Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.
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 Schlumberger Limited Second Quarter 2018 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 Ayatt, Chief Financial Officer and Patrick Shawn, 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 Q2 financial performance to report Patrick who views our results by geography.
Paul will close our remarks with a discussion of our technology portfolio and an updated view of the industry macro. However, before we begin, I'd like to remind our 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 Alesis 10 ks filing 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 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 Ayatt.
Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. 2nd quarter earnings per share excluding charges and credits was $0.43 This represents an increase of $0.05 sequentially and up $0.08 when compared to the same quarter last year. During the Q2, we recorded $0.12 of severance charges. Our 2nd quarter revenue
of $8,300,000,000
increased 6% sequentially, largely driven by the growth in OneStim in North America and higher reservoir characterization and drilling activity internationally. Pretax operating margins increased by 75 basis points to 13%. Highlights by product group were as follows: 2nd quarter reservoir characterization revenue of $1,600,000,000 increased 5% sequentially, primarily due to higher wild line activity in offshore North America, further progress on One Surface integrated production system projects and increased SIS sales internationally. Margins increased 166 basis points to 21.4 percent, primarily driven by the recovery of higher margin wireline activity and stronger SIS software sales. Drilling revenue of $2,200,000,000 increased 5% sequentially, while margins decreased 83 basis points to 12.9%.
The revenue increase was primarily driven by strong international drilling activity as a result of the start of integrated drilling projects. Margin was negatively impacted by start up cost associated with new projects as well as operational delays. Production revenue of $3,300,000,000 increased 10% sequentially and margins increased by 2 39 basis points to 9.7%. These results were primarily driven by OneStim growth in North America combined with higher activity in the Middle East and Asia area. Camarena Group revenue of $1,300,000,000 decreased 1% sequentially.
This decrease was largely driven by declining project volumes in OneSubsea, which were partially offset by higher sales for surface systems and valve and measurements in North America. Margins were essentially flat at 12.8%. 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 17.2% in the 2nd quarter compared to 17.6% in the previous quarter.
Looking forward, the ETR will be sensitive to the geographic mix of earnings As a result of the continued recovery in North America, we anticipate that the ETR will increase next quarter and over the remainder of the year. We generated $1,000,000,000 of cash flow from operations during the quarter. Our net debt increased $600,000,000 during the quarter to $14,600,000,000 We ended the quarter with total cash and investment of $3,000,000,000 During the quarter, we spent $103,000,000 to repurchase 1,500,000 shares at an average price of $68.45 Other significant liquidity events during the quarter included CapEx of approximately $520,000,000 and capitalized costs relating to SPM projects of $194,000,000 During the quarter, we also made $693,000,000 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. In my comments today, I will first discuss revenue growth by geography without Cameron and then conclude with some Cameron specific remarks on 2nd quarter performance. Looking at our results in North America, revenue increased 12% sequentially or more precisely, revenue grew by 9% on land and by 22% offshore. The land revenue increase outperformed both the 7% increase in the U. S.
Land rig count and the 8% improvement in the U. S. Land's frac market stage count. In Canada, activity dropped as expected as the spring breakup took effect. Offshore revenue grew due to market share gains in the well construction arena.
MultiClient seismic license sales were also higher as we continue to focus on the new asset light model at WesternGeco. One stim pressure pumping revenue grew by 17%, driven by the deployment of additional frac fleets. Net pricing remained stable as increasing capacity across the market matched increasing customer activity. We were also able to leverage the improved efficiency of our operations to grow revenue and gain market share. In particular, the investments in vertical integration supporting our pressure pumping operations has allowed us to respond rapidly to the increasing customer trend of separating pumping services from sand supply.
This means that we're able to bid competitively on both integrated or stand alone sand supply contracts to participate in the full revenue potential of each, particularly as we add more capability in sand supply on a regional basis. In the U. S. Land drilling market, activity was also strong with a growing customer interest in integrated well construction services, while demand also remained robust for rotary steerable systems. Based on industry figures, the average length of laterals have increased by 30% over the past 4 years and new well designs that balance lateral length with optimized simulated reservoir volume to maximize productivity and manage cost continue to be tested.
This approach is evident in SPM projects as well. The Palliser asset in Alberta, for example, restarted drilling activity after the breakup in June initially with 1 rig before quickly ramping back up to 4 rigs in early July. Drilling technologies have been key to increasing performance here. Periscope mapping service was combined with to enable drilling within a thin pay zone in 3 wells. A 100% reservoir contact was achieved in these thin pay zones, which exceeds the previous reservoir contact of 85% to 90% in offset wells.
In addition, PowerDrive Orbit enabled a higher ROP than wells drilled by others and also achieved the longest lateral ever drilled on this asset at a length of 4,244 meters. Turning now to our international business. 2nd quarter revenue, excluding Cameron, increased 6% sequentially as we responded to the challenges of mobilizing 29 rigs for new integrated drilling projects simultaneously in various geographies. With the commissioning of the new build rigs in places and the reactivation of stacked equipment in others, start up costs and operational delays impacted our financial performance in the quarter. In Latin America, revenue increased 3% sequentially.
