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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Simon Ferrant.
Please go ahead.
Thank you. Hello, and welcome to the Schlumberger Limited First Quarter 2017 Results Conference Call. Today's call is being hosted from Darran, Saudi Arabia on an Sanjay Limited Board meeting. Joining us on the call today are Paul Kipsgaard, Simon Ayatt and Patrick Shaw. We will, as usual, first go through our prepared remarks, after which we'll open up for questions.
However, before we begin with the opening remarks, I'd like to remind the participants that some of the statements we'll be making today are forward looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10 ks filing and other SEC filings. Our comments today may also include non GAAP financial measures. Additional details and reconciliations to most directly comparable GAAP financial measures can be found in our Q1 press release, which is on our website.
With that, I hand the call over to Simon Achat, who will present the Q1 corporate results and also review the results by group.
Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. 1st quarter earnings per share excluding charges and credits was 0 point 2 $5 This represents a decrease of $0.02 sequentially and $0.15 when compared to the same quarter last year. During the current quarter, we recorded $0.05 of Cameron merger and integration charges. Our first quarter revenue of $6,900,000,000 decreased 3% sequentially, largely driven by the Cameron Group as a result of project completions and reduced product sales.
Pretax operating margin only decreased by 42 basis points to 11%. Highlights by product group were as follows: 1st quarter reservoir characterization revenue of $1,600,000,000 decreased 3% sequentially, primarily due to project completions in testing and process systems and seasonally lower SIS software and multi client license sales. These decreases were offset in part by progress on early production facility projects in the Middle East and improved wireline revenue in North America. Margin decreased 170 basis points to 17%, driven by the lower contribution from SIS software and multi client sales. The Drilling Group revenue of $2,000,000,000 decreased 1% sequentially, while margins were sequentially flat at 11.5%.
Strong activity in North America was offset by lower activity and pricing pressure internationally across the group. Production in group revenue of $2,200,000,000 decreased 1% sequentially and margins fell by 78 basis points to 5%. These results were primarily driven by strong pressure pumping activity and the pricing recovery in North America land, which was offset by seasonally lower completion product sales and lower SPM revenue. Cameron Group revenue of $1,200,000,000 decreased 9% sequentially. This decrease was largely driven by OneSubsea as a result of declining project volumes, reduced product sales in surface system and a further drop in drilling system also contributed to the decline.
Margins decreased 80 basis points to 13%. Despite the revenue decline, 1 Subsea Margins still exceeded 20% for the 3rd straight quarter as a result of strong project execution. While the drilling backlog was essentially flat, the 1 Subsea backlog increase largely reflected the Mad Dog 2 award. The book to bill ratio for our long cycle businesses increased to 1.1 in the first quarter. This marks the first time these businesses have been above 1 since the Q4 of 2013.
Now turning to Schlumberger as a whole, the effective tax rate excluding charges and credits was 15.3% in the 1st quarter compared to 15.8% in the previous quarter. Looking forward, the ETR will be very sensitive to the geographic mix of earnings between North America and the rest of the world. With the continued recovery in North America, we anticipate that the ETR will increase next quarter and over the course of the year. We generated $656,000,000 of cash flow from operations. This is despite the consumption of working capital that we typically experience during Q1, which is driven by the annual payments associated with employee compensation as well as the payment of $140,000,000 in severance during the quarter.
We also continue to experience payment delays from certain customers, primarily in Latin America. Our net debt increased $1,300,000,000 during the quarter to $11,400,000,000 We ended the quarter with total cash and investments of $7,600,000,000 During the quarter, we spent $372,000,000 to repurchase 4,700,000 shares at an average price of $78.97 Other significant liquidity events during the quarter included roughly $380,000,000 on CapEx and investments of approximately $145,000,000 in SVM projects and $115,000,000 in MultiClient. During the quarter, we also made $696,000,000 of dividend payments and $221,000,000 in board drilling. Full year 2017 CapEx excluding SBM and MultiClient investments is still expected to be approximately $2,200,000,000 And now I will turn the conference over to Patrick. Thank you, Simon, and good morning, everyone.
Starting off with North America, our first quarter revenue increased 6% sequentially as growth in U. S. Land and Western Canada was partially offset by further activity reductions in the U. S. Gulf of Mexico and Eastern Canada.
As expected, the North America land market continued to strengthen during the Q1 in terms of both activity and pricing, leading us to start full scale deployment of idle capacity for most product lines. Revenue growth was led by hydraulic fracturing and drilling services, but also increasingly supported by artificial lift, service systems and valves and measurement. In spite of our capacity reactivation being heavily back end loaded as we continue to adhere to our profitable growth strategy, we still generated 16% sequential revenue growth in our hydraulic fracturing and directional drilling services in U. S. Land.
And even more importantly, we delivered incremental margins of 66% for these services combined in U. S. Land, driven by productive customer engagements around pricing recovery and operational efficiency, together with timely resource additions, new technology sales and proactive supply chain management. In the U. S.
