.
Next, we go to the line of Scott Gruber with Citigroup. Please go ahead.
Yes. Good
morning. Good morning, Scott.
Can you provide some color around the outlook for improvement under the new strategy in EBITDA dollars and free cash dollars. Since assets are being removed from the portfolio to optimize around the core, margins will obviously improve. Could you provide some color around your ability to grow cash flow and free cash dollars assuming limited market assistance?
I think the first and foremost ability that we have to grow cash flow is to improve our margins clearly, and that's the first and foremost. The next one for cash flow is ability to improve our working capital efficiency, both of which we have demonstrated this quarter. Long term, obviously, it depends on the mix and where we have seen growth and margin improvement. So I still believe that the fundamental international growth that we see is taking place, where we have a premium on margin compared to North America. The effect and execution of our strategy scale to fit to fixed North America and to enhance our net margin in dollar as well as in percentage, will both combine to improve our margins.
We believe that the asset efficiency that we have improved over the last couple of years due to our transformation, combined with modernization of our operating platform to will continue to have positive effect on working capital efficiency. So you combine all this, I still believe that the ability to deliver cash will only improve and the total cash, considering absent of the recession, will improve going forward. Do you want to add anything, Simon?
I mean, you said most of the things. The issue of the cash flow, definitely, it is earnings first and then management of our capital structure and the working capital. We normally do very well in the $1,100,000,000 and we anticipate the 4th quarter to be even better than this performance. In terms of next year, we have a plan to continue to be very cautious in our capital deployment and this will help the free cash flow and continue the performance on our working capital. Our working capital is normally subject of receivables, inventories.
We know where we stand. We always have pockets of collections here and there, and we intend to solve them. And we feel comfortable between our generation of cash from operation and the some of the divestitures that are coming will be more than sufficient to meet all our commitments including the dividend. One more thing to add about next year, you're going to see a lower SPM investments because of what we already announced that we're going to divest and we're going to it doesn't require as much as we have done in the current year.
Yes, Jean, at this point, are you comfortable dimensioning the drop in SDM CapEx?
I'm sorry?
Are you willing to mention where SDM CapEx is going next year?
Well, SDM CapEx this year is around 7 $50,000,000 and we anticipate that this would be quite much lower next year. I mean, we'll I don't know exactly where we have not finalized all the plans, but start of 500, 400 probably.
Got you. And then one additional question. One tweak to the strategy seems to be a willingness to selectively sell or lease technologies in various markets to 3rd parties, which will then provide the service of well site deployment. Can you provide some color on this tweak to the strategy? What is the breadth of this strategy by product line?
Which geographies are you looking at deploying the new strategy? And importantly, how do you get comfortable around not creating additional competition in these various markets?
Yes, Scott. This strategy, we call it technology access, subset of feed for basin, where we believe that in target basins, particularly the high ruling basin, the capital intensity that is required to fulfill and participate fully in the basin and the high competitiveness by local players is are carrying both condition that is capping our market access. So we have realized and we have tested this in North America, and we are accelerating the opportunity to lead or sell selected technology that we believe can help us access markets that we were not accessing before. So this has 2 consequence. 1st is creating a new business model that is accretive to our growth and our returns.
And secondly is to lower our capital density as we typically sell these assets possibly leased, we don't require CapEx to expand in this marketplace. So where we do this? Typically, when a set of local competitor, for 1, which is highly located in North America, where if you were to take the drilling space, are more than 50 local competitors that are competing into the drilling services. We expect this to be the case in Middle East, where there are regional players and in other part of the world where they are characteristic of high grade basins. When it comes to product line, the drilling is 1.
Obviously, this is where we started, but we'll not stop there. We are doing it for some of our perforating equipment in Roar line and continue to expand, and we are currently assessing and as part of the strategy for every product line, the portfolio that we are ready to sell, specifically designed for sale and or lease to 3rd party. The digital capability we have as well helps here because we provide digital services and monitoring of those capability of this technology. So am I comfortable? Yes, when we put the right term and commission with those third party company to operate in a defined scope with a defined set of customers, we are clear, and we are becoming increasingly comfortable as well they are successful in deploying our technology, and we are successful in supporting them and hence expanding our market access.
