Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger Earnings Conference Call. At this time, all participant lines are in a listen only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn conference over to the Vice President of Investor Relations, Simon Ferrant.
Please go ahead.
Good morning, good afternoon, and welcome to the Schlumberger Limited Second Quarter 2019 Earnings Call. Today's call is being hosted from Paris, France following the Schlumberger Limited Board meeting. Joining us on the call are Paul Kipsgaard, Chairman and Chief Executive Officer Simon Iatt, Chief Financial Officer and Olivier Lapouche, Chief Operating Officer. We will, as usual, first go through our prepared remarks, after which we'll open up for questions. For today's agenda, Simon will first present comments on our Q2 financial performance before Olivier reviews our results by geography.
Paul will close our remarks with a discussion of our technology portfolio and our updated view of the industry macro. However, before we begin, I'd like to remind the participants that some of the statements we'll be making today are forward looking. These matters involve risks and uncertainties that could cause 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 measure can be found in our Q2 press release, which is on our website. Finally, after our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q and A period in order to allow more time for others who may be in the queue. Now, I'll hand the call over to Simon Iatt.
Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. 2nd quarter earnings per share was $0.35 Excluding charges and credits, this represents an increase of $0.05 sequentially and a decrease of $0.08 when compared to the same quarter last year. There were no charges or credits recorded during the quarter. Our 2nd quarter revenue of $8,300,000,000 increased 5% sequentially, largely driven by our international operations.
Pretax segment operating margins increased by 17 basis points to 11.7%. Highlights by product group were as follows: 2nd quarter reservoir characterization revenue of $1,600,000,000 increased 7% sequentially due to activity increases beyond the normal seasonal improvements we typically experience in Q2. These increases were primarily driven by strong multiclient license sales and higher international wireline activity. Margins increased 81 basis points to 19.8 percent due to the increased contributions from higher margin wireline activity and MultiClient. Drilling revenue of $2,400,000,000 increased 1% as a stronger activity in the international areas was partially offset by lower drilling activity in North America land.
Margins decreased 45 basis points to 12.4%. Production revenue of $3,100,000,000 increased 6.5% sequentially, primarily driven by higher international activity across all product lines. Margins were essentially flat at 8% as the improvements in international margins from higher Camelin revenue of $1,200,000,000 increased 5% sequentially, margins increased 94 basis points to 12.6%. These increases were primarily driven by OneSubsea and Surface Systems. The book to bill ratio for the Cameron long cycle businesses was 1.2 in the second quarter.
The OneSubsea backlog increased to $2,200,000,000 at the end of the second quarter. Now turning to Schlumberger as a whole, the effective tax rate was 16.7% in the 2nd quarter compared to 15.5% in the previous quarter. This increase was a result of the geographic mix of earnings. In terms of cash flow, we generated $1,100,000,000 from operations, leading to $459,000,000 of free cash flow. Good performance for the Q2 despite the temporary delays in receivable collection that we experienced in certain regions.
Our net debt increased $335,000,000 during the quarter to $14,700,000,000 We ended the quarter with total cash and investment of $2,300,000,000 During the quarter, we spent $101,000,000 to repurchase 2,500,000 shares at an average price of $40.12 Other significant liquidity events during the quarter included CapEx of approximately $404,000,000 and capitalized costs relating to SPM projects of $181,000,000 During the quarter, we also made 693,000,000 of dividend payments. Full year 2019 CapEx, excluding SPM and MultiClient investment, is still expected to be approximately $1,500,000,000 to $1,700,000,000 And now I will turn the conference call over to Olivier.
Thank you, Simon, and good morning, everyone. Our Q2 revenue increased 5% sequentially, driven by international activity. Our international business grew 8%, accounts growth of 6%, while North America revenue grew 2% sequentially. I'm pleased with the progress made and proud of our team performance, many of whom I met during the quarter on my visits to our global operations. My comments today will include the Cameron business.
I will start with our North America operation. In North America, consolidated revenue was 2% higher sequentially, with land revenue growing marginally, while offshore grew 10%. Production revenue increased 3% due to higher cementing revenue and improved 1 steam hydraulic fracturing fleet utilization in response to market demand. These positive factors, however, were offset by the spring breakup in Canada and lower demand for drilling services as a result of the 5% decline in U. S.
Land rig count. North America land remains a challenging environment.
Indeed, the
NPE operator focus on cash flow has kept activity, and continued efficiency improvements have also reduced the number of active rigs and frac fleets so far without major impact on oil production. In response, we continue our returns focused approach, deploying new technology and working closely with the major independents and IOCs that are industrializing the development of unconventional shale resource at increasing scale. Our competitive advantage in North America land operation continues to build on our differentiation in technology and efficiency. So phase efficiency is one area where we have made significant progress. One new technology is the Monoflex, our new fracturing free delivery system, which significantly speeds up multi well pad rigor and reduces non productive time and safety results.
Reservoir efficiency is another key issue for our customers. We are seeing increasing take up of technologies that help customer design and deploy completion that mitigate or avoid brown child well interference. 2 such technologies are Broadband Shield and Procom Cement. Broadband Shield, innovative fracture control technology, emits the risk of communicating with or fracturing into nearby wells. By the end of June, broadband shield services has been used on nearly double the number of stage when compared to all of 2019.