In the Mexico and Central America geomarket, additional rigs mobilized for an integrated drilling services contract on land, while Workover and Production Services also experienced increased activity. In the Latin America South Geo market, activity strengthened with projects restarting in Brazil and increased hydraulic fracturing and coiled tubing activity on an unconventional land SPM project in Argentina. In Latin America North, activity was stronger in Colombia, while revenue was sequentially flat in Ecuador due to operational delays. Revenue in Europe CIS in Africa across the product lines excluding Cameron increased 5% as drilling activity in the North Sea and Europe recovered from the winter slowdowns. This activity increase was concentrated around development work in the U.
K. In addition to exploration activity in Norway after recent Equinor contract awards. Drilling activity was also higher in Continental Europe and in particular in Romania. Revenue in Russia was essentially flat sequentially due to delays in the start up of summer offshore campaigns while land drilling activity remained solid. Revenue in Sub Saharan Africa increased with the start of new projects in Angola, Nigeria, Ghana, Ivory Coast and Cameroon with well intervention activity accelerating and development work resuming in response to higher crude prices.
The North Africa geo market benefited from solid activity in Libya despite a challenging security environment and from integrated services activity in Chad. Middle East and Asia revenue, excluding Cameron, increased 7%, led by the Far East and Australia geomarket. In the Northern Middle East geomarket, good progress was made on one service production projects in Kuwait and Egypt, while the Eastern Middle East Geo market benefited from the start up of integrated drilling projects in Iraq. In Saudi Arabia, an additional 8 rigs have now been mobilized for lump sum turnkey work on the Ghavar field. With limited revenue growth in the quarter due to delays and logistical challenges in the start up phase of the project.
In Asia, growth in the Far East and Australia geomarket was due mainly to increased activity in Indonesia and offshore Australia, while China benefited from a ramp up in activity for shale gas and tidal plays, including first gas production on our China SPM project. In Southeast Asia Geomarket, operations began on drilling projects in Myanmar, Vietnam and India despite some startup inefficiencies. Southeast Asia experienced also some delays in Malaysia, although work on recently awarded contracts is strengthening as we move into Q3.
Last, let
me turn to Cameron, where increased revenue for service systems and valves and measurements was more than offset by lower project backlog at 1 Subsea. Revenue declined 1% sequentially as a result. Geographically, the revenue growth in North America and Latin America was more than offset by weaker revenue in the Middle East and Asia, while Europe CAS and Africa remained flat sequentially. Beyond the numbers, I would like to highlight a series of contract awards that point to anticipation of more offshore activity restarts. For example, awards by Transocean marked the sale of the 7th new Cameron managed pressure drilling system.
In addition, we extended existing service contracts to cover maintenance and service on BRP systems on 13 of Transocean Ultra Deepwater and harsh environment fleet as well as an order for a complete drilling package for deployment on a new build rig for service in the Caspian Sea. These orders support our view that the broad based recovery is now also reaching the offshore market, where drilling contractors are beginning to order equipment to upgrade rigs in anticipation of increased activity. And with that, let me pass the call over to Paul.
Thank you, Patrick, and good morning, everyone. The broader base recovery in the international markets has now finally started, which led us to record sequential revenue growth in almost all geomarkets and nearly all product lines in the Q2. 1 of our many growth drivers in the emerging international upcycle is our integrated drilling business where we through our systematic R and E investments and domain leadership in drilling hardware, fluids and software have created a highly differentiated well construction platform, which today enables us to win most of the tendered work, while at the same time deliver solid financial returns. Our tender win rate and backlog increase for integrated drilling projects over the past year is the highest we have ever seen. And based on these project wins, we will in 2018 mobilize a total of 90 land rigs, mostly third party, which by itself is equivalent to a midsized land drilling contractor.
In the Integrated Drilling business, the reduction of interfaces and improved definition of responsibilities between our customers and us creates significant improvements in both quality and efficiency that benefit both parties. At the same time, the performance based contracting model and the increased freedom we get to optimize drilling plans, select the appropriate technologies and continuously innovate in the way we run our operations create additional value which is shared with our customers. One example of the operational innovations we are currently deploying on all our new drilling projects is multi skilling and remote operations, which allow us to reduce the overall headcount on the rig site by up to 35%. Another example of operational innovation is how we are rapidly increasing the utilization of our operating assets through our global traceability system, our centralized planning centers, a more scientific methodology for equipment maintenance and our unique data driven drilling optimization software. As a result, our drilling and measurement product line is, for instance, on track to double the asset utilization of our globally sold out rotary steerable fleet over the course of 2018 alone, which helps improve the financial returns and reduce the level of current and future CapEx investments.
