Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Simon Ferrant.
Please go ahead.
Good morning, good afternoon, and welcome to the Summerjet Limited Third Quarter 2018 Earnings Call. Today's call is being hosted from New York following the SummerJae Limited board meeting. Joining from the call are Paul KidScout, Chairman and Chief Executive Officer Simon I, Chief Financial Officer and Patrick Shawan, Executive Vice President, Wells. 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 Q3 financial performance before Patrick reviews our results by However, before we begin, I'd like to remind our participants that some of the statements we will be making today are forward looking.
These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10 ks filings and other SEC filings. Our comments today may also include non GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our Q3 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 hand the call over to Simon Ayatt.
Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. 3rd quarter earnings per share was 0 point 4 $6 Excluding charges and credits, represents an increase of $0.03 sequentially and an increase of $0.04 when compared to the same quarter last year. There were no charges or recredits recorded in the current quarter. Our 3rd quarter revenue of $8,500,000,000 increased 2% sequentially, primarily driven by strong international drilling activities.
Pretax margin, pretax operating margins increased by 36 basis points to 13.5%. Highlights by product group were as follows: 3rd quarter reservoir characterization revenue of $1,700,000,000 increased 2% sequentially, primarily due to higher wireline and integrated services management activity in the international markets. This was partially offset by the completion of the first phase of an integrated production system project. Margin increased 88 basis points to 22.3%, primarily driven by the increase in higher margin wireline activity. Drilling revenue of $2,400,000,000 increased 9% sequentially.
This increase was driven by strong international growth and benefited in integrated drilling services, drilling and measurements and MRI SWACO activities. Margins increased 103 basis points to 14% as profitability improved in certain IDS projects that started in the prior quarter. The overall increase in drilling activity also contributed to the margin improvement. Production revenue of $3,300,000,000 and margins of 9.8% were essentially flat. Amerenity Group revenue of $1,300,000,000 was also flat sequentially.
Increased sales in surface systems and drilling systems were offset by lower revenue in OneSubsea and valve and measurement. Margins declined 140 basis points to 11.4%, primarily driven by the lower 1 subsidy revenue. The book to bill ratio for the Cameron long cycle business was at 1. Now turning to Schlumberger as a whole. The effective tax rate, excluding charges and credits, was 16.4% in the 3rd quarter compared to 17.2% in the previous quarter.
We generated $1,800,000,000 of cash flow from operations during the quarter. Our net debt slightly decreased during the quarter to $14,500,000,000 We ended the quarter with total cash and investments of $2,900,000,000 During the quarter, we spent $100,000,000 to repurchase 1,500,000 shares at an average price of $64.98 Other significant liquidity events during the quarter included CapEx of approximately $565,000,000 and capitalized costs relating to SPM projects of $285,000,000 During the quarter, we also made $692,000,000 of dividend payments. Full year 2018 CapEx, excluding SPM and MultiClient Investments, is still expected to be approximately $2,000,000,000 And now I will turn the conference call over to Patrick. Thank you, Simon, and good morning, everyone. Schlumberger revenue in the Q3 of 2018 increased 2% sequentially with pretax operating income increasing 5%.
In North America, while we continue to gain market share in artificial lift and drilling, takeaway constraints in the Permian led to lower activity for our 1 steam hydraulic fracturing business. Internationally, we continued to benefit from the broad based recovery that began in the 2nd quarter, seeing solid growth in all operating regions, driving international sequential revenue growth ahead of sequential growth in North America for the first time since the Q2 of 2014. As usual, I'll first discuss the revenue growth by geography without Cameron before concluding with a few remarks on Cameron's 3rd quarter performance. In North America, revenue of $2,600,000,000 increased 1% sequentially. On land, drilling revenue grew 5% sequentially to outperform the 3% increase in the land rig count.
Rotary steerable systems were again in demand to meet customer needs for longer laterals required in shale oil development for optimum well performance. Higher product sales for artificial lift systems, which grew by 10%, also contributed to 3rd quarter performance. These positive results, however, were largely offset by the weakness in the hydraulic fracturing market that developed during the quarter. While the quarter began by leveraging 2nd quarter fleet additions, customer activity weakened during the 3rd quarter as takeaway constraints in the Permian limited production growth. The resulting excess hydraulic horsepower in the market led to softer pricing, and as a consequence of this, we did not add more of our spare fleet capacity during the quarter.
The rapid change in the dynamics of the hydraulic fracturing market again highlighted the operational agility and execution needed to efficiently manage resources and to effectively control supply chain costs. The robust performance of our vertically integrated sand mining and delivery business is one of the key elements of this, where we, in addition to supplying our 1 stim operations with sand, now also are successfully competing in the 3rd party sand market as an integrated hydraulic fracturing company. The multistage stimulation business for completions in North America land saw a record number of stages installed in Q3. Broadband precision technology has seen steady uptake throughout the year from multiple customers in Canada and the Permian. The reliability of this technology allows not only efficient fracking of wells with 20 stages per day, but also selective sleeve closing and reopening to better manage water and sand production as the wells close cleans up.