Got it. Appreciate the color. Thank you.
Thank you. Welcome. Thank you.
Next, we go to Conor Linhaug with Morgan Stanley. Please go ahead.
Thank you. Good morning.
Good morning.
I wanted to stick with the CapEx theme here. In the core oil services business, how would you think about how much you can take out in 2020 spending? Obviously, with production group activity coming down, I would think there would be a decent amount of sustaining CapEx reduction there. But any thoughts around that?
I think it's too early to be specific and granular down to the production group at this stage. It fully depends on how do we execute the strategy in North America where there are several elements of the production group operating there. And this is too early as some of the activity level is not set yet for North America in particular. Globally speaking, our guidance that we shared before has been 5% to 7% of revenue. We believe with the mix of product line that we have, the recent divestiture of some asset heavy product line combined with what we anticipate in North America, I would say almost indefinitely of the strategic execution, we mean that we will stay within these guidance.
Okay. That's helpful. Thank you. I guess a broader question here. You've continued to highlight your digital strategy.
I think many investors have a hard time thinking through the addressable market or how big a business this could be for you. How do you think about what the opportunity set is on a multiyear view for that
business? Actually, it's a very big market. I think it's really the long term for the oil and oil and gas industry, the biggest market that will grow over the next 5 to 10 years, I believe, if I have to judge by the response from all customers, the desire they have to work with us and the alignment from all partners, industry, and leaders in digital technology across our industry, which are all aligning to work with us. So the price is big. Now the challenge is to monetize.
So as we said, there are 3 factors and 3 directions there. 1 is what we are doing with SIS. SIS has established a leadership into digital workflows, and we believe they will only expand the adoption of Delphi by 100 customers today. Is only about to grow and this expansion will mean accelerating the rate of growth of SI as a segment in our portfolio and it comes at margin that are accretive to our business everywhere. So I believe this will only continue and accelerate.
West Sanjico is the data digital branch of our product line of our business. And I think we have turned and transformed with success with San Diego from an asset heavy into an asset light product line last year, and we have compared with an aggressive digital strategy where we have established having a data platform, Gaia, that we have released that will become the industry reference for exchanging and monetizing data as we have seen with the announcement of HS Markets joining us on this platform. And finally, we will continue to deploy digital at the edge in operation. The Samsia JV is part of this ambition for the production space, and you have seen that we're expanding it beyond production into drilling. You will see that we'll continue to make announcement in that space, drilling operation.
And ORA, the wire line latest generation of fleet sampling, characterization, download is becoming full digital, and its success and expansion will become a key factor of digital success. So it's multidimension, it's large and it's long term, and we are leading in this space.
Thank you very much.
Next we go to Kurt Hallead with RBC. Please go ahead.
Good morning. Good
morning. Good morning, Kurt.
Thank you. Thank you for all the great color here this morning. A follow-up question I had kind of dovetails back to the strategy presentation from 1.5 months ago. And in that presentation, Olivier, you clearly stated an intention to increase international and North American margins by at least 500 basis points. And so my curiosity is that in the context of that 500 basis point improvement, how much of that can be maybe attributed to the improvement in the current contractual dynamics visavis the execution of the strategy you outlined, specifically the digital, the Fit for Basin and the performance model.
So if you could provide us some additional color on how you see that kind of mapping through, that'd be great. No,
Kirk, I think as I did come on to ENGIE before, I see that the expansion of the Fastenal BPS would come for 2 or 3 buckets. One of them is short term and is the one addressing is more operational and contractual. It's the one addressing our underperforming business unit and is our ability to operate at the benchmark being performance, and that's the performance transformation we are doing internally. That's a self help, if you want. So that is the target of all of our team, and the focus is very high on this.