Still the ongoing mobilization of all the services needed for our new integrated drilling projects will leave us with no spare equipment capacity by the end of 2018. In anticipation of this pending capacity shortage, we have already started to engage in pricing discussions with many of our customers, which will allow us to invest in additional capacity and it will allow our customers to secure this capacity in return for improved commercial terms. In North America Land, we continue to deploy additional fracturing fleets during the Q2, while pricing stayed flat as industry capacity additions matched the growth in customer activity. Although the rate of permitting and the overall activity levels remain high, the takeaway constraints in the Permian could temper the activity growth over the coming quarters, which is something we will monitor closely going forward. During the Q2, we completed a very important milestone in our transformation program with the successful rollout of our new and streamlined field organization just in time for the emerging international upturn.
This milestone caps 6 years of methodical investment into a new blueprint for our field operation workflows and organizational structure, including stronger and more professional functions, all equipped with cutting edge planning, execution and collaboration tools. The need to modernize our operating platform was clearly identified as far back as the late 1990s. But due to the technical complexity and the associated change management challenges, it was left unaddressed until 2012 when we launched our corporate transformation program. Our modernized field operations and support organization will going forward set new standards for internal efficiency, quality and teamwork, which will lower our need for capacity related CapEx investments compared to previous cycles and at the same time support our promise of delivering 65% incremental margins in the coming up cycle. As part of this transformation milestone, we also completed the second and last step in the simplification of our management structure, which will improve our agility and competitiveness and further lower our support costs.
This was the basis for the headcount related charge we took in the 2nd quarter as outlined by Simon. Next, I would like to update you on the global oil market and how we see the oil fill activity unfolding in the coming quarters. The fundamentals of the global oil market continue to evolve favorably for our international business as the balance of crude oil supply and demand tightens further. Global GDP growth remains robust and oil demand growth was strong in the first half of this year helped by cold weather in the Northern Hemisphere. Despite the increase in crude prices, the reporting agencies have not made any changes to their global oil demand forecasts, which still stands at 1,400,000 barrels per day for both 2018 2019, while we await further clarity around any potential demand headwinds from the ongoing U.
S.-China trade dispute. In spite of OpEx recent decision to increase oil production, the supply base continues to weaken with growing geopolitical pressure to remove Iranian barrels from the market with no apparent resolution to the falling production in Venezuela and with Libyan exports continuing to be volatile. At present, OpEx spare production capacity is limited to 2,100,000 barrels per day from Saudi Arabia, Kuwait and the UAE, which is approaching the lowest level seen in the last 2 decades. In North America, the pressure on infrastructure and export pipeline capacity from the Permian Basin is becoming an increasing constraint to production growth, which will likely not be resolved until the second half of 2019. The U.
S. Shale producers are also experiencing production challenges linked in part to well interference as infill drilling in the producing acreage increases and as drilling continues to step out from the Tier 1 acreage. And lastly, after more than 3 years of E and P underinvestment, the international production base has started to show accelerating signs of weakness with noticeable year over year production declines in 15 of the world's producing countries. These developments underline the growing need for increased E and P spending, in particular in the international markets, as it is becoming apparent that the new projects coming online over the next few years will likely not be sufficient to meet the increasing demand. Looking forward to the Q3, we expect the broader based international recovery to continue with sequential growth driven by Russia, Asia, Latin America and the Middle East, while we expect more nominal sequential growth in Europe and Africa.
In North America Land, we do not presently see any impact on the established activity outlook and we plan to continue to deploy additional fracturing and drilling capacity while we closely monitor the evolution of the market ready to adjust as needed. Due to its nature, the backlog driven business of Cameron has a cycle lag compared to our well related product lines. However, the reduction in backlog for the long cycle businesses is starting to slow, while the short cycle product lines are responding well to the recovery in both the North American and international markets. Overall for the Q3, we expect a similar rate of sequential revenue growth to what we saw in the second quarter with a corresponding EPS growth that should again be in the range of 10% to 15% as we complete the major mobilizations for our new drilling projects. These numbers further assume a quick recovery from the offshore strike in Norway and the unrest we are currently seeing in the Basra region of Iraq, which have both impacted our operations in July.
Over the past 4 years, we have been opportunistic and expanding our offering to our targeted M and A program and our corresponding R and E investments, which has allowed us to increase our total addressable market by 50%. Our broad and industry leading technology offering, together with our unmatched geographical footprint and our fully modernized operating platform, make a very powerful combination that puts us firmly in the driver's seat to outperform in the coming global upturn. And on that note, the entire Schlumberger team of 100,000 women and men are ready and primed to capture the growth opportunities coming from the positive market fundamentals we are now seeing. That concludes our prepared remarks. We will now open up for questions.
Thank you.
You. Our first question is from the line of James West with Evercore ISI. Please go ahead.
Hey, good afternoon, Paul.
Hey. Good morning, James.