Gulf of Mexico, the 1st quarter revenue declined again sequentially as the deepwater rig count dropped 15 at the end of March, which represents a reduction of 74% compared to the peak activity level of 2014. In addition to the low drilling activity, we also saw a further sequential drop in seismic multiclient sales, leaving offshore revenues at unprecedented low levels. In parallel with these record low level activity, product and services pricing has in several recent cases fallen to levels that make it impossible for us to uphold our operating standards and at the same time turn a profit in this extremely challenging operating environment. We are therefore in the process of redeploying both service capacity and technical support resources from the U. S.
Gulf of Mexico to other more viable markets. Internationally, the 1st quarter revenue fell 7% sequentially, driven by stronger than expected seasonal decline in activity and product sales, in particularly in the North Sea, Russia Land and China, and also by lower sequential activity in key parts of the Middle East. On a positive note, revenues in Latin America were flat sequentially, confirming that this region has indeed reached the bottom of the cycle. The results were driven by solid activity in Brazil, further supported by multiclient seismic sales and strong OneSubsea and Cameron Drilling Systems activity. This was offset by a range of activity challenges impacting our hydraulic fracturing operations in Argentina, which has now been resolved as well as production constraints imposed on our Xuxufendi SPM project in Ecuador.
Revenue in Europe, CIS and Africa decreased 10% sequentially, driven primarily by the completion of large OneSubsea project, lower Cameron Service Systems sales, reduced SIS software license sales and a more severe seasonal reduction in drilling related activity throughout Russia, Kazakhstan and the North Sea. Still, the activity in the northern parts of ECA is expected to recover in the Q2, and we maintain a constructive outlook for the year for both Russia and the North Sea. In Africa, revenue was flat sequentially, which clearly indicates that this region has also reached the bottom of the cycle. In North Africa, activity remained stable in Algeria during the Q1, and we also started preparations for reentering Libya and expect to start a small scale land operation in the Q2 after having been shut down on land for the past 3 years. Sub Sahara Africa revenue was also flat sequentially as early termination of ongoing drilling activity in Angola and Gabon was offset by the start up of 2 new deepwater projects in Congo and Senegal, as well as by strong growth in land activity in Chad, Congo and Ethiopia.
In the Middle East and Asia, revenue decreased 7% sequentially, driven by lower product sales from the Cameron Service and Drilling Systems product lines and also by lower activity and service pricing pressures throughout the Middle East, particularly impacting the production group. In Asia, revenues in China and Australia were lower sequentially due to lower offshore drilling activity and by severe seasonal weather impacting our land operation in both countries. And finally, the Q1 revenue in Malaysia and Indonesia flat sequentially confirming that we have reached the bottom of the cycle also here, but with no clear signs yet of any significant activity recovery in this region. With that, I will hand the call over to Paul.
Thank you, Patrick. Following the review of our Q1 results from Simon and Patrick, I will next provide you with an updated business outlook. But before I do that, I would like to say a few words about the Cameron Group as we just passed the 1 year mark since the closing of the transaction. Over the past 12 months, we have successfully implemented the first phase of our integration plan, which included 3 main themes. First, the colocation of 1700 employees into joint facilities around the world.
2nd, combining Schlumberger and Cameron businesses to deliver enhanced offerings to our customers, such as our new testing and process systems product line and third, bringing together Cameron and Schlumberger Technologies, for instance, in hydraulic fracturing and in 1 drill, and by launching as many as 32 integrated R and D projects to further expand our integrated technology offering. At the same time, OneSubsea, which is now in its 5th year of existence, has firmly established a leadership position in the Subsea market through the port to pipeline approach as seen by the higher rate of project awards in recent quarters as well as their industry leading operating margins. Overall, the entire Cameron integration program has exceeded the ambitious 1st year synergy target we set and delivered approximately $400,000,000 in operating income synergies as well as $600,000,000 in new orders. The Q1 results from the Cameron Group were again very solid, and I would like to complement the entire Cameron organization and the integration team on a job well done where they have jointly ensured that the largest transaction Schlumberger has done to date has turned out to be a great success. Turning next to the business outlook.
We maintain our constructive view of the oil market and we further inventory draws in the Q2 driven by the OPEC and non OPEC cuts put in place in January. At present, the region in the world showing clear signs of increased E and P investments in 2017 is North America land, although investment levels in the Middle East and Russia are also expected to remain resilient this year. However, for the rest of the world, which still make up more than 50,000,000 barrels per day of oil production, we are heading towards a 3rd year of significant underinvestment, which increases the likelihood of a medium term supply deficit as produced reserves are not replaced in sufficient volume. In particular, the market continues to focus on headline decline numbers that suggest that production is holding up well, while a closer examination of the underlying data clearly shows that the rate of depletion of proven developed reserves is rapidly accelerating in several key non OPEC countries. The current level of underinvestments is most visible in exploration, where the record low investments, including both drilling and seismic, led to a total amount of industry discoveries of less than 5,000,000,000 barrels in 2016 versus a produced volume of over 30,000,000,000 barrels, dropping the industry wide reserves replacement ratio to 32%.