Fulcrum Cement improved stimulation efficiency by helping keep fracturing free in the target reservoir zone by improving the cement bond. The Q2, Fukum Technology deployments tripled versus the previous quarter and doubled in the first half when compared to full year 2018. In our other North America Land businesses, surface system grew 5% sequentially and 6% year over year. This was driven by the factory rental business benefiting from Monoplex technology and integration with OneTEAM. Artificial lift was strong with sequential ESP sales growth of 5% for new technology and fit for purpose pump systems that outpaced low flow service revenue.
Offshore North America revenue increased 10% sequentially, primarily due to strong West San Diego multiclient license sales. While offshore rig count has yet to increase significantly, customer interest is high, indicating stronger activity coming in the second half of the year. With the North America market remaining challenged in the coming months, we continue to protect our operating margin by focusing on our agile execution and operational efficiency. In the international markets, we continue to witness broad based activity growth. More than half of the international geo market posted high single digit revenue growth or better year over year.
This was mainly driven by rig activity, but our performance was also enhanced by key geomarket activity exceeding normal seasonal rebounds. The improving exploration trends of last quarter also continued. While offshore exploration revenue grew by a third during the first half of the year with a sizable increase in new technology sales. As offshore momentum builds, shallow water rig activity grew by 14% in the first half and depot activity is strengthening as new project assumption. Cameron International revenue grew significantly over quarter over quarter, supported by leverage of the geomarket structure.
This is the 5th consecutive quarter where the total Cameron book to bill ratio was greater than 1. This was also the Q1 since we acquired Cameron where all four product lines, both long and short cycle, grew revenue sequentially. Consolidated revenue in the Latin America area increased 12% sequentially from 21% revenue growth in Mexico and Central America geo market. West and G Comultiplier and Fasnig sales had a strong quarter as exploration investments continued to gain strength offshore. In the Latin America North Shore market, revenue was driven by SPM activity in Ecuador with the Shire project continuing to improve from strong execution and water flooding recovery.
Europe CIS Africa area consolidated revenue increased 11% over the previous quarter on the back of seasonal activity recovery in the Northern Hemisphere and rig activity increase in Eastern Europe. In the UK and Protein of Europe geo market, revenue exceeded expectation by growing 28% sequentially with all product lines experiencing growth. In the Russia and Central Asia geo market, we experienced 12% revenue growth on seasonal recovery with the majority of product lines growing revenue high single digits or better. Consolidated revenue in the Middle East and Asia area increased 5% sequentially with Far East Asia and Australia, geomarkets leading the way with 19% sequential revenue growth, mostly driven by offshore activity. Elsewhere in the area, the seasonal activity recovery in China was partially offset by lower activity in Malaysia and India.
Iraq was lower on completion of our LBS project. And in Saudi Arabia revenue increased on sales of intelligent completions. In the Middle East, the 4 common product line delivered double digit revenue growth, driven by increased activity and share gains across the portfolio. As discussed in our last earnings call, we have initiated a systematic process to address underperforming business units and contracts in the international markets. I'm pleased to say that more than 2 third of our product line expands sequential revenue growth in the international markets this quarter and with each of them having expanded their margins.
A few business units, however, continue to be highly dilutive to our international margins, and we are looking at their performance very closely. We continue to work for our customers to resolve underperforming contracts, exploring ways to eliminate waste through joint planning or execution or improving terms and conditions to avoid unnecessary costs or excessive risks. Most customers are very receptive to this as they see the benefit of increased operational performance and are increasingly concerned about securing supply of technology and resource for future activities at stake. These focus efforts are already providing producing visible improvement in our international markets. As international activity increases, our deployment of CapEx is also prioritized towards the business unit with higher returns.
This dynamic capital requirement is creating some tightness in the market, which is another catalyst for pricing improvement. To conclude, we continue to see high single digit revenue growth internationally, excluding Cameron, consistent with previous guidance. At the close of the first half of twenty nineteen, international revenue has increased 8% year over year, while North America and land revenue has declined 12% year over year. These results are in line with our view of the normalization in global E and P spending. And with that, I will turn the call over to Paul.
Thank you, Olivier, and good morning, everyone. I will start by adding a few comments to complement the geographical review of the quarter provided by Olivier and highlight how the current market developments are favorably impacting the opportunity set for Schlumberger. Let me begin with the macro environment where the market sentiments remain balanced. On the demand side, the 2019 agency forecasts have been reduced slightly on global trade fears and current geopolitical tensions, but we do not anticipate any change to the structural demand outlook for the midterm. On the supply side, we continue to see U.
S. Shale oil as the only near to medium term source of global production growth. However, the consolidation among North American E and P companies is further strengthening the shift away from growth focus towards financial discipline, while at the same time driving increased focus on HSE, technology adaptation, more collaborative business models and it would also potentially dampen the large variations in investment levels throughout the cycle. These effects combined with the recent decision by OPEC in Russia to extend production cuts through the Q1 of 2020 are likely to keep oil prices range bound around present levels. Although the markets are well supplied from projects sanctioned and partly funded prior to 2015, this source of supply additions will start to fade in 2020, thereby further exposing the accelerating decline rates from the mature production basins around the world.