So it looks like from my standpoint, 2018, you talked about 90 land rigs being mobilized. We did 28 last quarter. Offshore starting to kick in. You're talking back about your 65% incrementals at some point here when you get pricing. Could you maybe give us an idea of what regions of the world I mean, obviously, good growth in Asia and Australia this quarter and continued growth in the Middle East.
But what regions of the world or is it just everywhere that's starting to inflect? I mean, this is a big inflection for international.
Yes. I agree with you. It is
a big inflection for international. And I would say that we are basically seeing it everywhere. We're not going to see the same sequential growth rate from every region in every quarter. And while Russia and the Middle East was a little bit slower in sequential growth this quarter, we are seeing them back right back with strong performance anticipated for Q3. Asia continues to be strong again for the Q2 in a row.
And Latin America, which we only had about 3% sequential growth in Q2, is going to be a lot stronger again in Q3. So we are basically seeing new activity, new projects being discussed, more activity on the existing projects we have in pretty much every corner of the world. It's not going to be a straight line for each of the regions, but we are very encouraged with what we see. We have with the management team been a lot in the field during the Q2, seen a lot of our customers. And overall, the mood is actually quite upbeat, which is quite a while since we have seen this on our field visits.
Sure. Absolutely. And then with respect to pricing, it sounds like you got a little bit in 2Q or maybe some smaller contracts. But the discussion about the absorption of all your equipment by year end, is that already a done deal based on contract awards that have already come through?
Yes. That's pretty much a done deal. That's basically mobilizing honoring the commitments that we have already taken on. So yes, I would say during the course of Q4 of this year, we will be, I would say, fully utilized in the international markets. And beyond that, we will look at adding capacity partly through CapEx, but also a fair bit through driving the efficiency of our asset base that we have in place, now further helped by the upgrade we've done to our field organization.
But by during the Q4, we will be fully mobilized. And we have already started these pricing discussions with our customers. Part of it is going to be price book uplift, part of it will be potentially better terms and conditions and in particular also payment terms. We are still, I would say, not really satisfied with the evolution of our working capital and this is mainly down to slow payments from our customers, which we are actively looking to address.
Next question is from the line of Angie Sedita with UBS Securities. Please go ahead.
Thanks. Good morning, guys.
Good morning. So
nice to hear the enthusiasm on the international side. I mean, it certainly feels more tangible than it has in some time. So maybe you could talk a little bit about some of your integrated project awards. I think that was a key factor and where you see this absorption in capacity and how that plays into pricing? And then I know it's early, but maybe you have some early thoughts on international E and P spend for 2019.
Is low double digit the stretch? Or is that a possibility?
Yes. Okay. So on the first part of your question in terms of the areas of international, as we discussed with James, we see it generally everywhere at this stage at varying rates. But in terms of the drilling projects, we also see them in most regions, right? Obviously, on land for lumpsum turnkey, we see that in Latin America, very much so in the Middle East and also some in Asia.
And we also have integrated projects more from a project coordination standpoint happening on land, but also now occurring in the shallow water where offshore, where we also starting to see a an uptick in activity. So overall, it's quite exciting. It's been a while since we were able to kind of talk as optimistically about the international market as we can now. So it's all positive. Now to your question on 2019, it's obviously early for us to make predictions about what our customers are going to do.
I don't think they really started their planning exercises yet. But obviously, we have a pretty good handle on our revenue backlog from all the project wins we have and the outlook generally we have on our business. And I can at least say from our standpoint that our growth in international for next year will be double digit. Don't ask me where in double digits, but it's going to be double digit.
Okay. That's very helpful. And then going to North America and the Permian, thought you made a little comment here on your deployment. So maybe talk a little bit further about OneStem and the deployment for the rest of 2018 and going into 2019? And also very interesting on the sand strategy with the vertical integration and your commentary by your customers and should we expect further integration into Sand?
So maybe a little bit on OneStem and then on Sand.
Yes. On OneStem, stem, we have continued to deploy our spare equipment. And we basically said that by the end of this year, we will be in a position to have deployed it all. We will do whatever rebuilds necessary, and that's currently ongoing. It's progressing well.
And we continue to deploy now into the Q3. We are aware of the emerging Permian takeaway constraints, but we have yet to see any real impact on the activity growth or any activity on pricing. So we are continuing to deploy, and things are progressing well with One Stim. Now as for the vertical integration, we have been investing into this now for about 3 years, and we now own several sand mines. And our investment into sand mines will be concluded basically this month.
We will then have sufficient sand mine capacity to take care of 100% of our current and also projected frac work. We see this as a significant competitive advantage going forward because there is a quickly growing trend from our customers now to separate the tendering for frac services and frac sand. And through the investments we've done in vertical integration all the way from the sand mine to the rail to transload and also trucking for the last mile where we have vertically integrated all aspects of this, not for 100% of our capacity, but for a fairly significant part. That allows us now to bid very competitively for the standalone sand tenders, which means that we can obviously compete in the entire revenue stream continuously,
which would
have been a lot more difficult in the event we were not vertically integrated. So we are basically done this month with our vertical integration investment program, and we're now in a prime position to really take advantage of that and continue the deployment of the remaining spare frac capacity we have by the end of the year.