Still at present, there is no clear sign of any general increase in exploration spend with the one exception being Mexico, where we are seeing an increasing interest in the offshore multiclient surveys we have acquired over the past 2 years. Looking next at our business outlook by region, the recovery will clearly be led by North America Land, where investment levels expected to increase by 50% in 2017, leading to a strong increase in activity and an overdue correction to service and product pricing. Through the organic and inorganic investments we had made in our North America land business in recent years, we are very well set up to take a leading position in serving our customers in the coming growth cycle. In drilling, we have built a market leading position by expanding our offering through the Smith and Mi Swaco acquisitions and through a broad organic R and D program targeting the North America land market. As drilling complexity continues to increase with even longer laterals, our purpose designed technologies are starting to have a significant impact on our customers' drilling performance.
One example of this is the strong uptake of our ax blade drill bit, which by itself has demonstrated a record 35% increase in rate of penetration for Matador in the Permian. Furthermore, our PowerDrive Orbit rotary steerable technology continues to be sold out for a 3rd successive quarter And in an AT well campaign for Parsley Energy in the Midland and Delaware Basins, this technology contributed to a 17% reduction in the average drilling time per well and a 30% reduction in the drilling cost per lateral foot. Both of these examples show the performance potential new technologies hold in the North America land market and demonstrate the growth opportunities for our drilling offering as we continue to prepare for the introduction of our One Drill platform in the second half of this year. We are also starting to see strong growth momentum in North America land for our market leading artificial lift offering, where we recently also acquired a 49.9% stake in the HEAL technology from Production Plus Energy Services based in Calgary. Steel, which can be used in wells together with our ESP, plunger lift and rod lift offering, reduces fluid slugging, depresses foam generation, contains solid and separates gas, which altogether improves production and reduces the need for workovers.
We are presently at the introduction stage of this exciting new technology, which over the first 140 installations have delivered an average production increase of 45%. Within our hydraulic fracturing and completions offering, we have also made significant investments in recent years, including the development of a fully automated surface delivery system and also by acquiring our own sand mines and the associated vertically integrated distribution system, which will greatly improve our full cycle returns. In terms of well productivity, the market uptake of our geoengineered completions continues to grow and the offering is delivering significant value for our customers as seen by the 18 well program we recently completed for Lone Star Resources in the Eagle Ford Shale. Here we optimized drilling, stimulation and completion plans across the long laterals supported by our true bit formation evaluation data and broadband sequence diversion technology. As a result, the wells produced up to 86 percent more hydrocarbon per 1,000 feet of lateral compared to offset wells in 2 other fields.
With propane prices and distribution costs now starting to rapidly increase, we are also expecting to see a recovery in the use of our highway technology, which reduces propane use by 40% and water use by 25%. Building on its broad technology platform, the pending 1 STIM JV with Weatherford will give us the required scale in terms of both hydraulic horsepower and multistage completions technologies to drive efficiency and market penetration in all the unconventional basins in North America land. At this stage, the regulatory filings have been completed and as we await the required approvals to close the OneStim transaction, the integration teams are making all the necessary preparations for a successful day 1 of the new company. Looking next at Latin America. The flat sequential revenue in the Q1 was a long awaited positive confirmation that this market has indeed reached the bottom of the cycle.
Going forward, there are emerging positive signs for our business in the region, including opportunities for new commercial models in Brazil as Petrobras continues its asset divestment program and as a new focus is brought to mature land basins. In Argentina, new plans to bring stability to natural gas prices should lead to higher investment levels and we are also excited about our recent agreement with YPF for a joint development in the Vaca Muerta Shale. In Europe, Suez and Africa, we see strengthening activity in the North Sea, Russia and the Caspian region in the coming quarters as the winter season ends and new projects start up. In Africa, we expect some activity improvement in the north as we started a small scale land operation in Libya after being shut down for the past 3 years. While we see a slow but steady improvement in Sub Saharan Africa over the coming quarters, driven by a mix of land activity in Chad, Congo and Ethiopia and a limited number of deepwater startups in Congo, Guinea and the Ivory Coast.
In the Middle East, activity will continue to be driven by the GCC countries. However, we do not expect significant sequential growth from this region over the coming quarters, while in Asia, we will see the normal seasonal recovery in China. Overall, it's clear that activity in international market has reached bottom in all regions. But even though we see positive signs in many countries, we expect only moderate sequential activity growth in the coming quarters. This slow recovery together with the lingering pricing pressure means that we will likely face another challenging year in the international markets, while we expect an acceleration of the activity growth towards the back end of 2017 and into 2018.
With this market backdrop, we continue to actively position Schlumberger at the forefront of an industry that needs to evolve. We do this by proactively managing our base business and responding to ongoing pressures of commoditization by tailoring our offering, resources and service performance to the trailing market conditions. In parallel, we constantly look to expand our opportunity set in a period where the industry in many ways lacks overall direction. This includes driving a broad and very active M and A program, engaging with existing and new customers to establish closer collaboration and more aligned business models and also expanding our offering from technical support to now also taking a financial position alongside our customers in applicable projects, all with the aim of generating more activity for our 2019 product lines. As we continue to carefully navigate the current industry landscape, we remain confident and optimistic about the future of Schlumberger, knowing very well that beyond the current market challenges lies a wealth of opportunity for the industry players that are ready and able to think new and to act new.