In addition, while the number of new FID approvals in 2019 are likely to increase again for the 4th consecutive year, their size and number account for supply additions far below the required production replacement rates. We therefore maintain our view that international E and P investments will grow by 7% to 8% in 2019, a figure confirmed by the increasing international rig count and the growth seen in our international business in the first half of this year. In contrast, the cash flow focused amongst the E and P operators confirms our expectations of a 10% decline in North America land investments in 2019. This means the welcome return of a familiar opportunity set for Schlumberger. For the first time since 20122013, we see high single digit growth in the international markets, signaling the start of an overdue and much needed multiyear international growth cycle.
This growth is taking place in our backyard, where our technology performance and long standing presence is highly valued and where our market share and profitability gives us an earnings potential up to 4 times that of our closest competitor. Our leading international market position is built on our scale, footprint and extensive technology portfolio and further strengthened by the significant efforts we have made to evolve the company over the past 5 years along the following three directions. The first is our internal transformation program that has modernized our workflows and our organizational structure by creating stronger and more professional support functions with cutting edge planning, execution and collaboration tools. This has allowed us to significantly improve the utilization of our asset base and reduce our operating costs through improved planning, distribution and maintenance. At the same time, we have been able to deploy our people and expertise more effectively.
All of this has created structurally lower capital intensity of our traditional product lines and lower working capital throughout our technology offering. This will together improve our ability to generate incremental margins and free cash flow as international activity continues to increase and pricing headwinds gradually become tailwinds. The second major direction we have been pursuing is our digital strategy, which is built on the pillars of a cloud based applications platform and open data ecosystem and a broad range of edge architecture solutions. Altogether, this represents a complete platform ready to support our customers in accelerating the digital transformation of our industry. After years of R and D investments in line with this strategy, we are now introducing several applications to the market with more to follow in the coming years.
Within reservoir characterization, we recently introduced the Gaia platform at the EAGE Conference in London. Gaia uses the power of Delphi to enable explorationists to discover, visualize and interact with all available data in a basin without compromising resolution or scale. In drilling, our 1Drill platform is the 1st digital drilling system that is fully designed for integration and automation. It spans our drilling software applications, the automation ready rig of the future and the range of new downhole hardware that together will redefine the efficiency of land drilling operations. And spanning production in Cameron, our recently announced Sensia joint venture with Rockwell will upon closure be the 1st fully integrated oilfield automation provider focused on production measurement solutions to main expertise and automation.
The third of our focus areas in recent years has been to reduce the capital intensity of our business after we invested actively to build out the company in the early part of this extended downturn. Our efforts to reduce capital intensity began with our decision to exit the Marine Seismic business in late 2017 after our advanced geophysical measurement technology failed to deliver the needed financial returns over a number of business cycles and with no improvements in sight. Another recent example is the divestiture of our land drilling rig business in Kuwait, Oman, Iraq and Pakistan to the Arabian Drilling Company, a minority joint venture we have had with our Saudi Arabian partner, Taka, for more than 50 years. Through this transaction, we will eliminate the need for capital investments into this rig fleet, while maintaining access to the rigs for our integrated drilling operations in the Middle East. We will also follow a similar capital structure but with other partners for the deployment of the rig of the future, where we now have introduced the first rigs into U.
S. Land. We have also announced our plans to exit the business related to Fishing and Remedial Services, DrillCo and Thomas Tools that came with the Smith acquisition in 2010, as these business lines are capital intensive, generate a lower return on capital and are not core to our drilling operations. Bjorna recently announced transactions, which will produce approximately $1,000,000,000 of gross proceeds in 2019, we have also stated our intentions to monetize partly or fully our 2 SPM projects in Argentina and Canada to demonstrate our ability to generate value from the assets we take under management. And we have decided not to undertake new SPM projects that involves any period of negative cash flow, we still see a significant opportunity to deploy the technical and commercial expertise we have developed within SPM through less capital intensive contractual models.
On this basis, we have signed an MoU to work on a large integrated project in the OML 11 Block Offshore Nigeria, where we will act as the technical and project execution partner with funding provided by a third party. This SPM light project, which involves no Schlumberger capital investment, is our preferred SPM business model going forward. We have also recently entered into a similar SPM Light project to manage the Awale field in Bahrain. In addition to the divestitures and the new SPM Light model, we have also structurally lowered the capital intensity revenue compared to historic levels of 10% to 15%. In addition to the major directions I've just described, our day to day execution focus continues to be on further improving the quality of service we provide to our customers, optimizing the deployment of our resources as we start to see shortages in several basins and to address our underperforming contracts and business units around the world.
Altogether, this should enable us to restore profitability to our target levels and also to drive incremental margins and free cash flow going forward. Let me conclude my remarks with a few comments as we transition to a new Chairman and new CEO of Schlumberger. Earlier today, we announced the appointment of Mark Papa as our new Chairman and Olivier Lepuch as our new CEO. I've spent the past decade as COO, CEO and more recently as Chairman of Schlumberger. And while it has not necessarily been the friendliest of decades in terms of the business environment, it has been a fantastic journey and a great honor to be trusted with the responsibility to lead this amazing company, which is made up of the best people in our industry.