All right. Thanks. Very helpful. I'll turn it over.
Thank you. Thanks, Angie.
Next, we go to the line of Scott Gruber with Citigroup. Please go ahead.
Yes. Thank you. Paul, can you discuss the outlook for the Drilling segment, both revenues and margins in the second half? You mentioned double digit growth internationally next year. Will the double digit growth start to manifest within drilling in the second half, just given all the rig deployments?
And then as the start up costs fade, how should we think about the margin trajectory within drilling?
Yes. So I would say the double digit growth was an overall Schlumberger International projection for next year. For the second half of this year, I gave some indications around how we see Q3. And obviously, given the significance of these integrated drilling contracts, we expect significant growth within the context of the overall growth from the drilling group. There's been a heavy mobilization burden on them in the first half of the year.
It will continue into for sure Q3 and that has impacted margins. We're not obviously happy with that level of margin, but we also understand that there are challenges with these type of deployments, right? So you can expect going forward into the second half that both margins will improve. And we also would expect that the drilling group will be in the high end of our sequential growth as we go into the 3rd quarter.
Got it. And while we're on the forward outlook, consensus currently stands at $0.51 according to FactSet for 3Q. Are you comfortable with that figure given the trends you see today?
Well, as I said in my prepared remarks, our view in the Q3 is that we will again grow roughly on the top line at the same percentage rate as we did sequentially in Q2, which is roughly 6%, which I think is more or less in line with the revenue consensus. On the EPS side, we're still again looking at probably 10% to 15%, which if you do the math, would probably be in between $47,000,000 $50,000,000 And again, that's going to come down to how effective we are in getting the mobilizations done. And the quicker you get the mobilizations done, the lower your cost will be and the quicker you will also get the wells into a position where you can recognize the revenue and the profit. So there is a bit of a range, and it's down to the fact that we still will have a very heavy burden to lift on the mobilizations. So that's the kind of range I would give you at this stage.
But I would say overall, what is really driving our business going forward is going to be our ability to drive the top line. And I'm very pleased with where we sit in terms of contracts, tender wins and the fact that we can execute these contracts going
Hey, good morning, Paul.
Hey, good morning, Paul. Appreciate that summary on the operational outlook. Maybe I can ask a question here relating to cash use, cash flow expectations, especially as you get these projects up and running internationally? And maybe you can kind of give us a rough glimpse on how you expect free cash flow to progress maybe through the back half and maybe give a rough sense as to what cash flow could look like as you go into next year?
Yes. I'll make a couple of quick comments and I will hand it to Simon to elaborate a bit. But I would say, first of all, we're not satisfied with the free cash flow in the Q2 and even the first half overall. The main issue around the cash flow is the consumption of working capital. And while we have a pretty good handle on inventory and payables, the main issue here is still high DSO and customers paying slowly.
I'm not worried about being paid ultimately, but the rate of payment is too slow. And this is something we are already addressing in our commercial discussions with our customers. We had a very good handle on the internal part of the DSO, but we now need to get a bit more traction on the customer side. So typically, our cash flow free cash flow improves considerably in the second half of the year, which we do expect it to do this year as well. So we are overall going to be on track for the year as we plan, but the start in the first half has been slow versus our expectations.
So, Amin, do you want to elaborate?
So, Amin, not much to add here. But as Paul mentioned, we're not happy with the first quarter first half, sorry. It is similar to what we did last year, but we should have done better. The working capital consumption was a bit higher than what we expected. But the second half of the year will always improve and we expect the improvement to come and meet our target for the year.
You asked on next year? Well, we haven't done any detailed work yet, but given the fact that it is going to be a better year with our growth. And we are we will maintain our investment at the level which is that meets this growth. So we expect to do better. And the other element of the cash consumption is obviously buyback.
As you see, we are we will continue for this year at the modest level. So in order to preserve the cash to meet the business needs.
Okay. Appreciate that. Maybe I could follow-up as well. Paul, again, you referenced you're still plan or have a target of mid over 60% incremental margins, obviously, as the cycle kind of kicks in, you get pricing. Sounds like you talked about a broad based recovery, you talked about accelerating activity levels, you talked about improving pricing on the international front and then double digit kind of revenue growth internationally next year.
I don't know, is it safe enough for us to could potentially hit 60% incremental margins in 2019? I'm not trying to hold you to that or pin you down. I'm just trying to kind of gauge based on your commentary and what you said your targets were in the past.