We also continue to see solid new technology sales in the U. S. Land market. The growth of our drilling business has been underpinned by technologies such as PowerDrive rotary steerable systems and X Blade drill bits, which have become the key enablers for drilling longer lateral sections. One new bit technology introduced during the quarter was the Hyperblade Hyperbolic Diamond Element Bit, a development of our market leading StingBlade and X Blade Bits.
Hyperblade bits lowered drilling cost by improving the rate of penetration while maintaining steering response and directional tracking in the soft and plastic rock formations that make up many of the unconventional reservoirs. At the same time, the emergence of well and reservoir performance issues are leading to new focused cementing technologies such as the SEMFIT shield mud ceiling cement system that provides the industry's 1st zonal isolation technology specifically designed to improve isolation between hydraulic fracturing stages in long horizontal wells. On the major STM Pelletar asset in Canada, drilling continued with 4 rigs. Drilling efficiency and advanced drilling systems continue to drive performance. So far, 93 wells have been drilled and a further 30 are expected by year end.
On the completion side, One Stim has enabled higher efficiency and reduced cycle time between drilling and flowback accelerating production of new oil. Overall well production has met or exceeded type curve expectations and total oil production oil production is up 54% year to date. Offshore in North America, revenue decreased 4% sequentially as drilling activity was impacted by scheduled platform maintenance. At the same time, activity also shifted to workover operations and the combination of these changes led to a less favorable activity mix for us. Turning now to the international areas.
3rd quarter revenue, excluding Cameron, increased 4% sequentially as the broad based international recovery continues across all regions. Our sequential performance was led by growth in Latin America and the Middle East due to higher activity for both national oil companies and independent operators, while Europe, CIS and Africa saw solid growth boosted by strong activity in Russia. The ramp up of our international IDS activity continued with an additional 19 rigs being mobilized in the quarter and revenue climbing on the back of the previous quarter's mobilizations. We expect our excess international equipment capacity to be fully absorbed by year end, after which we see increasing opportunities for pricing leverage as customers seek to secure services for new projects. Excluding Cameron, revenue in Latin America increased 7% sequentially, driven by strong performance in the Mexico and Central America geo market from increased drilling and reservoir characterization activity.
Revenue in the Latin America North geomarket was also up from higher activity on SPM projects in Ecuador. In Xuchefendi, we reached a resolution of legacy payment issue and the amended commercial terms to establish a solid and stable operating framework that will enable future investments for further increasing production. Elsewhere in Latin America North, strong activity growth in Colombia as operating capacity tightened further created opportunities for increased pricing. We also saw progress in Latin America South where increased activity in Brazil was fueled by international oil company intervention and exploration work, while in Argentina, higher operational efficiency drove increased fracturing activity. Also in Argentina, results from the first two wells on the YPF SPM project exceeded expectations and can be considered among the best producers in the Vaca Muerta formation to date.
Revenue in Europe CIS Africa excluding Cameron increased 4% as strong activity in Russia and Sub Saharan Africa more than offset the impact of labor disputes and scheduled summer maintenance in the North Sea. The activity growth in Russia and Central Asia was driven by summer campaigns in Russia Land, Sakhalin and Kazakhstan. Wireline, drilling and measurement and testing services were the main beneficiaries of this growth. Eastern Europe also saw stronger activity. Revenue in the Sub Saharan Africa Geo market increased with the start of new projects in Ghana and Mozambique, stronger drilling activity in Central and West Africa and higher product and equipment sales in Nigeria, Angola and Namibia.
Customers are returning to exploration activity in the region and consequently, we are beginning to see demand return for higher technology services. The offshore market strengthened further during the quarter, including demand for a stimulation vessel fleet, where available capacity in West Africa is nearly sold out ahead of the 2019 ramp up. This is paving the way for market share gains and improved pricing. The North Africa geo market benefit from solid activity in Libya despite the volatile security environment and from strong operational execution in chat on integrated services management contracts. Middle East and Asia revenue excluding Cameron increased 3%, led by the continued ramp up of lump sum turnkey projects in Saudi Arabia and by strong IDS activity in Iraq and the United Arab Emirates.
We added additional rigs during the quarter in Saudi Arabia, keeping us on track to have mobilized 25 rigs by the end of the year. These positive effects, however, were partially offset by lower hydraulic fracturing activity as a major contract was completed and demobilized In Asia, the South and East Asia geo market posted sequential growth on increasing IDS work in India and on new ISM projects that mobilized in Malaysia. In the Far East Asia and Australia geomarket, revenue was driven by increased drilling activity offshore Indonesia and by a return to exploration work in Australia. Turning now to Cameron. Revenue was largely unchanged from the previous quarter.
Increased sales for service systems in North America and service activity for drilling systems in Europe, together with increased pressure control system sales in the Middle East, were offset by lower revenue and backlog from 1 Subsea. Looking at the Cameron's backlog for Drilling Systems, however, the total figure added at the end of the Q3 in 2018 was already significantly higher than that added for the whole of 2017. This is a further indication of the moves being made by offshore drilling contractors as they prepare for increased activity. And with that, let me pass the call over to Paul.