1 of the most important duties of a sitting Chairman and CEO is to ensure an orderly succession process to the next leader, which in my mind involves several key responsibilities. The first of these is to pick the right time to step down. After a decade at the top of the company, with the deepest and most challenging downturn in our history behind us and with the international upturn starting to take shape, I therefore asked our Board to start a succession process exactly 12 months ago. The second responsibility is to fully support the Board as they run the search and selection process for the leadership succession. In this respect, I have provided input to the Board on a broad range of topics, including candidate assessments.
The third is to support and guide incoming CEO as he or she gradually takes over as the new leader of the company, and it has been a pleasure managing side by side with Olivier over the past 6 months. And the last responsibility is, in my mind, to walk off the stage as soon as the successor is ready to take over. This provides the needed freedom and space for the new CEO to drive the changes he or she sees fit, which is the overarching goal of any change in leadership. This is why I recommended to the Board that I do not stay on as Chairman. I will still be attached to the company for a period, ready to be an adviser to Marc and Olivier as required.
But beyond that, I will step completely into the background. In closing, I would like to thank the entire investment community for the enjoyable and constructive working relationship we have had over the past decade. I would also like to thank my management team. You are all amazing. And also the Board of Directors, our entire organization, our customers and our partners for their support.
I will, in many ways, miss being part of all of this, but it's now time to move on to the next chapter. Thank you. We will now open up for questions.
Thank Our first question is from James West with Evercore ISI. Please go ahead.
Hey, good morning guys.
Good morning, James.
And Paul, congratulations on a 22 year run at Schlumberger including 10 years at the top and the modernization and transformation of the company, well done. And Olivier, congratulations on your appointment as CEO.
Thank you. Thank you.
So Olivier, I guess you're up now. So as you take over here from Paul and Paul outlined a number of the initiatives that have been underway over his tenure and especially the last several years during the downturn, could you perhaps give us somewhat of an outlook or some guidance on how you see your strategy unfolding over the next several years? What are the key points or at least some preview of your strategy? I know you're going to outline that more detail later on this year, but if we could get a preview that would be great.
James, I think you will understand that my short term priority is clearly to complete first the transition with Paul and to focus on execution during the upcoming weeks months as we want to fully enrich the opportunity set that this new market outlook presents to us. I will gradually indeed communicate the element of the strategy during the next few months and quarters as we mature and deploy initially with the leadership team going into 2020. I don't think it's appropriate for me to deploy and PTLDs. I prefer to postpone that in a setting, in a setup that would be more appropriate so that could develop and then expose all of you to the right priority going forward.
Okay, understood. And then maybe a follow-up. A lot of the recent adjustments within Schlumberger have been to move to a more capital light structure to drive returns higher. I know Paul outlined several of these recent transactions. Should we expect more of this in the future?
Or has the asset base or the business mix and portfolio been called enough at this point? Or is there more to come?
I think first, I think this is nothing really new. We have started that 2 or 3 years ago. I think we initiated this in larger scale with the West Angico transaction about a year, year and a half ago. I think we had as part of the management team agreed that we need to look critically at every business we own and look at the return on assets and return on capital and then use a proactive approach to anticipate and use every opportunity that exists in the market to either separate or do and run it differently. And I was associated very closely to 2 of them, the RIG deal with ADC Middle East and Essentia as I believe that it was not necessarily for the asset, but it was more for creating the unique joint venture that would change the market.
When I will stop there, I think it will depend upon the market condition for 1 and 2, upon the results of some element of the strategy. But clearly, we will continue to look at every way we can improve return on capital, return on equity and improve ROCE for the company. So that's trust me and trust us on this for the future.
Very good. Thanks, Olivier.
And next we go to the line of Angie Sedina with Goldman Sachs. Please go ahead.
Good morning. Good afternoon, guys.
Good morning, Angie.
Hi. So I echo James' remarks. Certainly, congratulations, Paul, on entering the next chapter of your career. And we really enjoy very much working with you and your willingness to meet with investors in The Street regularly is appreciated.
Thank you, Angie.
So I think the first question for me is to Olivier or Paul or either one of you both is, I think it's really interesting to see this announcement with Mark Papa as Chairman of the Board. I'm not sure, but is this the first time that a non exec has been named Chairman for Schlumberger and it'd be helpful to hear the rationale around the decision. Is it corporate governance? Is it a focus on U. S.
Land markets or the general strength of Papa? And is this a long term position? Or is this an interim position?
Well, I wouldn't read too much into the details of this. I think the board is following pretty much the same recipe as when I took over. There was a split of the office Chairman and CEO also when I took over. My predecessor as CEO stayed on a bit longer, but also we had another nonexecutive Chairman, Tony Isaac, staying on for a couple of years after that as the Chairman as well. So the selection is basically down to what the board has decided.
And the split of the office at this stage is the same as what we did when I took over. And what the board decides to do going forward, I think, will be up to the board.
Okay. Okay. That's very helpful. And then maybe for Simon, there's been a lot of discussion on free cash flow and the dividend. I'm sure you heard this as well.