And I have personal overview on each of these every quarter. So the next you mentioned, the next bucket, and I think the one that will certainly have the most impact the next 3 to 5 years will be the mix of digital, Fit for Basin and Technology Access internationally. We'll have Technology Access in Middle East. We'll have digital everywhere. And we'll have some feed for our basin from Russia to Latin America, from China to Mexico.
So that's what we expect. So I'm confident that as we deploy this over the next few years, these 3 fit for basins, performance model and digital will contribute
on this.
Right. I appreciate that. And then a follow-up I have was on the you gave some broad general guidance in terms of business direction. So I'm just kind of curious when you look at the lower depreciation, it was about a $0.015 impact for the quarter that I guess was only 1 month. So once you annualize that, you should get a positive $0.18 per share benefit from lower depreciation.
I don't know, it seems to me like the headwinds on the market could potentially offset that benefit as you head out into 2020. Do you have any initial perspectives on that? Do you think my assumption is kind of my gut instinct is correct on that?
So first, I think your math are correct. I think the annualizing this €0.015 will generate more or less €0.18 net impact in same scope. Now would it be offsetting to the decline? I think it's too early to say. I think, again, we are looking at the outlook.
As I commented before, the outlook in International remain likely positive on growth. The outlook on now is too early to call at this point that we reached the bottom in now, and we're expecting to expect a 2020 flat from 2019 or we'll reach another bottom in 2020. It's too early to say. So I will remain cautious about coding this at this point. But I think your assumptions are correct for the impact indeed.
This. Okay, great. And then maybe one last one. I noticed in the press release, you mentioned that there was a project cancellation in Subsea. Was that a project that came through earlier in the year?
Or was it kind of a dynamic?
No, actually not. It's an old booking that was awarded to 1 Subsea some time ago, more than 1 or 2 years ago. That was put on the back burner from future FID. And this asset was actually subsequently sold from 1 operator to the next. And the next operator, rather than carrying on, decided to cancel and rethink its option for the FID.
And as such, we have to remove the booking from the backlog. That's as simple as that.
Next, we go to Sean Meakim with JPMorgan. Please go ahead.
Thanks. Good morning.
Good morning, Sean.
So Olivier, a follow-up on SBM. It's been a challenging few months in terms of the macro in Argentina and Ecuador. Based on your comments of lower CapEx spend next year, does that suggest you're still confident in affecting the asset sale in Argentina in the near term? And also just you wrote down some smaller SPM assets. Can you maybe elaborate on their impact in terms of CapEx?
And then just are we still confident that cash flow for SPM as a whole is exiting 2019 positively now we have some of an impact on production in Ecuador?
Yes. So let me come on 1 by 1. So first, the process of the asset divestiture in from Bordeaux, Assur and Argentina is progressing. We have completed the 1st phase where we received actually we have offers in a few offers in hand that we are reviewing as we speak. So we still do anticipate, and we'll walk every step to get to signing and closing in the following months.
So yes, we account for this as an impact for 2020. We are not making a decision at this point to divest any other asset. The Ecuador, the Toxin will be the main asset that remain on the SPN portfolio. The other asset that we are relating with, 2 in the lead, much smaller, were initiated a few years back and are not meaningful in terms of their impact on CapEx nor in terms of production revenue for SPM. So in term of cash flow, yes, our commitment bond is still to operate within cash flow, and the cash flow will be positive and improving next year compared to this year considering the divestiture we are making.
And we are committed to continue to keep it as is. So it will mean lower CapEx and increased cash flow from the SPM contribution.
Thank you for that. That's very helpful. And then just given the growing importance of digital and your go forward strategy, are you able to quantify the baseline of digital contribution today? I know some parts can be difficult to quantify, but a reference point is a common investor question. And with respect to the margin impact, is it mostly accretion from software as just higher margin product?
Or are there internal OpEx benefits you can get as well?
So Sean, I think we look at it from digital is a business that has 2 characteristics. 1st, it is something that is transformative for the industry, and it's something that is having high price for all operators. So we need to be in this business, And we believe the rate of growth of digital is here to stay and only accelerate. So we'll be part of that. And that's really the one the most important factor.