Well, we are ready to ultimately be held to the 65% incremental, that's for sure. Whether we will see the full effect of it next year, I think it's going to come down to how much pricing we will get. What I'm very confident about is our ability to drive the internal efficiency from all aspect of our operations, right? And what we've done this quarter with the full implementation of our, I would say, fully modernized operating organization is going to be a key driver to make that happen. So there's a lot of excitement in our field operations around now having this organization in place with cutting edge tools and the ability they now have to drive overall efficiency from the vast international operating base that we have.
So this is going to be a key component of ensuring that we deliver on the 65%. So when we get all the way there next year, I think it's going to come down to, I think, more on how much pricing we get because I'm very confident about our own ability to execute efficiently.
Okay, great. Thanks, Bob.
Thank you very much.
Next, we go to the line of Jim Wicklund with Credit Suisse. Please go ahead.
Good morning, guys. Good morning, Jim. And now I'm glad we get to talk about international and we can now talk about international pricing. So that's all in indicative of things definitely improving. Pal, I realize that we haven't planned for 'nineteen, 'twenty and beyond.
But I look back at your margins in Reservoir Characterization and in Drilling, which are your most international segments. And in 2015, you had margins of 26% in reservoir characterization and 18% in drilling. And we're well below that now. I'm not asking when those margins recover, but is there anything fundamentally different in the market going forward that would stop you from getting back to those historical margins at some point in the next couple of years?
Jim, no. I don't think there is. Obviously, we have conceded on price a fair bit over the past 4 years. Yes.
That's near term though.
Yes. So no and I'm confident that we can recover at least a fair bit of that. And I think that alone think, should be enough for us to get back to those kind of margins. I mean, this quarter reservoir characterization made a pretty big step forward already. And the main issue around the drilling margin is not the, I would say, the overall execution capabilities and the technology portfolio, which is highly differentiated.
Is the fact that we are carrying a lot of mobilization and start up costs and with that inefficiency. So I would see I would expect you to see fairly noticeable margin progression over the coming quarters in drilling. So for us to, within the next few years, get back to those margins that you were indicating for characterization and drilling, I see as absolutely achievable.
Excellent, excellent. That's very helpful. My follow-up, if I could. We talked a little bit about Cameron. I know the book to bill is at 1.
The backlog declined a little bit. There's been a lot of talk about FIDs picking up this year, but from an exceptionally small base. A lot of the FIDs that have been issued are getting slow rolled by their clients. Can you talk a little bit you have so much exposure and margin exposure to Deepwater. And Deepwater, the offshore drillers have obviously ran their stock prices up this year.
Is there any increased visibility on when Deepwater may start to pick up and when Cameron may move that book to bill from 1, which is just fine, to a higher number? Do we have any visibility on Deepwater at this point?
Patrick, you want to comment? Sure.
So Jim, I think that at this moment and what we have continuously said is that once the recovery starts, we obviously start seeing it on land and we clearly are now having very clear evidence on what is happening in the shallow offshore. Equally, we are preparing ourselves further for deepwater to start again as well. Whatever size of a bonanza this is going to be, I think at this moment is somewhat unclear. But from the work that we have been doing in completing our technology portfolio, making sure that we have a leading technology on the boosting side. And clearly, the work that we already signaled that we're doing with subsea 7 to get a JV that prepares us even more to be ready to play significantly in this market.
We do see that we are going to go back in the years to come into a deepwater activity because looking at the longer term supply demand, there is a certain amount of assets that will have to be developed. So we're still positive on this market. I think at this moment, it is a little bit tough to call a deepwater revival short term, but we are preparing ourselves further and certainly expect over the longer term the book to bill to go in more favorable numbers.
Okay, gentlemen. Thank you very much. Appreciate it.
Thanks, Jim.
Next we go to the line of Dave Anderson with Barclays Capital. Please go ahead.
Hi, good morning. So as you're ramping up on the LSTK contracts and you talked about the 90 rigs you're mobilizing this year, I was just wondering kind of what this looks like going forward. I mean, you obviously have quite a bit of appetite for the separate work. Could you seal another 90 rigs, say, mobilized next year? I'm just trying to get a sense as to ultimately kind of the breadth of this opportunity that you're seeing kind of coming in front of you here?
Well, at
this stage, we don't have visibility into 2019 for that. But I think it's fair to say that we're not
expecting to see a similar
type of ramp up of that number of rigs 2019. We expect to be very competitive in every bid that is out there for a lump sum turnkey anywhere in the world at this stage. And we feel very confident in our ability to compete and win these tenders and also turn the tenders at competitive rates into good profits for Schlumberger. So but I don't anticipate the same level of ramp up in 2019 as in 2018.
Now is this still largely concentrated in Saudi? And I think we see a little bit in Oman. But what about can you just talk about maybe some other I don't know if you want to get too specific here, but are you starting to see this more broad based in the Middle East? Or is it still sort of concentrated in Saudi?
No, it's not. It is not concentrated in Saudi. Saudi is a very important market for us, but and we have a big ramp up of rigs in Saudi over the year. But we have, in addition to that, countries like Mexico, Iraq, India, just to name a few. And there are other countries in the Middle East and Gulf area as well where we are starting to take on these type of contracts.