Maybe you can give us some color around the outlook for free cash flow into the second half of twenty nineteen. Is it reasonable to think that it could be similar to 2018 levels in the second half or $2,500,000,000 $2,900,000,000 I think it was last year? And in that context, the importance of the dividend and the dividend coverage, which is roughly 1.25 times?
Okay. Thanks, Anji. Let me just elaborate a bit on the cash. As you noticed in the Q2, we performed better than last year. We although we expected better, actually, we had some delays in collection in certain geographical regions.
But that put us at 6 months level at better than last year. We expect the second half to even be better than last year as well. As you know, we always perform during the second. We consume liquidity during the first half because of working capital, and we improved it during H2 of every year. And this year is not going to be an exception.
We will continue the trend. And you will see that this thing we're very confident on it. Our plans shows that the cash flow in the second half will be quite healthy. And this takes me to this issue of the dividend coverage and return of capital. We obviously we haven't been producing enough cash to cover the return on capital, but we know that this is a priority.
This is an objective. And we're comfortable by that this level of cash flow, free cash flow will be reached and we will be able to cover our commitment to the return of capital to the shareholders.
Okay. And then if I could slip one more in. I mean, with Paul's announcement on his resignation, it's only natural to think about the CFO succession. While clearly love you, Simon, we'd love to hear if there's any background on the air apparent and just general timing.
Well, I would I'll make the bold statement and say that Simon and I will most likely retire at some stage. A date hasn't been set yet, and I think the date will be set in between Olivier Simon and the board. And the succession will be carefully planned, and we will inform the market when we are ready.
And next we go to a question from Scott Gruber with Citigroup. Please go ahead.
Yes, good afternoon to you all and I'll reiterate the dual congrats to both you Paul and to you Olivier.
Thank you. Thank you Scott.
Olivier, I realize it's early days, but just following up on James' strategy question, question we often get from investors is on 1st. Is this considered a core for Schlumberger? And how do you think about that business going forward within the portfolio, within the context of trying trying to reduce the capital intensity of the overall portfolio?
Yes, good question, Scott. I think, 1st and foremost, I think, when we pursue mergers to participate into the North America land market. It's too big to ignore. And I believe that our ability to extract value, work for customers to meet a technical challenge and create efficiency for industry is critical. So that's the reason why I think we are still in the invested in technology to extract value and meet our customer expectation there.
Going forward, we will obviously look at the way we run this business and look at the optionality going forward of doing it differently. But for now, I think we are in this business to make it a success. We have made improvements on efficiency. We are working more closely with the international operators that are growing in the basin, also with some large independents. And acknowledging our efficiency and the impact we can provide.
Now the future is the future and we will determine on the outlook of the market, what is our position and be smart about
what we take
as a decision and manage the capital allocation accordingly.
Got it. And a follow-up on IDS. I was a bit surprised to hear some weakness in the IDS portfolio during the quarter. Can you just discuss what happened in the segment during the quarter? Was it just a speed bump?
Is there something more to be concerned about here? And then given the outlook for IDS in the second half, how do we think about the outlook for the drilling segment in the second half of the year? I think the original expectation was for overall revenue growth in drilling for the year of around 10% and incrementals of 20% to 25%. How should we think about those two items for the rest of the year?
Yes. Let me first come back onto the Q2 drilling performance as I think 2 or 3 things played at the same time. Actually internationally, X-ray and STK compared with IDS, the product line performed very well and had growth internationally and improved our margin. Unfortunately, this was offset by the significant activity drop in North America, both coming from the breakup and coming from lower rig activity by 5% into the land. Combined with this, indeed, the total IDS sequential was actually lower than in Q1.
And this is due to 3 things. 1st, Iraq, we completed the project. Next, India has an activity that is linked to the project. And last, we had only a flat revenue or flat activity quarter on quarter in Saudi. So Saudi is having 4 LSTK contracts, and we are not necessarily pleased where we are on the performance.
But as any project, we are focusing on improving on performance, taking our earnings and trying to improve from this to accelerate the learning curve. Despite Qatar conditions in Saudi, we had geological well condition and operational issues that both combined to create a setback for execution. But I spent quite some time within the team. I've been with the team on the ground, And I'm pretty confident that actually the team has understood the gaps, both technology and operational execution, and that we gradually see improvement of our performance in Elastic{contract} in Saudi and Stack converge into the ambition we had, which is to reach and being accretive from this execution to the drilling group margins.
Do you think that margin convergence can happen by the end of the year?
I think we will review the progress during the Q1. I'm planning to stand back and be with the team sometime later this quarter to review progress. And then we'll at that time review which of action we need to take if we are short.
Got it. Appreciate the color. Thank you and congrats again.
Thank you.
Next we go to the line of Kurt Hallead with RBC. Please go ahead.
Good afternoon in Paris. And Paul, I'll go the same path. I really appreciate your accessibility. I know you've done the absolute best you could in a very, very difficult environment. So kudos to you and look forward to what your next gig is going to be.
Olivier, welcome aboard and look forward to get to know you and work with you. So kudos on both fronts.
Thank you.
Yes. So I guess my line of questioning here would maybe focus on some of the operational dynamics. And I was wondering whether Paul or Olivier, either one, can you speak to the progress that you've made so far in improving the margins on the underperforming international contracts?