Thank you, Patrick, and good morning, everyone. In the Q3, the broad based international recovery continued while the business environment in U. S. Land Hydraulic Tracturing changed rapidly with both activity and pricing softening more than expected over the course of the quarter. In parallel with this, the global supply and demand balance tightened further with another draw in global oil inventories a $10 increase in oil prices during the quarter.
Based on this industry backdrop, I would like to address 3 key questions that are central to our business outlook. First, why is there a strong need a significant multiyear increase in global E and P investments? 2nd, why is Schlumberger best positioned to capitalize on these growth opportunities? And third, why will Schlumberger generate the best operating profits and cash flow in the coming upcycle? The international production base still accounts for around 80% of global supply and is critical to the stability of the oil market as the mere 1% net decline will represent around 800,000 barrels per day of lower production.
Production growth from the international market has since 2013 been driven by Saudi Arabia, Iraq, Iran and Russia, which combined have added 3,700,000 barrels per day, while the rest of the international production base is down by 1,500,000 barrels per day over the same period. Since 2014, many of the international operators have focused on maximizing cash flow by producing their fields harder and by prioritizing short term actions at the expense of the required full cycle investments. This short term investment focus offers a finite set of opportunities over a limited period of time, and this period is now clearly coming to an end as seen by accelerating decline rates in many countries around the world. In addition, reduced production tailwinds from new projects that were sanctioned and largely funded prior to 2014 are now uncovering the underlying weakness in the International Production Day. Furthermore, additional investments will also be required to replace the Venezuelan and Iranian barrels that are now rapidly disappearing from the market.
So in our view, after 4 years of low activity, the international production base now needs significant growth in investments for the foreseeable future simply to maintain production flat at current levels. The North American production base, which makes up the remaining 20% of global supply, has absorbed close to 70% of the demand growth since 2010, initially supported by the Eagle Ford and Bakken and more recently by the Permian Basin. However, the well established market consensus that the Permian can continue to question. In this respect, we do not believe that the temporary offtake constraints are the main issue as this will likely be addressed within the next 12 to 18 months. Instead, we believe the main challenge in the Permian going forward is more likely to be reservoir and well performance as the rate of infill drilling continues to accelerate.
At present, our industry has yet to understand how reservoir conditions and well productivity change as we continue to pump billions of gallons of water and billions of pounds of sand into the ground each year. However, what is already clear to us is that unit well performance, normalized collateral length and pounds of proppant pumped is dropping in the Eagle Ford as the percentage of child wells continues to increase. Today, the percentage of child wells drilled in the Eagle Ford has already reached 70%. And in the 3 year period since this percentage broke the 50% level, we have seen a steady reduction in unit well productivity. In the Permian, the percentage of child wells in the Midland Wolfcamp Basin has just reached 50%, and we are already starting to see a similar reduction in unit well productivity to that already seen in the Eagle Ford, suggesting that the Permian growth and market concerns around economic weakness in the emerging markets, we believe that the level of E and P investment must increase both internationally and in North America, first of all, to counter the multiyear drop in investments and second, to develop and deploy the new technologies needed to overcome the emerging shale oil production challenges.
So with this market outlook, why is Schlumberger best positioned to capitalize on these growth opportunities? First, we have an unmatched global footprint that enables us to cost effectively pursue growth opportunities in every corner of the world. In the majority of the 120 countries where we generate revenue, we have a rich history, deep industry relations, unmatched operating infrastructure and detailed knowledge of local business conditions. 2nd, we have the broadest technology portfolio in the industry where our market leadership positions enable us to compete for growth opportunities in all parts of the E and P value chain. Over the past 8 years, we have actively expanded our technology portfolio through targeted M and A activity and organic R and E investments.
In the past 3 years alone, we have increased our total addressable market by 50%, and we today hold market leading position in 17 of the 20 product lines we currently operate. 3rd, we mastered the widest range of business models, which allows us to partner with our customers in their preferred way, and this provides us with multiple avenues to increase our participation and share in markets all around the world. These models, which we have evolved over the past decade, now include equipment sales and rental, traditional provision of stand alone products and services, project coordination and bundled services, lump sum turnkey contracts and lastly, full fee production management through our SPM model. And 4th, we lead industry in designing and engineering new high performing technology systems, spanning our entire data, software and hardware capabilities and fully leveraging the latest advances in collaborative and digital technologies. To enable this, we last year reorganized our entire R and D effort into several distinct technology platforms, directly supporting our stated goals of pursuing the highest level of technology system performance for the benefit of our shareholders as well as for our customers.
So with our differentiated growth potential, how will the best operating and cash returns in the coming up cycle? We already consistently deliver superior full cycle EBITDA margins and cash flow from operations compared to our competitors, and in particular, in the part of the cycle where the international markets are growing. In 2014, which was the last year of growth for our international business, we generated 69% incremental margins on only 4% revenue growth with no support from pricing. In the same year, we generated $6,200,000,000 of free cash flow, which represented a conversion rate of 83% of net income from continuing operations. This performance was driven by solid execution from our global organization and the early benefits from our transformation program.