Thank you. With that, we will open up
Your first question comes from the line of James West from Evercore ISI. Please go ahead.
Hey, good afternoon, Paul. Good afternoon. So given that you guys are holding your call from the kingdom, the Board meeting was held in the kingdom as well. I'd love to hear kind of what as you and the Board talk about strategic focus over the next several quarters, but also several years and talk about the implementation of those strategies. What are the key kind of top 1, 2, 3 items that you or that Schlumberger is most focused on in the near term and especially given your broad international focus?
And I think we understand where you stand in North America.
Well, if you are asking about, particularly in Saudi Arabia, let me first say that the Board has spent actually a full week in Saudi Arabia in between Jeddah, Riyadh, Sheba and Daran. We have visited the KAUST University, a range of government institutions focused on science, technology and innovation. And of course, we spent a lot of time with our largest customer, Saudi Aramco, both at their headquarters in Daran and their field operations in the south in Sheba. Now the board had a particular interest in broadening its understanding of both the Vision 2,030 for the country as well as the in Kingdom total value add program, which is also very important, and in particular, how Schlumberger continues to actively support these programs and also how we further strengthen our position in the kingdom. Now as part of our visit, we also had the privilege of meeting His Excellency, Khalid Alfalla, to discuss the state of the oil market, which was also very useful for our board to do.
Now everywhere we went, we've been met by exceptional hospitality, and the board was actually very impressed with everything that we saw and everything that is going on in the kingdom. So this has really served as a further extension of our understanding of all the details of what's going on in the country, and that is helping both the board and the senior management team, which was also here, to further adjust and, I would say, accelerate our plans of investment in the country.
Okay. That's great. That's very helpful, Paul. And maybe just a quick follow-up for me. You recently announced the new special venture fund, and you made some very quick moves there with that fund.
Could you perhaps elaborate a little bit on the mandate here for the fund and what you see as the opportunity set?
Yes. So just to be clear on what the fund is. So this is a new avenue for project investments alongside our customers. And this is basically to enable closer collaboration and alignment with our customers. It is also there to facilitate and support additional E and P investments and also for us, very importantly, to secure preferred supplier agreements for our products and services for whatever these investments that we facilitate.
So this is the overall driver behind it. Now we understand that many of our customers do not see a need for this, but some customers do. And the key principle for us that this fund and these investment opportunities is open to all customers. So the basic thing here is that it's simply aiming to enable growth in the base business. Now the scope of the will evaluate each project based on its stand alone merits.
We haven't at this stage set a limit for the size of the fund. But I think importantly as well, we're also open to possibly co invest with 3rd parties. And obviously, the fund will be subject to the same, I would say, governance and risk management processes that we have for the base business. And ultimately, all the investment decisions will be approved by our CFO. So it's something that is in place to facilitate further growth for the base business.
I think that's the best summary of it.
Okay, great. Thanks, Paul.
Your next question comes from the line of Angie Sedita from UBS. Please go ahead.
Thanks. Good morning. Good afternoon, guys as well. So could we go back to the U. S.
A little bit and obviously the OneStem is a surprising JV and interesting to see. So could you talk a little bit about your strategy there as far as redeploying the frac fleet into the U. S. Market and if you could even have a target horsepower as you exit 2017 and maybe a little bit about the logistics of the JV?
Yes. I think we need to separate the JV from our current hydraulic fracturing business in North America land. The JV will obviously include all that business when it's closed. But as of now, we continue to manage our business in a standalone while we are preparing, obviously, to close the JV as soon as possible. So I will comment briefly on our plans for activation of capacity for the base business today, and I'll have Patrick give a few comments around the OneStim JV and the plans post closure.
So if you look at the situation today on our fracking business, we've always said that as soon as we have a clear pathway towards profitability, we will start actively reactivating our idle capacity. This point in time actually passed in the Q1. So towards the back end of the Q1, we actually started actively reactivating our idle capacity. And this process is going to accelerate in the Q2 and also going into H2. So based on the current plan we have at this stage, we plan to have our entire idle capacity from the Schlumberger side deployed during the Q4 of this year.
So this is the current plan of reactivation. We are getting, I would say, significant traction on pricing. We are actively hiring people both for the wellsite operations and for the vertical integration part, including the transportation side of things as well. And I think the balance we have between the in sourcing of our vertical supply chain, together with still a very close working relationship with our suppliers. And just to be clear, we are not looking to fully vertically integrate.
We will have a certain amount of our capacity vertically integrated, and we will continue also to work closely with our suppliers, both on the sand mine side as well as transportation and distribution. So we will continue now in the coming quarters to actively redeploy. And obviously, when we close the OneStim JV, these resources and these businesses will all be combined in OneStim, which will then just continue on the same process. So Patrick, you want to say a few words about where we stand on OneStim and plan?