So as I've shared in my prepared remarks, I think we initiated some key initiatives on the earlier this year to focus on both the contract and the very specific underperforming blueprints unit and not only doing reviews, but also making actions to change the contracts and or to work with the customer to improve those. So yes, we have made progress. I think a few business units or contracts that were particularly dilutive transferred into neutral or accretive during the quarter. And this is visible. As I said, more than 2 third of our product line have experienced growth internationally during the quarter.
And all of them experiencing growth has actually experienced improved margins quarter on quarter, which I believe is a first for quite a few quarters. I think it's due to some of this heightened focus onto this underperforming business unit. So now it's not over. We still have a few business units or contract or execution area where we are not satisfied, and I think we have acknowledged this. We have all eyes on this issue.
And we're working with the team to improve those occasionally with customers so that we improve our performance and continually will gradually improve our margins going forward.
Okay. I appreciate that color. Thank you for that. And then my follow-up question would be, can you give us some general insights on what you see in terms of pricing trends for your drilling related business lines and frac business lines in the U. S.
As well as what you've been experiencing lately for pricing outside North America?
So first, starting with North America. I think the pricing is still a little bit depressed environment, both due to the reactivity decline that we have experienced for the last few months, combined with the excess capacity that still sits into the North America business. Now this being said, with the right technology, with the right value creation, with the right efficiency, we are capturing either through performance or through technology setup the pricing mix that I think is favorable. And we have seen that in our LSS technology in North America. We have seen that, as I mentioned, in surface Monoflex.
We have seen this into some very specific dedicated fleet contract that we have with Onesteam. And this help us mitigate the exposure to the spot price market that keeps going down in the market. Now by contrast internationally, while the market is not uplifting the price on the large tender for sure and we still see a very much very highly competitive environment across the globe. We see that in some spot geography, be it offshore or be it in more remote geography with the right technology, be it in exploration or be it in drilling for difficult wells and difficult condition, we are starting to obtain updates and upgrades on our pricing condition or simply getting the mix that is more favorable to our margins. And as such, as I commented before, several product lines internationally have had quite a robust fall through in
the last quarter.
Thank you. Appreciate that.
Next we go to the line of Bill Herbert with Simmons. Please go ahead.
Good morning.
You expressed basically that you expect the market to remain balanced. When one can make a case, which is shared by, I think, both EIA and OPEC, that non OPEC supply, certainly in 2020 is going to significantly outpace global demand growth. Call on OPEC is going lower. And the only thing keeping oil prices where they are is a combination of rational guardianship on the part of Saudi and GCC on the one hand and embargoed and quarantined oil in the form of Iran and Venezuela. So walk me through your thesis as to why you think the market stays balanced.
Well, let me take on that one. So overall, what we're saying is that the balance between demand and supply as we see today, we don't see it changing dramatically as we go into 2020. The main issue, I think, around the oil price today is the negative overhang around trade and what the implications of that is going to be for the medium to long term. So I think in our assumptions, we expect that there will be some type of resolution to this, that it's not going to go on for a long time. And with that, we will not have a structural change to the global demand outlook.
On the supply side, as I said in my prepared remarks, we see a gradual fall off of the supply additions from the projects that were sanctioned and largely funded prior to 2015. And this will further expose the accelerating decline that we see in the more mature production base. You can look at Norway, U. K, Nigeria, Indonesia, Mexico and presold in Brazil, you'll see that there is significant declines taking place there. And I think with that, we don't see a major tailwind on non OPEC production outside the U.
S. In 2020. And with also the lower investment levels in the U. S, there will be growth in 2020 in the U. S, but I think it's going to show a decelerating pace.
And that's why when you combine all of these things, we believe that the current situation is roughly where we will find ourselves also in 2020.
Okay. Well, time will tell, and I hope you're right. And the second question is with regard to views on the Q3, if you could talk about that, your comfort level with Street estimates, etcetera. Thank you.
Olivier? Yes. I think just to give a little light on this. So we do anticipate a similar earnings step up sequentially during the Q3. And as such, we believe that the current street estimates are achievable, however, with no visible upside.
Indeed, we expect the momentum in international growth and relative margin expansion to continue. That's what we have seen. And we do anticipate also the North America outlook to remain actually a challenging as a result of again the sustained pricing pressure and limited of no activity increase partly for drilling. So that in all will result into the guidance I shared.
Okay. Thank you. Thank you.
Next, we go to the line of Sean Meakim with JPMorgan. Please go ahead.
Hi, afternoon everyone. Good afternoon. I wanted to circle back to the dividend. This is something that we discussed when you were at our conference in New York last month, but it seems worth addressing here in this forum as it's a common investor question. So Olivier, could you maybe speak to your commitment to the dividend as you step into this seat?
And Simon, if we can maybe look beyond 2019, could you walk through the levers that are at your disposal to cover the $2 dividend with earnings and cash flow if we end up in a lower for longer scenario in terms of how the macro unfolds?
So let me first reiterate what I said indeed to the investor community back in New York is that we are committed and I'm personally committed to the dividend. I will not be the 1st CEO to step back on this commitment. So count on me and count on the team and the commitment we have into the operating margin improvement and working capital improvement to make it steady and a reality going forward.