So this is much more broader based than one particular country.
Thank you. On a separate subject, Patrick, you had talked about the Pallister block and where you are with the 4 rigs. I was wondering if you could give us a tell us kind of where you are in terms of the progression on the wells and the success of that project. We haven't heard too much about that. And during the quarter, there was some talk about monetization.
I was just wondering what that means. Does that mean you could potentially be kind of maybe selling down some of your working interest? Do you take it on partners? Just if you could give a little bit more color on that, that would be great.
Okay, Dave. So at this moment, we have about 15 active SPM projects. And let me try to give you a bit of a detail on some of the key ones. Palliser, the one in Canada, we did talk about that. We are at the moment active again with 4 rigs.
We'll do well over 100 wells on that asset during this year. As you know, this is one way we are shifting from a gas producing asset to an oil production. The wells are performing very well. We're pleased with the reservoir performance that we see with the well locations that we have. So this is going as per plan, quite keen on that.
Ecuador remains active for us with the 3 assets that we operate there. In Argentina, we're picking up further on the Bandurria Sur asset. And again, there, we're having very good success with the technologies that we deploy in the reservoir. And then maybe the last one to highlight would be Nigeria, where we have a project with 1st EMP and NNPC, and that is on track to FID here very, very soon. So just to give you a bit of a broader view on it, the opportunities for new projects really remain plentiful, but we are only considering those at the moment that really fit with what we call the SPM Light Business Model, where capital intensity and key cash flow are much more key criteria in defining which project ultimately fits with us and which doesn't, which is much in line with the communications that we have had previously.
So in the SPM light context, we've also spoken about monetization of the SPM investments. And there are several assets in our portfolio that are reaching a level of maturity and where we have generated the value that we are going to be able to sell. And here, you would have to think really about farming off or selling certain portions of our equity in these fields. And this is what we want to do in the next 12 to 18 months once we really start reaching peak valuation on them. On the last point maybe around SPM and what was highlighted during this quarter was that we exited the 1 LNG venture, which might have come a bit as a surprise.
It's still a business that we believe very much in, which is a business around stranded gas and FLNG technology. But for us, it has been a decision that we exited purely based on the intensity of capital required for these projects. And when we entered, we were very clear on we are very keen on investing upstream, not so much in investing in the vessels itself as that's really not where our money is best employed. And maybe with that, I can I've given you a bit of an idea where we are with the main activities around SPM.
Next, we go to the line of Bill Herbert with Simmons or Simmons. Please go ahead.
Thanks. Good morning, Paul and Simon. So assuming a double digit increase in international revenues for 2019,
how should we
think about capital spending consolidated as a percentage of revenues in 2019? Should it look much like it has in 2018? Or should the capital intensity go lower given the mobilization unfolding for this year?
So obviously, we haven't gone through the detailed planning for year. So it's early to kind of make firm statements about this. But I think directionally, I think you can expect that the CapEx as a percentage of our revenue going into this upcycle versus 20 19 CapEx would be, like I said, it's too early. But I think the planning number I would have on my piece of paper today would still be around the $2,000,000,000 mark. And I think with that, coupled with the big upside we are now starting to see from the complete modernization we have done of our operating platform is going to drive significant asset utilization efficiency.
I mentioned in my prepared remarks that Building and Measurements, for instance, in 2018 alone will double their asset utilization of our sold out power drive technology. So you can expect us to be for the base business as well a lot more capital efficient in this upturn compared to what we have been in previous upturns, and we haven't been too bad in the previous upturns either.
Okay, great. Thanks. And you mentioned that pricing was stable in the second quarter for Lower 48, and I presume that meant frac and 1 sem. I'm just curious given the occlusions that are unfolding in the Permian and the slowdown in drilling activity that have seen in the past 8 weeks and what likely will be a slowdown in completions activity. Can you comment on the cadence of OneStim deployment going forward?
And then moreover, just your expectations in general for pricing, it seems like it's softening on the margin for the industry.
[SPEAKER JOSE
RAFAEL FERNANDEZ:] In terms of the cadence of the ON STIM capacity deployments, I don't want to go into the details of it. Other than that, we basically said that over the course of this year, we would rebuild the equipment and be in a position to reintroduce it into the market. We are continuing to progress well with that plan. There will be always some variations in the deployment rate by month or by quarter. But at this stage, we are not altering the plan based on some of these take away constraint discussions around the Permian.
We have yet to see that in the projected activity growth. But again, this is something we will monitor very closely. And in the event there is a need to adjust, we will adjust. But as of now, we are continuing to deploy. And this is why we are outgrowing both the rig count and the stage count in the market with these deployments.
And as to pricing, flat pricing for the OneStim business roughly in the Q2. And we have not seen any kind of major movements beyond that far into the Q3 either. So it's pretty it looks pretty stable as per now, and we continue with our plan. And as with anything in the North America land market, you got to be on your toes because it can change quickly.