By advancing our transformation program further over the past 4 years, we have completely modernized our internal workflows and organizational structure and created stronger and more professional support functions with cutting edge planning, execution and collaboration tools. This allows us to significantly improve the utilization and reduce the operating cost of our asset base through improved planning, distribution and maintenance. At the same time, we continue to deploy our people and expertise more effectively by applying multi scaling and remote operations, which will allow us to reduce our annual recruiting numbers by at least 1500 to 2000 people in each of the coming years. These operational efficiency improvements all support our goals of delivering superior incremental margins in the coming up cycle and at the same time lowering our need for capacity related CapEx investments compared to previous cycles. Based on our market outlook and strengthened execution capabilities, we have defined the following set of performance targets for the coming cycle.
We will outgrow the market in terms of top line through our unmatched global footprint, our industry leading technology offering, our broad range of business models and the investments we are currently making into our next generation technology platforms. We will deliver 65% incremental margins driven by our modernized operating platform and the recovery of the pricing concessions we have made over the past 4 years. Our SPM business will at least be cash flow neutral in 2018 2019, after which we will see a significant free cash flow tailwind as our recent project additions reach their planned production rates. The CapEx requirements from our seismic business after adopting the asset light model will be limited to specific multiclient projects where each project we undertake continues to require a significant level of customer pre commitments. At this stage, we are not planning any M and A transaction that would involve significant cash outlay other than the pending Eurasia billing deal, where we now have met and accepted all the requirements stipulated by the Russian authorities and await their decision.
These targets mean that we should meet or exceed our stated goal of converting more than 75% of our net income into free cash flow and generate an increasing amount of excess cash, which we intend to return to our shareholders in the form of increased dividends and stock buybacks. At present, the entire Schlumberger team of 110 1,000 women and men are ready and primed to outperform in the market upturn that we are now entering. And through the hard work we have collectively undertaken over the past 4 years to expand our external offering and modernize our internal execution platform, we have never been better positioned to outgrow the market in the coming upcycle and to generate superior operating margins and cash returns to the benefit of our shareholders. Thank you. We will now open up for questions.
Our first question
Good morning, James.
His line has accidentally disconnected. He must have had himself on mute one moment here. We'll move on to the next. We'll go to the line of Scott Gruber with Citigroup. Please go ahead.
Yes. Good morning.
Good morning, Scott.
Paul, good to hear some additional color on the transformation this morning. Now your peers have programs as well, what actually calls there is the transformation program. Now when we look at peers, they're reducing costs through internal programs and also through some merger synergies. But overall, are you surprised by the level of cost reductions at peers? It doesn't sound like what peers are doing changes your view on eventually achieving the very robust incrementals that you originally laid out with the transformation plan.
But is it delaying the ramp in incrementals, the timing of seeing those robust incrementals via the pricing dynamics in the marketplace today?
Well, I mean, I can focus my comments on what we do. I'm not really into the details of what our competitors are doing or peers are doing internally. But we've been working on our transformation or modernization program since 2012, and it's been a very meticulous and systematic approach to understanding what part of our operations or what in our operation can we improve in terms of both quality and efficiency. It takes time to change these type of things in a big organization that is actually functioning quite well from the get go. But our job is to make sure that we pursue the upside potential, and that's what we've been doing.
So this will translate and be a significant part of how we drive incremental margins in the coming up cycle. Now the incremental margins are still a function of a couple of other things in addition to the transformation, and one is we need growth. And secondly, we have also been very clear that we need some tailwind from pricing. And if you look at this year, we have internationally very low growth, price nominal. And at the same time, we are working through some, let me say, cross currents in pricing.
We are still absorbing new contracts where pricing is actually dilutive to the base price that we have through the bidding we've done over the past year. But when that is all normalized and we get a bit more consistent sequential and annual growth with a bit of help from pricing, then the modernization program is going to be the real driver for us delivering on the promise of the 65% incremental. And this is something that will evolve, I would say, over the coming 1 to 2 years.
Got it. What aspects of the transformation program do you think were most profound? What aspects will peers struggle to replicate that you think really gives you an edge into the next cycle?
Well, let me again focus on us. I mean, the most profound part of what we've done has been firstly to update the entire blueprint of all the activities we do as a company and put that together into one company wide map. When you've done that, you can start breaking down these things and streamline them in terms of how each part of the company comes together in a huge element of teamwork to drive again both the quality and efficiency of what we do. So having a deep understanding of how everything is interconnected, you can also then start to professionalize more the individual parts, things like procurement, sourcing, transportation. These are all actually huge aspects of what drives our performance.
And when you're as big as we are, I think it's very, very smart to actually address these things with a lot more professionalism than what we've done in the past. I wouldn't say that we've done a bad job at it. It's just that when you're as big as we are, then there is huge opportunities to drive efficiencies and quality by further professionalizing these type of functions.
Next, we go to the line of Kurt Hallead with RBC Capital. Please go ahead.
Hey, good morning, Paul.
Good morning.
I was just kind of curious, thanks for that color on the incremental margins and what's going to be necessary to get there. On the interim basis, right, can you give us some give us your perspective on how you see the North American frac market mapping out over the course of the next year or so? And then given some of the challenges, can you kind of give us some insights as to how you're kind of managing the cost dynamic and how you're trying to maximize your margins through this interim lull?