Okay. Let me just repeat a little bit what I said about the cash. Here, with the performance that we have achieved the first months and what we anticipated in the following 6 months and helped a bit by the divestitures that we have announced, we're going to cover everything and overall reduce our net debt slightly, but we will, which in other words, we will reduce our net debt, which is a borrowing, and we will be able to cover all the commitment, the dividend and the continued buyback that we are performing on a quarterly basis to avoid the increase in the share count as a result of the stock based compensation. Now I'm going to go and confirm on our expectations for next year. Next year 2020, our forecast today that the dividend will be covered through a the generation of cash from operation, And we will be able to cover the again, the dividend, and we will continue with this small buyback.
So the commitment to dividend, as Olivier mentioned and historically, there is no question about us maintaining the dividend. And I think given our forecast and what we see the way we're going to conduct the working capital the investment in the projects, we will have ample cash to cover it.
Very good. Thank you for that. I think that's
And on the divestiture, let me finish on the divestiture. You have 3 divestitures, which are close to $1,000,000,000 And what we anticipate, what we included in our scenario for this half is at least 2 of them will be completed in the second half.
Thank you for that. I think that will
be well
received. We haven't spoken on Cameron yet. And so I was hoping to get a little more of the outlook there, maybe confirmation from your perspective that we've hit a trough in the margins in the first half of the year, perhaps in the Q1. In the release, there were some nice contract wins with Chevron and Shell, I noticed. How do you view market share in Subsea and perhaps in pricing as well as integrated projects are becoming a bigger part of the demand mix there?
Good question. Thanks. I see first the Cameron Group continue to perform very well. I think you have seen that the long cycle business continue to increase backlog. Now we're in excess of $2,700,000,000 mostly from Subsea.
And the short cycle as well continuing to maintain share in North America and gaining share internationally. So you have seen that mix includes increasing share internationally for the short cycle and maintaining share and rebounding from the activity long cycle rebound is combining to help us with not only growth but also with margin improvement over the period. So I think the margin, yes, I think we have made that comment that we believe the margin drop is behind us. And I believe that this is roughly the case. And I think we are we see going forward steady growth build on the backlog that the long cycle have accumulated and build on further gain on the international growth.
As we have seen, international growth was across the 4 product lines in Q2 sequentially. We expect this to continue in the second half. And this is built on the leverage of the joint market franchise that have started to take place and is giving a tailwind to the Cameron organization. Now more specific to Subsea, I'm very pleased with the engagement and the relationship and the alliance we have with Subsea 7. We have actually in connection with this, we have received the required antitrust clearance.
And as such, we have accelerated our elevating allowance to now having a dedicated management joint management structure that oversees not only the engineering, but also the pursuit of new opportunity integrated project and the execution of projects doing integration. The result of which, I think you may have seen it, we're quite successful in the last few quarters to gain against competition, integrated joint project. And I think the feedback that I've received personally from the customer and that Jean Carusac and his team have received from the customer is excellent, both on the execution, but also as we presented one team to the customer, we also offer them the optionality to choose us independently and go with either the SURF package or the SPF package. So I'm confident that this integration will continue to be a success for both companies. And I'm very confident that with regards to 1 Subsea, the leadership they have on the tieback compression and execution track record they have, they are the execution company in subsea to what I've seen.
They have technology edge on subsea processing including compression. We have seen the recent award from Shell Hermann Lange in Norway against a major award that cements our leadership into subsea processing system that have the reliability and the deliver the recovery that the customer wants. So very well aligned, and I'm confident.
Very interesting. Thanks Olivier.
And our next question is from Dave Anderson with Barclays. Please go ahead.
Hi, good morning Olivier. Just a question on the offshore side. I think you had said in your remarks that your shallow water business was up 40% on the first half year over year. I was also really more curious about the deepwater side. Floating rig count is up 20 rigs or so this beginning of this year.
Seeing more FID exploration activity. Is this lining up for sort of an inflection in this deepwater part, the market which is so important to the Schlumberger business? Is that a 2020 event? Is it too early to tell? Can you just kind of help us understand kind of how the deepwater market is framing up for you?
Yes. Thank you. First for correcting the number, maybe I misspelled it, but it was 14%, 1% 4% shallow water rig activity that is continued growth. The deepwater is seeing less growth of rig activity at the moment, more single digit, Yet we are seeing FID. There's quite a number of FIDs that are lining up in the 3rd Q4 of this year that would translate into further growth and acceleration of deepwater as we expect into next year.
Now the offshore activity at large, I think is very solid on shallow both in Middle East and in Asia. And Deepwater is seeing the rebound of activity in West Africa at large. So I think the combination of this is very favorable. As I did comment in my prepared remarks, the offshore exploration is up more than 30% year on year year to date and this benefits very much wireline. So the deepwater activity is more later cycle increase that we'll see from the second half and into next year.
Great. Thank you. A completely different subject. North America, I'm sure you're getting bombarded with the talk of E and P Capital discipline like everybody else is. But and I know you don't know exactly how the year is going to play out, but 4th quarter activity kind of looks like it could happen similar to last year.