So regarding the OneStim joint venture, which is a seventy-thirty joint venture with Weatherford for North America Land for hydraulic fracturing and completion, it really creates a new industry leader in terms of hydraulic horsepower and multi stage completions. Through its scale, it will offer a cost effective and competitive service delivery platform, which is clearly positioned to provide customers with leading operational efficiency and best in class hydraulic fracturing and completion technologies. Importantly, reliable equipment availability for our customers, and it will also improve significantly the full cycle shareholder returns from this particular market. So in this case, Weatherford and pump down perforating business. And what we and pump down perforating business.
And what we will end up with is a very capital efficient structure pulling the hydraulic horsepower to gain economies of scale, which clearly is very much timed to benefit from the current market recovery.
Thanks. And I'll
leave it with that.
Okay. Thank you. So as an unrelated follow-up, maybe you can give a little bit of color on Cameron and what your outlook is for subsea overall as far as large projects and pricing and even the rig of the future, any update there?
Patrick, do you want to cover that?
Sure. So firstly, we exceeded our 1st year synergy targets, and we realized approximately $400,000,000 in savings there. And we already secured around $600,000,000 in new synergy orders. So from that perspective, the transaction is working well and the integration is going extremely well. So what we are focused on in Cameron is really creating a fully integrated drilling and production system, combining our leading well and sub service offering with Cameron's leading service technology, further instrumentation and software control and optimization capabilities.
During Q1, overall, the revenue was seasonally down driven mainly by 1 Subsea and Service Systems. Service and V and M posted double growth in U. S. Land and a stop change in bookings. And that is maybe the most important that was already mentioned by Simon as well, where we are starting to see that the book to bill is starting to go over 1.
The margin declined somewhat, but through strong execution and cost control, we limited the margin decline to approximately 80 basis points.
Your next question comes from the line of Ola Slower from Morgan Stanley. Please go ahead.
Thank you very much. I wonder whether, Paul, Simon, whether you could elaborate a little bit on the increased participation in customer projects under SPM. You highlighted in the prepared remarks that payments from certain Latin American customers have slowed down. And how do you see the evolution, the impact on return how big will the committed capital become? I think that's a line of questioning.
I think I get in every single investor meeting when the topic of Schlumberger comes up.
Well, I'll say going back to what I mentioned about the fund earlier, the fund itself is there to facilitate growth in the base business. So the way we look at the fund is that if we do make investments alongside our customers, these investments will need to meet the return criteria that we have overall as a company. And also, the base business that we get associated with the project through preferred supplier agreements, we'd also obviously need to meet the same return criteria. So I think the way to look at the fund is that we have a strong balance sheet. We have strong cash flow, and we have a fair bit of cash on hand.
And what we are doing on a selective basis is looking for investment opportunities to facilitate more base business for the company. Our revenues are still at around 50 percent of what they were 8, 9 quarters ago. And we are trying very actively to make sure that we can get baseline growth, just in North America land but also globally. And given the capability set we have as a company, in particular around subsurface understanding and drilling and completions, we see this as a very good way of operating to drive, I would say, short- and medium term activity. But very importantly, these contracts that we enter into here could have durations of 10 to 15 to 20 years, which would also provide us with a very good baseline of activity and earnings throughout the coming cycles as well.
So I don't think there should be a huge reason for concern around the capital intensity. We have capital available to invest, and we are trying to invest as wisely into projects that have good returns stand alone, but also that facilitates growth opportunities for the base business. Okay.
On the revenue synergies with Cameron, dollars 600,000,000 it's very difficult for us to see what would have come through with or without the joint venture. So can you elaborate a little bit about what type of business is it that you've signed up that you don't think either Schlumberger or Cameron would have achieved on a standalone basis? And maybe the context of that, also comment a little bit on your rationale by investing in between Olav and Borje?
Well, Patrick, why don't you talk about Cameron? I'll cover Borje when you're done with that.
All right. So talking about some of the examples of revenue synergies, I think one of the obvious one is clearly the expanding of Cameron's geographical reach and using as such the Schlumberger existing footprint to reach a far larger customer base. What it also helps with is accelerating the implementation of the OneSubsea vision and plans as the cooperation between the companies is much closer today. And the first one of the first points we had brought up when we started talking about the opportunities was addressing the significant industry NPT issues related to BLPs. And here you have to really think about monitoring and how we could optimize the use in that side.
And then where we really focus and this might link into what you what we have discussed in the past when it comes to issues like rig of the future is creating an integrated drilling system, which would include all the service and service components that we offer and obviously then optimize the drilling process to such an extent that neither one of the single companies could achieve. That is really the main examples of revenue synergies.
Okay. Thanks, Patrick. So Ulla, let me just comment quickly on Borr then. So as you've seen, we made a $221,000,000 investment to take a 20% stake in this new company. Now there are several drivers behind investment, but the main driver is really to create a platform where we can collaborate closely with Borr to offer performance drilling offshore in shallow water.
We see this as, I think, a significant opportunity for Schlumberger and also for Bor to offer this new type of contract model, which is now heavily used on land but also now to be used in shallow water. Now just for the record, we're also open to work with other offshore drillers on similar type of performance contracts. Now back to Borr. Borr also a significant potential market for Cameron Drilling, both in terms of BOPs and drilling packages. And I would say lastly, looking at the company and the plans going forward, we also expect this to be a very good financial investment.
So this is the main rationale behind the investment.
Thank you.
Thank you, Ola.
Your next question comes from the line of Bill Herbert from Simmons. Please go ahead.
Thanks. Good morning. A question with regard to the incrementals that you generated in Lower 48 for frac and directional, 66%, I think for Q1. Patrick and Paul, just given the reactivation slate that you have in front of you, which seems to be pretty large, do you expect to generate either that level of a profit improvement over the course of this year or something within that neighborhood as you reactivate assets? The rest of the industry seems to have have difficulty with regard to revenue growth and converging that with profit improvement.
That hasn't happened. But in your case, it looks like the profit improvement was actually fairly considerable. And I'm just curious as to the relationship between reactivation, growth and margin improvement in light of that.
Well, that's a good question. So I will kind of split it into 2. When it comes to the one time cost of reactivating, yes, we will have some impact of that in the coming quarters. I incrementals that we're aiming for is going to be around this level, but we will be subject to some additional activation costs, I would say, in the probably in the second and the third quarter, which might, for those two quarters, basically deliver slightly lower incrementals overall. But the underlying, I'll say, drive we have between getting customer price increases and driving efficiency through scale as we reactivate and also managing our supply chain.
Underlying, we are aiming for those type of incrementals, which we have talked about for the company for the past couple of years. We will have some headwinds around onetime reactivation costs in the coming quarters. But beyond that, we are looking to manage at this level.
Okay. Thank you. And then secondly, with regard to Susquehinde and I guess the challenges that were reported in the media in recent weeks with regard to Ecuador. Can you update us with regard to what the forward path on that project looks like?
Yes, I can. And first of all, let me just clarify that we have several SPM projects in Ecuador, and the issues we are discussing are only pertaining to Sushafindi, right? Now just to give you some background on Sushafindi, we are now in the 5th successful year of operations here. And in between the ZSUJUFINDI consortium, which we lead, and Petro Amazonas, the state oil company, we have a very solid governance model, and we have annual budgets and annual production targets, which are set and agreed. And if you go back for these 5 years, we have exceeded all these production targets.
But what has happened is that with the lower oil price, this has led to cash flow challenges for Petro Amazonas. And they're also selling the oil that we produce from the Shushufinde field. So they're basically then falling behind on our payments, and this is really the key issue. So the proposal they have made to address the payment issues is not acceptable. And the situation over the Q1 has been further aggravated by the fact that they have imposed also production constraints on the output from the Fushufendi field.
So bottom line, we find this treatment of a partner who's made significant investments in the country somewhat disappointing. But still, we are very confident that the issues are going to be resolved either amicably by or by using the dispute resolution provisions that are in the contract. So that's kind of where we are. How long it's going to take to get it resolved? I can't say at this stage, but we are ready to sit down again and continue discussions.
And there have been a number of meetings and discussions over the past couple of months. We are ready to continue these discussions as soon as the imposed production constraints are lifted.
Okay. Thank you.
Your next question comes from the line of David Anderson from Barclays. Please go ahead. Thanks. Paul, I was wondering if
you could elaborate a little bit more on the weakness in the Middle East you saw this quarter. It was mentioned a few times in the release and I guess the pricing pressure wasn't a huge surprise, but the activity reduction did stand out to me. I was just wondering, is there a specific country that's experiencing this? And do you think this comes back later in the year? Or is it more of an adjustment to the drilling programs?
I was just wondering if you could just provide a little bit more color on the GCCs?
Yes. So I wouldn't use the word weakness, David. I think we have a slight decline in overall activity and revenue in the Middle East. Obviously, all the declines in Asia that weighs in on the overall MBA numbers. So I don't think there's anything that concerns us or worries us, should concern or worry you.
But we are not seeing any significant growth in the coming quarters. We are slightly down, like I said, sequentially on. This is more around, I would say, project mix, priorities and so forth, right? So I would say the underlying business in the Middle East is very resilient. There are strong and clear plans in each of the countries we operate here.
So no major worries. It's just that there is no, I would say, significant steady sequential growth either in Q1 or in the coming quarters, just a very steady resilient base business.
Okay. And just a follow-up would be on the offshore side. It seems like IOCs just don't seem eager to invest offshore. We haven't really seen much on the step out and tieback front. I was just wondering if you could maybe elaborate.
We talked in the past about maybe 5 to 8 big projects potentially be announced in the back part of the year. Has your views on kind of off shore kind of shifted a little bit? I was just wondering if you could help us kind of what is the roadmap you think to recovery in offshore? Or is this kind of getting pushed out maybe more into an 2018 event and when we start seeing some of these projects awarded?
Yes. We see the same as you, right? So there hasn't so far of significant FIDs, plans being discussed of things going on offshore. We if you look at jackup utilization, I think there is a slight uptick on it. So I think there's probably some early signs that we'll get some light work coming our way as an industry in the next couple of quarters.
But in terms of bigger projects, I agree with you, we haven't seen anything yet. So I think the main thing here is, I think, for the IOC customers to basically get a better medium term view on oil prices. And obviously, the positive uptick we've seen over the past couple of quarters is a gain. But I would assume that they're also looking for what the floor could be and maybe awaiting potentially what OPEC is going to do as we go into the May or the late May meeting around whether they extend the production cuts or not. So I agree with you.
I think the increase in offshore activity or shallow water activity is probably more going to be a second half of the year event leading into 2018. So with that, though, it's still very important for us as a company to at least secure the work that is coming out of projects that are being FID ed. And that's why we are very happy and excited, the fact that we landed the Madoff 2 project, for instance.
Great. Thank you, Paul.
Your next question comes from the line of Jim Wicklund from Credit Suisse. Please go ahead.
Good morning, guys.
Good morning, Jim.
Questions a lot of questions asked, so if I could drill down a little bit on North America. Patrick, you made comments about increased vertical participation in sand and additional sand mines. Can you tell us what you guys have done here in the last couple of quarters in terms of assuring capacity delivery and making a little extra money that goes to in North American sand?
Yes. I'll cover that, James. So what we have done, we basically started this vertical integration investment program towards the back end of 2014. And we have made a number of investments in sand mines, which are now starting to come on production. And in addition to that, we obviously also invested further into owning railcars, owning transloading facilities, and we also are now we have established our own trucking fleet where we are now hiring people into manning the trucks that we have bought and that we are currently buying.
So but just to be clear, we are not looking to vertically integrate 100% of our capacity need. We will do a fair bit of it, but we are still going to rely on the long term suppliers that we've had, both in the upturn as well as in future downturns. But we see the investments that we make into this with the rapid cost inflations that you typically see starting at this part of the cycle as a very good investment and a way to insulate ourselves from the massive supply chain inflation that we saw in the previous cycle, right? So it's going to be balancing between vertical integration 100% owned by us as well as using the supply chain capabilities that we have in the open
market. Okay. And my follow-up in kind of the same vein. You talked about the completion capacity that Weatherford brings in one SCIM. I know that 80% of the completions that we do in the U.
S, 80% what, excuse me, are plug and perf and sliding sleeve has been marginalized. I know that Weatherford does both plug and perf and sliding sleeve. What is Schlumberger's view of how those two technologies are going to develop? And is everything going to be plug and perf in a couple of years? Or can you talk about where that technology is going to go?
We don't really know a whole lot of details about the breakdown of Weatherford's business, more frankly of yours in that regard. So if you could give us some guidance on where the market is headed that would be appreciated.
Okay. Well, I think, first of all, the multistage completion offering that Weatherford brings into the JV and also combined with ours will have a complete range of both open hole and case stall solutions. Now if you look at where the market has been heading, I would say, in the last 3, 4, 5 years, it has been gradually moving more and more to plug and perf with less, I would say, open hole completions and sliding sleeves. There's still more of that type of completions in Canada compared to what you have in U. S.
Land. So I would say that we are basically set up for if the market continues the current trend towards more plug and perf and case toll or whether there is a reemergence of the open holder. I think we have a very good balance and we can go either way. I think it's going to come down to well performance, productivity and completion costs in terms of what's going to govern this, but we are set there well in either way, Jim.
Okay. Thank you guys very much.
Thank you.
Your next question comes from the line of Kurt Hallead with RBC. Please go ahead.
Hey, good afternoon. Where you are?
Good afternoon. Thank you very much. Good afternoon.
You're great. Hey, awesome information flow so far. So I figured I'd kind of get right to the crux of probably what a lot of people are trying to gauge from all this great information is. How do you feel about the progression on the Street numbers as we look out into the Q2?
Well, there the question came. That's good. Well, I would say that in the second quarter, first of all, at a high level, we are expecting to see a continuation of the main trends that we saw in the Q1. And then if you break out North America and International, for North America, we expect solid top line growth in Q2, and this is going to be driven again by what we saw in Q1 as well, further growth in the rig activity. For us, additional pricing and market share gains in our actual drilling and also, as we talked about earlier on the call, an acceleration of the capacity reactivation in fracking.
Now underlying incremental margins, as I commented on earlier, should be solid. But in Q2 and probably Q3 as well, they're going to be partly offset by some of these onetime start up costs that we are having. And also in the second quarter, we are, as usual, also footing the cost of the Canadian breakup. But overall, I would say strong top line growth and decent earnings growth for us in North America in the second quarter with some small headwinds around the start up costs. Internationally, as I said earlier, we have reached bottom in all markets.
But for the Q2, we only see at this stage flat underlying activity in Q2. So really, the only growth that we are going to see in the second quarter is going to be limited to the seasonal recovery in the North Sea, Russia and China. Now on the Cameron side, revenue is also expected to be more or less flat, where we are seeing solid growth in the short cycle businesses of surface and V and M, but this is going to be offset by the slowing decline now in the long cycle businesses of 1 Subsea and Drilling. So if you combine all of this, I believe there is sequential EPS growth of around 15% to 20% between Q1 and Q2 is a reasonable expectation.
Great. That's fantastic. Now based on your commentary about pricing pressures in the international market and it sounded like a recovery still at hand in the second half of the year internationally then it would I guess we can assume that the Q1 is going to be the low point for earnings of the year and then you'll get sequential growth throughout the year? Is that kind of how you see it setting up?
Yes. In principle, yes. I would say, like I said, the underlying activity internationally in Q2 isn't showing any great signs of improving, but we will have at least a seasonal recovery we are still seeing continued pricing pressure on new tenders. But at the same time, some of this we are looking to offset by our unsustainable contract. We still have some of these contracts that we are looking to resolve either by shutting the contract down or by getting the pricing increases that we need in order to make this a viable business proposition for us.
So yes, I would say in principle, the Q1 should be the low end of earnings for the year in international market with still only limited growth in Q2 but more of an acceleration in the second half of the year.
Okay, great. Thank you. And then maybe a quick follow-up here just on your commentary about the investing alongside your customers and the YPF deal and board drilling and so on. So Paul, you guys have indicated in the past that all your SPM investments have effectively been margin and returns accretive in aggregate compared to the corporate average. As you're making more and more investments in here, like what is the criteria, right?
How should we think about it? If you're going to invest, say, dollars 200,000,000 in bore drilling, how do we think about that in terms of incremental revenue or incremental profitability? Could you give us just some general gauge on how to assess that?
Well, the investment in the equity of ore drilling should bring a return on investment or capital employed, which is accretive to the company. That's why we made the company that's why we made the investment. And for future investments, that's again what we are going to look for when we spend cash on these type of investments. Hand in hand with that is also obviously the revenue opportunity that this brings. And with this, like I said, we're going to focus in on 2 things.
With that big fleet of jackups, this is a very good market potential for Cameron Drilling. But even more importantly, what we are really driving at here is to introduce performance drilling in the offshore market. So this is just one example. But when we make these investments, there will be synergies and business opportunities and revenue opportunities associated with them. The investments will stand on our own 2 feet, and we aim for them to be accretive to our return on capital employed for the company.
But they all need to be associated with the business opportunities for the rest of the company.
Okay. That's great. I appreciate that color. Thanks so much.
Thank you.
And your final question today comes from the line of wakar Syed from Goldman Sachs. Please go ahead.
Thank you for taking my question. My question relates to Cameron, some of the recent projects that you've entered into Mad Dog and others. How should we think about long term margins for these new projects versus what OneSubsea has been generating before?
Well, obviously, if you look at the commercial environment at this stage versus the commercial environment 3 years ago when the project that we are currently executing were bid, it's obviously more challenging. So to think that we can, I would say, achieve the exactly same margins on these latest projects that we are currently delivering on 1 Subsea, that might be challenging? But I would say for all the bids that we are making and the contracts that we ultimately secure, we have very clear return expectations on them, somewhat lower than what the OneSubsea is currently operating at, but we are still looking for this to be a very good business for us going forward. And continuous improvement for instance, OneSubsea is showing and the plans they have in place going forward as well to even further improve the way they execute projects, there should also be opportunities for the projects we bid and secure at these days to have potentially margin upsides as we go forward. So it's a tough business, but I would say I'm very pleased with how OneSubsea is navigating the commercial environment and also executing and delivering on the projects that we take on.
And then just my follow-up question on integration related expenses, when do you think you're going to stop reporting those?
We as we said earlier, we will continue to be reporting them announcing them separately for the year. But starting next year, we will drop this. This is normally our style. For the 1st year after the acquisition, we continue to incur them and announce them. And from there on, they become part of our ongoing run rate of cost.
Thank you very much.
Thank you, Wacker. So just before we close this morning, I'd like to summarize the 3 most important points that we've discussed. First, the only region in the world showing clear signs of increased E and P investments E and P investments in 2017 is North America land, where activity has been growing for the last few quarters. And in line with our profitable growth strategy, we have begun redeploying our idle capacity in pressure pumping, and we will accelerate this in the Q2. Through the organic and inorganic investments we've made in our North America land business over the past 7 years, we are very well positioned to take a leading role in serving our customers as they expand their activity in the coming year.
2nd, the performance of our international areas in the Q1 confirmed our belief that activity has now reached bottom in all regions. And although we see positive signs in many countries, both on land and offshore, we expect only moderate sequential growth over the coming quarters. The slow speed of recovery together with the lingering pricing pressure means that we expect another challenging year in the international markets in 2017 before a clearer acceleration of activity in 2018. And 3rd, as we continue to carefully navigate the current industry landscape, we remain confident and optimistic about the future of Schlumberger, knowing very well that beyond the current market challenges lies a wealth of opportunity for the industry players that are ready to think new and to add new. Thank you very much for listening in.
Ladies and gentlemen, that does conclude your conference for today.