Yes, I will. So let me focus on the next quarter and maybe the quarter after that. The North America land market is changing pretty rapidly. So how this will play out over the full course of 2019, I think it's still a bit early to say. But let's talk first about Q4.
So it is evident that the rapid softening we have seen both in frac activity and pricing over the, I would say, second half of the third quarter is continuing more or less with the same pace in Q4.
And this is
obviously representing challenges in terms of white spaces in the frac calendar. In addition to this, which is sort of further aggravates the situation, is that several of our key customers have decided that they're going to lay down all their frac fleets from about middle of November and up until middle of January, which again is a fairly significant is to actively try to reduce the is to actively try to reduce the variable part of our cost base. But we aren't going to do any significant adjustments to the structure because what we see in this in the outlook for hydraulic track is that there's going to be a couple of quarters where there will be lower activity. But this is more of a pause than, I would say, a long term structural issue. Whether this is Q4, Q1 or it lingers into Q2, I think it is to be seen.
But we will do what we can to manage the variable costs, but we aren't going to take any significant actions or charges or anything like that when it comes to our structural setup in the market. We are committed to this market, and we have a very good position, both on the frac services and also, as Patrick alluded to, on the integration through the entire sand value chain. So we will have to absorb some of the headwinds from the costs that we choose not to do anything with in the next couple of quarters. But beyond that, we are going to continue to leverage our strong position in the market following
That's great. And then if I I
have one follow-up for you then
in that context. Do you think that over the quarters to the next few quarters that the momentum that you have in the international market will be enough to offset the weakness in North America?
Well, let's be specific on Q4 to take that first. I mean, if you look at international markets in Q4, we expect flattish revenue. There's a few moving parts on that, that leads to it. There's no change to our outlook on the international market. And the momentum we've seen in the past couple of quarters, we to continue into 2019, and we are still very confident about the north of 10% revenue growth for our business internationally in 2019.
But for Q4, we do see sequential growth in MEA, but this is going to be offset by the normal winter slowdown in Russia and the North Sea. And Latin America is going to be flat, and we don't see any significant year end sales this year, mainly because I don't think our customers have budgeted for that. So international, both on revenue and earnings, we see as relatively flat with Q3. Now based on what I just said on North America land, our earnings from North America land and our revenue will be down in Q4. So EPS sequentially is going to come down.
I think how much I'm not going to give a specific number. I think it's going to be a function of how severe the shutdowns are going to be in November December. But in a normalized kind of outlook for going into next year, I would still believe that the strength of the international going forward beyond Q4 should outweigh any further challenges that we have in North America land.
Right. That's great color. Thanks, Paul. Appreciate it.
Thank you.
Next, we go to the line of Jud Bailey with Wells Fargo. Please go ahead.
Thank you. Good morning.
Good
morning. Paul, I wonder if I
could just follow-up on one of your comments from the prior question on international growth for next year, still confident in 10% -plus growth. Could you maybe give us some insight as to what you're seeing, maybe the difference in what you're seeing from your IOC customers versus NOCs? And maybe from a regional standpoint, how you kind of see any difference in growth between kind of those customers and market segments?
Yes. So like I said, we are still very much committed and clear on double digit revenue growth internationally for us next year. Looking at it from a customer base standpoint, the growth will be driven by the NOCs and the international independents, and I would say less so at least from where we stand and what we can see today from the IOCs. I do expect at some stage that the IOCs will potentially open up a bit more in terms of their investment levels as well. But at present, next year's growth, the way we have it on the board, is going to be driven more by the NOCs and the international independents.
And if I look at where the growth will come from percentage wise, we still see the areas that have been the most compressed since 2014 that going to have the highest percentage growth, and that's still Latin America, sub Saharan Africa and Asia. Still expect to see solid growth in the other areas, but the North Sea, Russia and the Middle East will probably be lower in percentage growth. But overall, double digit revenue growth for us, we are still quite confident with.
Okay, great. Thank you for that. And my follow-up is maybe if you could give us a little more color on your thoughts on the offshore market kind of broadly. You mentioned in your comments and Patrick did as well on some of the positive things you're seeing offshore both at Cameron and other parts of the business. Maybe if you can maybe talk a little bit about what you're seeing in terms of maybe deepwater versus shallow and just some more general market color there would be great.
Yes. So if you look at the offshore market, I think what's going to come back first is still going to be shallow. And I think we are starting to see movement on shallow water, both drilling activity as well as on rig rates. And obviously, rig rates for us are key because our differentiated technology increases in value proportionally to the increases in the drilling rates, right? So this is a very good indicator for us both in terms of effective pricing as well as activity.
But as Patrick alluded to, offshore, we see starting good signs of higher drilling activity, in particular, on shallow water. But it's actually there's a little bit of movement on deepwater as well. We expect in 2018 deepwater drilling activity to be up about 8% versus 2017, obviously, from a low base, but at least it's moving in the right direction, and we expect this trend to continue into 2019. So drilling, we are already starting to see some movement. And from the subsea or FPS standpoint, also increasing amounts of tiebacks and more activity coming into the subsea arena.
So we are quite focused and we're quite upbeat about what's happening in subsea at this stage.