Is that how you're preparing your business right now for sort of the cadence of spending in North America to look similar to last year? And if so, what does that mean? Does that mean that you're prepared to stack more equipment? How do you prepare your business for that type of market, which could potentially fall off in the back part of the year?
No, you are correct. That's the assumption we're also taking. I think we do expect and anticipate that the combination of seasonal slowdown and budget exhaustion will create a trough in the Q4 as we have experienced last year, but will be followed most likely by strengthening and burn activity in Q1 across the area. So we are prepared for this. We have done it last year.
We'll be agile. We'll be certainly stacking some equipment. We'll be going and doing the is necessary to withstand this trough, but we are ready for it. I think agility is one of the focus of the team, both in organization and into responding to the market trough and peak. So we will do that again this year.
Great. Thank you, Olivier. We look forward to hearing from you later this year on your broader strategy. Thank you.
Thank you.
And next we'll go to a question from Jud Bailey from Wells Fargo. This is our last question. Please go ahead.
All right. Thanks and good afternoon to you guys. First of all, Paul, it's been good working with you over the years and good luck on the next chapter for you. And Olivier, I'll say also congratulations to you as well.
Thank you.
Yes. My question, I guess Olivier, just thinking a little bit bigger picture on North America, kind of given the outlook that looks like the U. S. Market doesn't really need to grow for maybe the next couple of years. How are you thinking about getting margins higher in that business?
You kind of talked a little bit about OneStem a little while ago, but what about just North America more broadly? How do you drive better margins in that business and in this market where year over year you're maybe flat, but you're also having to navigate some pretty severe seasonal swings as well quarter to quarter?
No, that's a challenge that we all face. And I think the way we are addressing this is 2 fold. 1st, focus on our own what we can control, which is our own efficiency and our own productivity. And I think we have deployed several parts of business system, digital tools and technology that improve our own surface efficiency, that improve the way we operate, deploy equipment and run remote operation in the North American Basin. And that has over time proven to be falling through and helping to protect our margins.
Now the second aspect is reservoir efficiency or addressing the gap of technology that the customer are looking for to address some of the technical challenge and the specifics pound charge interference and all the specific performance contract that some of the major are ready to engage with. So playing on both, continuing our execution on productivity, efficiency, modernization, which has already gained a lot of fall through and aligning more with some critical customers partly around the technical challenge or around when we can like we did with Oxy in Avanti, New Mexico around performance based contracts and then using leveraging our system performance to extract the margin. Both this will be played, 1, to protect our cost structure and to be more positive and the other one to uplift and capture some of the value with our customers. So this will protect and increase our margin going forward.
Okay. All right. I appreciate that. My follow-up is on the Q3 commentary. I think I believe you said, you're comfortable with where consensus is.
And I wonder just to understand a little bit better, does that envision, like a recovery or a little bit better margin trajectory from the drilling business, which stepped down this quarter to hit Q3 consensus? Do you envision that your drilling margins are probably more in line with where you would have expected them earlier in the year? Just help us think about margin progression and how you're thinking about that in the various segments.
Yes, absolutely. I think the mix will be a little bit different, albeit similar trajectory for international. I would expect that some of the setback we had in the Q2 will resolve themselves, and the activity mix will present itself an opportunity for drilling to perform slightly better next quarter.
Okay, great. Thanks. I'll turn it back.
So ladies and gentlemen, thank you very much. So before we end today's call, I would like to offer a few closing comments. Firstly, I want to reiterate my word of appreciation to all the Schlumberger employees who did contribute to last quarter's success. Our 2nd performance Q2 performance was both solid on earnings and cash flow generation on the back of a broad international and offshore market recovery, partially offset by the persistent challenge in North America land market. We need to respond very well to this familiar setting, leveraging our international footprint, our technology portfolio strength and our efficiency and performance execution with most of product lines and geography posting material revenue growth quarter on quarter.
Our elevated focus on service quality and underperforming business units and strict prioritization of capital allocation have also resulted in margins improvement internationally. Additionally, we are working closely with our customers to extract more performance from ACIM contracts, and we are jointly planning the mobilization of the upcoming activities in response to the increased concern about future supply of resource and technology. Looking forward, despite the fears of global trade and geopolitical tensions, the current activity trend looks set to continue into the second half of the year with the next quarter driven by strengthening activity on increasing international spend, whereas we anticipate the North America land market to provide no relief on pricing pressure and little or no incremental activity. We believe that these market conditions continue to align very well with our position of strength, particularly on our ability to generate much differentiated earning potential. And we expect that the momentum initiated during the Q2 to continue during the remainder of the year.
Finally, I would like to express my sincere thanks to Paul for his support and guidance during the past 6 months, while recognizing the contribution he has made to the company for the last decade. I have the privilege to work side by side with Paul during most of the last 10 years, and I've been very impressed by his unique leadership skills and his ability to steadily transform the company in a very difficult period and propel true margin for future success at the heel of a new growth cycle international. I believe in Pascuala that the modernization platform and the digital technology leadership developed during the last few years will represent a unique foundation upon which we will develop our next chapter with an increased focus on cash and returns. I look forward to continuing the engagement with the investor community during the quarter and look forward to see many of you during Energy Conference early September. Thank you for your attention and participation to this call.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.