Okay. Thank you.
Next we go to the line of Jud Bailey with Wells Fargo. Please go ahead.
A question, Paul, if I could. You referenced the expectation of double digit international revenue growth next year. Be curious, number 1, how do you think about your visibility for achieving that kind of growth next year? And then number 2, how do you think about the drivers of that growth, I guess, from either a regional standpoint? And also how you'd see the potential split between offshore and onshore growth playing out next year as well?
Well, again, I gave the 10 or the I would say, I gave the double digit international growth numbers basically because we are confident on the backlog we have of contract wins And we know where these wins are and how it's going to shape up. Now we have not done the detailed planning. So I can't give you any kind of granular review of where it's going to come. But I would say, in general, we see growth in all geographies next year. I would say land is still likely to be the driving force of it.
Obviously, a lot of our lump sum turnkey sits on land and this is where the shorter cycle barrels are. But I think we will start to see movement in particular on shallow water as well. I believe there are some movements in shallow water rig rates, which I think is a very good precursor to what is likely to happen. And going back to deepwater, deepwater drilling activity in 2018 is roughly going to be 10% up versus 2017. And I think the growth in deepwater will probably continue and potentially accelerate as well into 2019.
So I know I'm not giving you the details you're looking for, mainly because we haven't done the detailed planning as of yet, But I see no region of the world, which we see as a region that is not going to grow in 2019. And we find that to be very good news.
Okay. Well, I appreciate the comments. And I'd say that my follow-up would be most of the commentary so far industry wide has been on the expectation that development work will kind of dominate the next life of deepwater activity. Are you seeing any hints of improvement in terms of exploration on the deepwater side? Or is it still dominated on the development side?
It's a good question actually. Obviously, the in terms of the absolute volume, it is dominated by development. But we are starting to see that exploration spend appears to be turning a corner as well. I mean, the current level of exploration investment over the past, whatever, 3, 4 years is obviously clearly not sustainable. And we are starting to see some uptick there.
Q2, in terms of exploration rig count was actually up 22% sequentially and about 7% year over year. And we expect that in 2018, Exploration, Drilling and Well Services spend is probably going to be around 12% higher than 2017. So both Deepwater and Exploration is starting to show kind of double digit growth already in 2018. And I can only see that accelerating going into 2019. And associated with exploration, we are actually also starting to see more interest and more discussion with our customers again on formation evaluation, this being either wireline or LWD and actually customers going back into talking more reservoir with us.
And obviously, this is a very good news for some of our high end measurement related businesses as well. So exploration is coming, and it's also increased focus on reservoir information evaluation.
Great. Thank
you. I'll turn it back.
Thank you.
And our last question is from the line of wakar Syed with Goldman Sachs. Please go ahead.
Thank you very much. Appreciate that. Paul, the pricing improvement that you expect later in the year, would that start to have a benefit in the first half of twenty nineteen? Or do you see that by the time it turns into contracts and revenues could be late 2019 or even 2020?
No. I think the pricing discussions we are starting to have now and we had some by customer and by by customer and by contracts and by market on how we are going to engage into recover some of the big concessions that we have made. So the pricing improvements we are now discussing and seeking should have a gradual impact on our results going forward, right? So I would say the discussions we are having in the second half of this year should have an impact on our results in the first half of twenty nineteen. To what effect, it's still early to say.
But with activity continuing to go up with ourselves at least being fully deployed capacity wise by the end of the year, I think it's only natural that pricing comes up and starts to have a be a bit of a tailwind on our results. And it's been a pretty significant headwind for about 4 years in a row now. So I'm encouraged in terms of what I'm seeing around the pricing discussions and also optimistic that this will become more of a noticeable tailwind as we go into 2019.
And then just finally on that, as you go into 2019 and you're expecting revenue growth internationally in double digits, Could you do that with the same kind of capital budget around $2,000,000,000 or do you think the CapEx will need to grow as we go into next year?
No. We can do that with the same CapEx budget of $2,000,000,000 That's on the back of the modernized field operating platform.
Okay, great. Thank you very much. Appreciate it.
Thank you, Wacker. So before we close today's call, let me summarize the main messages. Oilfield activity strengthened in the Q2, both in land in North America and also throughout international markets. And as a result, we delivered strong sequential revenue growth. With a total of 90 rigs being mobilized over the course of 2018, the integrated drilling services model is one of our many growth drivers in the global upcycle we are now entering.
The Q2 saw us complete an important milestone in our transformation program as we rolled out our modernized field and support organization. And linked to this, we also completed the second and last step to simplify our management structure, which altogether puts us in a great position to outperform in the emerging global upturn, both in terms of top line revenue and bottom line earnings growth. With that, we conclude today's call. Thank you for participating.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT and T Teleconference Service. You may now disconnect.