Next, we go to the line of Sean Meakim with JPMorgan. Please go ahead.
Thank you. Good morning.
Good morning.
So on the international cycle, just we talked a lot about capacity getting tight here by year end. And thinking about a little more elaboration around which product service lines and our geo markets are already fairly tight and which do you think you will still have some more slack into next year? Just thinking about that progression and the consistency which you think you'll see pricing power come to fruition next year?
Yes. In terms of product lines, I would say where we are we don't have a lot of spare capacity on any of them. But the ones that we will, I think, be out of capacity first is going to be everything related to drilling. And broader than that, the other product lines that we have as part of our lump sum turnkey project as well. So that includes part of our services, part of wireline, part of testing, which they're all contributing to these type of projects.
A pretty broad based drive on our capacity we have seen in the past couple of quarters, and that's why there is no one, I would say, product line that stands out, maybe drilling and measurements and their high end technologies, given the fact that we have a strong pull on that both internationally but also in North America land. So if anything, I would say high end technologies from drilling and measurements is probably the one that is in the highest demand. But I would say there's been a pretty good pull on our broad based capacity from most of the product lines related to well sized activity. As to where the growth is coming from is back to what I said earlier. The highest percentage growth we see in the most compressed area, Latin America, Sub Saharan Africa and Asia.
We have over the past 12 months or so steadily redeployed capacity to make sure we have an ideal setup of capacity where the growth is going to come. But in terms of pricing, it's probably likely to say that Latin America, Sub Saharan Asia is where we would get pricing maybe stronger than in the other regions given the stability of activity we've had that over the past couple of years.
Got it. Thank you for that. That's very helpful. And then on Cameron, I was curious if you could get a little more update on how the customer uptake has been to the enhanced JV with Subsea 7. I'm just curious if the Katmai award from Fieldwood, if that was at all influenced by some of the changes there or maybe that project is already a bit far along.
Just looking to see your thoughts on how that enhanced relationship is progressing with customers.
Patrick, you want to take that? Yes. So I mean, I just will make
some general comments around the JV, but also around Cameron. Clearly, with the majority of the work that we do today around FEED and the comment that Paul was making, quite a bit of that is actually related to tiebacks. There's a tremendous amount of engineering work being done that benefits from the cooperation that we have in the JV. So there's clearly value there that we're very pleased to see. I'll refrain from making specific comments on whatever contracts they're working on, but we're quite happy with the type of cooperation and the action that we're seeing in that relationship.
Just to give you maybe a bit of an idea what's happening with the rest of Cameron. So the book to bill ratio was over 1 for the full Cameron in Q3. And actually, it was well over 1 for service billing at B&M for the 4th consecutive quarter. Of course, the booking orders for OneSubsea were flat, and the total revenue in OneSubsea is actually down 3% year on year. Total Cameron revenue, flat sequential and flat year on year, but clearly, the long cycle businesses are down 5%.
But seeing what the short cycle businesses are doing, it's up 12 percent, and this is mainly driven by North America land. On the margin side, Cameron is down 140 basis points sequentially and down 350 basis points year on year. But noteworthy is that Q3 short cycle business margins are greater than the long cycle business margins for the first time in this cycle. So clearly, there is some good things happening there, Maybe not in the traditional part of the 1 subsea yet, but clearly, the other businesses are picking up as we go.
I'll leave it at that.
Fair enough. Thanks a lot.
Next, we have a question from the line of Bill Herbert with Simmons. Please go ahead.
Good morning. Paul, thanks for
the color on Q4. I'm just curious with regard to Q1. Can you comment I mean, typically we see sequential weakness and seasonal weakness internationally. Do you think that's in line with historical norms at this stage? Or is it a little bit less threatening given the absence of year end product sales for Q4?
To be honest with you, Bill, we don't have a lot of visibility as of yet on Q1 in terms of those type of details. But I would agree with your kind of high level analysis that with less year end product sales, the sequential impact Q4 to Q1 should be somewhat dampened. I would that I would agree with. But we have we obviously have a view on next year. We have a high level view of how the market is shaping up, but we haven't gone into kind of a detailed analysis of Q4 the Q1.
Will do that during the course of the coming quarter. But I agree with you, Haynes, that the absence of the Aeron sales should ideally dampen some of the sequential drop that we typically see in Q1.
Okay. And Simon, question for you with regard to cash flow and cash balances. Cash flow was much improved in Q3, but your cash balances keep leaning lower. And so I guess the question is the required amount of cash on hand to run the business and what do you expect the cash outflow to be for Eurasia when that happens?
So as you noted, the Q3 was a pretty good performance cash wise. We typically see that kind of performance during the second half. This should continue in Q4 actually. The cash outflow for Eurasia, we already as you know, this has been long pending. So it is planned that Eurasia is going to come with its own cash flow and its own strong EBITDA actually.
So we are we will fund this through additional borrowing. The cash on hand we have today is 2.9 and will continue to be at this level. And this is the comfort level that I like to keep or we like to keep for the company. So the as I said for Malaysia, we'll be funded when it gets approved through more borrowing and we'll see how the final transaction format and structure will be at that time. But just worth noting that the cash generation in the second half will be like every year stronger than the first half, and we should be back on target by the end.
All right. So you don't see cash balances going markedly lower from current models?
Excuse me?
It's a bit difficult to hear you. Can you try to repeat the question?
Sorry, you don't see cash balances going markedly lower from current levels?
Well, no, not really. I mean our Q4 cash outlay is already planned and the cash generation, we don't see a drop, no.
Next, we have a question from James Wicklund with Credit Suisse. Please go ahead.
Good morning, guys. Good morning. Labor, I noticed that your severance charges this quarter were up from Q2 and Q1. And so I'm curious to know where those severance charges here are. And contrasted against what we're hearing about the tightness of labor, onshore U.
S. With some people expecting labor inflation of 10% to 15% in 2019. Can you talk a little bit about your workforce and your personnel, where these severance charges are, why they keep ramping up, when do they peak and what do you see for U. S. Labor inflation?
Yes, right. So the outlay we had on severance in Q3 is basically implementation of the reductions we did earlier this year associated with the last step in the change of the organization. So this is not something new. In certain jurisdictions, there is a bit of time needed from the notification of the individuals we had to let go until that is implemented. And these are just reflecting the cash payments of that charge that we took earlier this year continuous charges or outlets we have on severance.
This is all linked to that one bigger thing we did earlier this year with a bit of lingering in the implementation due to local labor laws.
Okay. That's helpful. And onshore U. S. Expectations?
Onshore U. S, it is a tight market. Obviously, for the coming quarter or 2, on the frac side, there is lower activity, in which case, some of the crews that we have operating today, we will need to temporarily lay down. And the way we do that, we will look at these things individually, whether we have to lay people off or we can try to furlough or try to bridge it in other ways with respect to the other businesses we have in U. S.
Land. So this what our operating people are looking at on a daily basis to try to minimize the impact on our individual employees and at the same time, I would say maximizing our ability to ramp back up quickly again, both in time and in terms of quality. So it's a balancing act, and this is just the nature of the very dynamic U. S. Land market, and that's something we are used to dealing with, and we are dealing with as fast as we can.
But you are right directionally that it's a tight labor market in U. S. Land. And actually, the only thing that's impacted really in terms of both activity and pricing at this stage is frac. The drilling business is and our lift business is more or less unaffected by the softening or these offtake constraints.
It's the frac that is the main driver. So we're going to be managing this, Jim, as best as we can. And it's just another curveball that we need to deal with, and that's what we do for a living.
My follow-up, if I could, you noticed Latin America was well in Q3 and then you commented that it will probably be flat in Q4. On Q2, you talked about how Latin America and other places would have to recover in 2019 to get the total global international growth we expect. Can you talk about your expectations for Latin America in 'nineteen as we sit here today? And before we get cut off, I want to thank you for helping reestablish, resetting the bar for expectations going forward, so investors can have a better idea of what we can earn in this business if the world ends. So thank you on that.
But Latin America, what's your outlook for 2019?
Yes. Latin America, thanks for that, Jim. Latin America for next year will be solid. I think, like I said earlier, Latin America, Sub Sahara and Asia are the ones that we still have seen the largest revenue compression. It's actually been a couple of quarters now of quite decent sequential growth in Latin America.
Due to mix and these various ways things are panning out, it's going to be flattish in Q4, but it doesn't change our view for 'nineteen. I think we are looking at solid year over year growth again in Latin America in 2019.
Next, we go to the line of Chase Mulvehill with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning. Paul, about 2019 yet with the U. S. Customers? I mean, realize in near term, you got the Permian bottlenecks.
Are you starting to see kind of accelerated activity in
other basins outside the Permian yet? No. We have not seen any major shift in the activity projections for the other basins. So I think that's going to be continuing along the path that we already had established, whether this is the Northeast, Bakken, Haynesville or Eagle Ford. So no real change to that.
And I think the interactions we have with customers around the Permian is that there's still very positive outlook. The growth we have seen production wise over the past couple of years was almost bound at some stage to kind of hit the infrastructure constraints. And I think the industry there is very active in debottlenecking both the infrastructure when it comes to piping, but there's a lot of other challenges that we have as an industry in the Permian region from all sorts of infrastructure, which we are obviously participating in those discussions. So although there is going to be a couple of quarters with the challenges here, I think the overall customer sentiment on the Permian is quite upbeat. And we are also committed to them and to the activity in the region, right?
But we're just going to have to manage now the next couple of quarters. And I think there are three dimensions of infrastructure challenges. It's oil or crude, which I think will be addressed the first, but there's also challenges around gas offtake and NGLs, which also is going to have to be addressed, right? And the industry is working on all three aspects.
Okay. That's very helpful. Appreciate the color. The follow-up, you talked about U. S.
Shale production and the challenges around that, that you're starting to see. These challenges, is this something that can be solved through technology? Or is this just reservoir challenges that we have to deal with?
No, I think it can absolutely be solved through technology. A lot of this has to do with the conformity of the frac to make sure that we frac every cluster that we perforate, and we have diversion technologies that we have been promoting to the market for several years with some uptake, but I think this is likely to accelerate. And it's also about how you ensure that your frac stays within the allocated rock volume that you have for the well, which is more of a far field conformance that you're looking for. And we have technologies in terms of what we how we design the frac fluids to address that too. So all of these things, I believe, are addressable, but it requires a bit more of a reservoir focus on how the wells are built, how the wells are fracked, and we need a little bit more data to make sure that we do the right things here.
But the measurements are available. The analysis and interpretation of the measurements are available, and the remedies that we need to do to the frac fluids are also available. It's just a matter of adopting these technologies. We have them all ready to go. Awesome.
I'll turn it back over. Thanks, Paul.
Thank you.
And our last question comes from David Anderson with Barclays. Please go ahead.
Hey, good morning. Paul, I was just wondering if you just kind of walk us through some of the LSTK projects and how they're ramping up in the Middle East. Do you think by the year end of this year that you'll get all kind of all of those costs all absorbed, all the start up costs absorbed? And as we progress kind of the next couple of years of these projects, how should we think about kind of revenue and margin? Should revenue be largely flattish the next few years with margins continuing to pick up?
I was just wondering if you could just kind of help us kind of walk through how to think about those projects as they move through?
Yes. So I mean, we have integrated drilling projects, of which LSTK is one of the business models of it. We have a project that is ramping up in many parts of the world. You rightfully allude to the Middle East where a lot of them are happening. We have these type of projects in Saudi Arabia, in the Emirates, Iraq, India.
We're probably starting up soon in Kuwait. So there's a lot of activity along these business models, which we like because we are entirely in charge of our own destiny. So if we drill better, if we outperform what the norm is in the market, we benefit our customer. And at the same time, we are able to drive our margins up. So to your questions about the ramp, it's been a big ramp for us this year, which we are happy to take on in one way because it means we won a lot of work.
But at the same time, it impacts the incremental margins and the cost base. But I would say that by the end of this year, these projects should be fully mobilized. The cost should be absorbed, And we should have a very, very good platform for growth in all these areas as we go into 2019. So I would expect 2019 for sure to be up in terms of IDS or integrated drilling services revenue, and the margins should start to come up as well. We have both the benefit of less mobilization costs, but also as we get quickly up the learning curve on these projects, that again is going to further give us tailwinds on margins.
So I think you'll see very strong growth for our integrated drilling business in 2019, and we expect that to continue into 2020 with a steady improvement in margins as we go along.
And Paul, kind of separate subject, turning gears to the North America. I was wondering if you could just talk expand a little bit more about your strategy regarding stand and property in the U. S. Land market. My understanding is you acquired another Permian sand mine during the quarter, And then you talked about 3rd party sales during the quarter.
Can you just kind of talk about, I mean, I would assume a big part of this is to ensure your supply chain for kind of maximizing utilization on your pressure pumping. But what else is this for us? Is this also a strategy to kind of add more revenue in from North America markets? Can you just kind of expand a little bit and kind of how last mile solutions might fit into this? I know you have some of that, but is that something you need you think you need to expand out as well?
Just kind of your overall strategy regarding sand in North America, please.
Yes, that's fine. That's a good question there. So we started on this about 3 years ago in terms of investments. And our view at the time was that to further improve full cycle returns in this market, we wanted to have part of our sand value chain internally sourced. The main thing the main reason for that is that in the up cycle, there is always a massive inflation in both the sand coast at the gate of the mine, rail, transloading and trucking.
So we decided as a starting point that we wanted to internalize part of this because that would significantly reduce our cost base in the upturn. And these things are easily mothballed in the downturn as well. So if we chose to actually buy it off the market entirely in the downturn where certain players are willing to sell it probably below cost, that would be one contributor to driving close cycle margins. Now since then, we have seen an emerging trend from our customers who has also seen that there is a lot of inflation in this part of the value chain to the point that are starting to break the way they bid the frac work up into individual products as well as services. This has always been integrated in the past where the frac company is the one that basically handles the supply chain for sand.
But at an increasing pace, we see a separation of sand and service in terms of how the work is bid out. So in this process, we have stepped up a bit further our investments into the value chain to the point that we are now pretty much self sufficient on Zang. We have a pretty good fleet when it comes to last mile. And we have also both mines, which are fairly closely associated with where we do most of our activities. So we have a couple of mines in West Texas, in particular, which is very, very key for our operations there.
So what started up to kind of drive full cycle margin has now kind of played into our favor into a major industry trend, which the separation of sand and services in the frac market. So we have done this through organic investments. I think we've made some very good deals in the process. We don't have any more sand mines that we are looking to buy at this stage. We are where we need to be.
So the vertical integration is done. And we see now the opportunity, like I said, obviously, 1st of all, to supply our 1stim frac business with very competitive costs for sand. But at the same time, there is now a flurry of individual sand bids, which we can also participate in using the investments and the capacity that we have already sunk in. But we have no plans on investing further into this. We have done the investments.
We have done them, I think, at the right time. And we kind of saw that industry trend coming, and that's what we're now benefiting from.
Great. Thanks, Mal.
Thank you very much. Okay. That concludes today's call. Thank you very much for listening in.
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