The other characteristic is that when we operate it well and we have the right IP and operating model there, we have been able to be generating margin that are highly accretive, which has been the case for the last 10 to 15 years with SIS. So it will continue to increase its contribution going forward, but I cannot comment at this point until we see the 2020 plan and we see the outcome of all the leads and opportunity that we have built during the last month following the SI
Okay, fair enough. Thank you.
And ladies and gentlemen, our final question will come from Chase Mulvehill with Bank of America. Please go ahead.
Hey, thanks for squeezing me in. I guess first one I'll start on 4Q. Just trying to think about the outlook for Q4. I guess 3Q you were at $0.43 if we kind of gross it up for the $0.03 of the lower D and A for the full quarter, that's a $0.46 number. And it sounded like North America will be significantly down in the Q4 and I wasn't sure about international if it will be up or not from your commentary.
But can you maybe help us kind of bridge the gap from that $0.46 number and how much EPS could potentially be down?
I will comment on the activity. I will not give quantitative guidance on the EPS at this point. And I will repeat what I shared during my introduction remarks. What we see on International is sequentially, we see the unanticipated activity decline in rigs and activity decline in large will be down due to seasonal effect, winter season in North Northern Hemisphere. That is here to state, happens every year.
The magnitude of it will depend in Russia, particularly, but North Sea Russia and China, to a lesser extent, have this effect. We don't anticipate to see a sizable, if any, year end sales that could offset this partially or fully. And we have some exposure, as mentioned and as prompted before, in Argentina that could also further decline due to the investment climate that has moved there. And finally, you heard about the Ecuador civil unrest that happened a week and a half ago, which had some consequence on our operation for about a week, a little bit less than a week, where we restored our production at this stage. But so this is a combination impact that we foresee for International.
That means not activity increase for sure. Now the North America, I think it's more difficult to exactly point pinpoint where the market will end up in terminal activity. But the rate of decline on the permits, the rate of decline on the risk that has accelerated from July to September, the rate of decision in the last few days weeks on the pulling track commitment for the following 3 months has accelerated. And as such, we anticipate that the year on year, the sequential decline from Q3 to Q4 in North America will be greater than it was last year.
Okay. All right. Understood. Got all that. And then just coming back to Sean's question on the digital side.
It sounds like that you've got a lot of revenue opportunity on the digital side as we kind of move forward over the medium to longer term. Could you talk about which businesses you see the most opportunity to leverage digital? And then ultimately, how meaningful of a revenue opportunity do you think this could be for Schlumberger?
The one first and foremost, the business line that we benefit is SIS and then West Sanjico, which are already fully invested into the digital workflow and digital data marketplace. So that will continue to expand. Rate of growth, I think, is to be seen, but the momentum is there and the early success early indication are quite encouraging. The next one, I would say, is drilling. We happen to have a platform including the real future and some software, including DrillOps and DrillPlan that we announced commercial during this SaaS bond that, when combined, give the opportunity to create digital automation at the scale of a week or full operation or at the scale of a sub process in drilling rig.
And this can be productized and applied to platform offshore, to platform in the rig in hand. And we are working with operators as we speak to accelerate this productization and to make it a meaningful impact on to the drilling. And finally, production, we'll be building on the success we are building to create with the JV SANTIA JV. I'm working very closely with Rockwell Automation. I will be participating to their automation fair in the months in Chicago and meeting their board to make sure that we are fully aligned to build the support to this same charge area.
Got it. Understood. All righty, I'll turn it back over. Thanks.
Thank you very much. So before we conclude the call today, I would like to reiterate 3 key points. First, our Q3 performance was very solid. We expanded international margins while mitigating the North American land activity headwinds. We delivered strong free cash flow and record safety performance.
2nd, the new company vision is gaining industry wide acceptance, and the initial progress on the strategic execution is very encouraging. 3rd, we have adopted capital structure as an operational mindset to deliver increased returns through investment discipline, optimization of working capital and overall margin expansion. Ladies and gentlemen, thank you very much for your participation today. Lia, you may now conclude the call.
Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation.