Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Simon Ferrant.
Please go ahead.
Thank you. Good morning, and welcome to
the Summer Jay Limited 4th quarter and full year 2015 results call. Today's call is being hosted from Houston. Following the call are Paul Kipsgaard, Chairman and Chief Executive Officer and Simon Iatt, Chief Financial Officer. Our prepared comments will be provided by Simon and Paul. Simon will first review the financial results and then Paul will discuss the operational and technical highlights.
However, before we begin with the opening remarks, I would like to remind the participants that some of the statements we will be making today are forward looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10 ks 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 Q4 press release, which is on our website.
We welcome your questions after the prepared statements. I'll now turn the call over to Simon.
Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. 4th quarter earnings per share, excluding charges and credits, was $0.65 This represents decreases of $0.13 sequentially and $0.85 when compared to the same quarter last year. During the quarter, we recorded $2,100,000,000 of pretax charges. These charges are the direct result of the very challenging market conditions we are operating in and include severance, impairment and restructuring charges.
The asset impairment charges largely relate to our North America business, which as you know, has been the hardest hit during this downturn. All of these charges are described in detail in our earnings press release. Our 4th quarter revenue of $7,700,000,000 decreased 9% sequentially. Approximately 1 third of the revenue decline was attributable to pricing. Despite the very challenging environment, both in terms of pricing and activity, pretax operating margins only declined by 132 basis points sequentially to 16.6%.
This was due to continued strong and proactive cost management across the entire organization. Sequential highlights by product group were as follows: 4th quarter Reservoir Characterization revenue of $2,200,000,000 decreased 7% sequentially, while margin decreased 230 basis points to 24.2%. These declines were due to decreases in exploration spending that largely impacted Wildland internationally. We also did not see the year end surge in multiclient and software sales that we typically experience in Q4. Drilling Group revenue of $3,000,000,000 decreased 8%, primarily due to pricing pressure and activity declines internationally that have mostly affected Drilling and Measurement and MI Swaco.
As a result of strong cost management, Drilling Group margins only declined 173 basis points to 16.7%. Production in group revenue of $2,700,000,000 decreased 10%, primarily due to the continued North America. Production in group margins were essentially flat at 11.3% as SPM projects and higher earnings from our investment in 1 subsea compensated for the effects of the lower activity and pricing pressure. Now turning to Schlumberger as a whole. The effective tax rate excluding charges and credits was 18.2% in the 4th quarter.
This was lower than the previous quarter by about 2 percentage points. This decrease was largely due to the geographic mix of earnings between North America and the rest of the world as well the favorable resolution of certain tax contingencies and an R and D credit during the quarter. Excluding the impact of Tamarin, we expect the ETR in 2016 to be around 20%. On a pro form a basis, we expect the combined company ETR to be in the $800,000,000 of cash flow from operations. During the Q4, we generated $2,200,000,000 of cash flow from operation.
This is all despite making severance payments of approximately $800,000,000 during 20.15 $200,000,000 during the Q4. In light of our strong cash flow generation, yesterday, our Board of Directors approved a new $10,000,000,000 share buyback program. This new program will be effective once the remaining $1,400,000,000 of authorization under the current program is exhausted. During the quarter, our net debt deteriorated to $343,000,000
to 5,500,000,000
dollars as we continue to invest in future revenue streams. During the Q4, we spent $627,000,000 on CapEx and invested approximately $600,000,000 in SBM projects and $150,000,000 in MultiClient projects. Full year 2016 CapEx, excluding MultiClient and SPM investments, is expected to be around $2,400,000,000 During the quarter, we spent $398,000,000 to repurchase 5,400,000 shares at an average price of 73.8 $6 This is despite being prohibited under the securities laws from repurchasing our shares for about 1 month prior to the Cameron Shareholder Board. Let me take this opportunity to talk a little bit about the Cameron transaction. In order to ensure an efficient capital structure within the group, Strongbridge Holdings Corporation, our principal U.
S. Subsidiary that we also refer to as SFC, is the legal entity that will acquire
Canon. FHC will acquire
approximately 137,000,000 shares of common stock from its parent and transfer these shares to 100 shareholders. SSC will also take cash of approximately $2,800,000,000 in connection with this transaction. During the Q4, SFC issued $6,000,000,000 of notes. These notes have a weighted average interest rate of approximately 3 point 15% and have maturities ranging from 2017 to 2025. SSC will use the proceeds from this debt issuance to partially fund the purchase of the 137,000,000 shares from the parent company, SSC will then use a combination of cash on hand and commercial paper borrowings to finance the difference between the proceeds received from the issuance of these notes and the cash required to complete the Cameron merger.
As a result of this debt issuance, Schlumberger's pre tax interest expense will increase approximately $40,000,000 in Q1 as compared to Q4. As we close the Cameron transaction, we will begin to incur merger and integration related costs. These will include transaction costs, the cost of the integration team, one off purchase accounting adjustment as well as one off cost to achieve synergies. These amounts will be most significant in the quarter the transaction closes and the quarters immediately following the merger. We will separately call out these charges for you as are incurred.
And now I will turn the conference over to Paul.
Thank you, Simon, and good morning, everyone. Negative market sentiments intensified in the Q4 with global overproduction of oil continuing, extending the various trend in global oil inventories and causing a further fall in oil prices, which reached a 12 year low in December. The worsening market conditions added further pressure to the deep financial crisis throughout the oil and gas value chain and prompted operators to make further cuts to the already low E and P investment levels. For many of our customers, available cash and annual budgets were exhausted well before the halfway point of the Q4, leading to unscheduled and abrupt activity cancellations, creating an operating environment that is increasingly complex to navigate and where the traditional year end product and multi client seismic sales were largely muted. As planned, we input release of 10,000 employees as well as further streamlining of our overhead infrastructure and asset base.
In spite of these significant structural adjustments, our overall 4th quarter results were in some areas impacted by events that were either outside of our control or where we chose to maintain cost and resource levels, pending available space and that we are well positioned to continue to deliver solid financial results in both the Q1 and throughout 2016, which will clearly be another very challenging year for our industry. Looking closer at our 4th quarter results, global revenue fell 9% sequentially, driven by a continuing decline in rig activity and persistent pricing pressure throughout our global operations, together with a broad range of activity disruptions, project delays and cancellations. In North America, revenue was down 14% sequentially, which is in line with the reduction in the drilling rig count and driven by exhausted customer budgets and cash flows together with the extended holiday period. Our North American pre tax operating margins remained very resilient at 7.1%, driven by proactive cost and resource management, excellent performance from our supply chain and distribution organization, strong execution and new technology sales from our operations, all of which were further supported by our transformation program. On land in both the U.
S. And Canada, the weakening activity resulted in additional commercial pressure for all product lines and in particular in pressure pumping where pricing levels dropped further into unsustainable territory for both operating margins and cash flow. We also saw continued pricing pressure and activity reductions in the U. S. Gulf of Mexico as the drilling rig count dropped by another 2% sequentially and where year end multiclient seismic sales were largely muted.
Turning to the international markets, revenue was 6% lower sequentially as customer budget cuts, the start of the seasonal winter slowdown the absence of the traditional year end product and multiclient seismic sales all impacted results. Our 4th quarter international operating margins dropped to 22%, driven by further pricing pressure and unfavorable revenue mix and a significant impact of activity disruptions, particularly in the Middle East and Asia. In Latin America, revenue declined 1% sequentially with pre tax operating margins improving by 2 29 basis points to 23%. In terms of revenue, solid activity in Mexico and Ecuador was offset by further budget reductions in Colombia and Brazil, while the weakening of the peso had a negative impact in our 4th quarter revenue in Argentina. Margins remained resilient across the area as the cost and resource based adjustments made during the previous quarter took full effect and as we continue to leverage our transformation program.
This combination more than offset the persistent pricing pressure we saw throughout our customer base. In Europe, CIS and Africa, revenue fell 9% sequentially, while pre tax operating margins dropped 138 basis points to 20.8%. The drop in revenue was led by Russia and Central Asia, where a further weakening of the ruble, the start of the seasonal winter slowdown in Russia and a noticeable reduction in activity throughout the Caspian region all impacted the results. In Europe, activity in Norway was resilient, but this was more than offset by a significant reduction in Continental Europe and the UK, while in Africa solid activity in Nigeria and Algeria was not enough to offset the further weakening in Central and West Africa. In the Middle East and Asia, revenue declined by 5% sequentially, while pre tax operating margins decreased by 448 basis points to 22.5%.
The sequential drop in revenue was led by where we saw a general weakening in activity throughout the region, which was most pronounced in Malaysia and Australia, where projects ended and customer budgets were cut further. 4th quarter revenue was also down in the Middle East, where solid activity in Kuwait and Iraq was more than offset by reductions in the rest of the region. In terms of operating margins, pricing pressure across the area was only partly offset by adjustments to our cost and resource base and where project cancellations, delayed start up of new projects and activity disruptions due to 2015 budget limitations all contributed to the sequential reduction in operating margins. Our 4th quarter results have shown that we can navigate the challenging operating environment better than most and produce solid financial results while maintaining the bandwidth to pursue and capitalize on opportunities that strengthen the competitive position of the company. So as we prepare for another very challenging year, I would like to summarize what we have delivered in 2015 as this sets a very good benchmark for our expectations and ambitions for the year to come.
Looking first at the top line, full year revenue dropped by 27% in 2015, driven by a 39% drop in North America, where we have further strengthened our market position in spite of our decision not to pursue work that falls outside of our financial return requirements. Our international revenue fell by 21% in 2015, which is comparable to the drop in E and P investments. Included in this revenue drop is both the impact of our higher leverage towards the exploration, de quarter and seismic markets, where E and P investments saw significantly higher reductions and also included the impact of the strong dollar against a number of foreign currencies. These revenue mix headwinds are fully absorbed in our results at this stage, which makes our international business coil spring, which we will capitalize on when E and P investments and customer activity starts recovering. In addition to this, we have in the past year significantly increased our tender win rate, which further strengthens our very solid contracts portfolio and puts us in a great position to increase market share going forward.
Looking at our 2015 profitability, full year global operating margins fell by only 342 basis points to 18.4% as we maintain our wide margin lead in the international markets and as we now are also approaching a similar margin gap in North America. We have managed to protect our margins due to a very proactive approach to cost and resource management and by further accelerating our corporate transformation program. Together these actions have delivered decremental margins of 31% in 2015, which is about half the level seen in previous downturns. Turning next to cash. Our free cash flow in 2015 was about $5,000,000,000 which represents net income conversion rate of 114%.
This includes CapEx of 2,400,000,000 dollars which is now down to 59 percent of D and A, in addition to investments of $1,400,000,000 in future revenue streams in the areas of FPM and multiclient seismic. Our ability to generate free cash in this part of the cycle is unmatched in the oilfield services industry and gives us a unique ability to capitalize on the significant business opportunities that the current market conditions present. From our free cash flow, we have returned $4,600,000,000 of cash to our shareholders through $2,400,000,000 in dividend payments and $2,200,000,000 worth of stock buybacks. In addition to this, we have spent about $500,000,000 on M and A, where we continue to target smaller disruptive technology companies that we can integrate into our existing and future workflows and deploy through our extensive global organization. The strength of our free cash flow can also be seen from our net debt level, which has only increased by $160,000,000 on the full year basis, driven by the financial performance I have just described.
With respect to the pending Cameron transaction, the integration plans are now largely completed and we are fully ready for day 1. We still expect to close the transaction during the Q1 of 2016 and we have already received antitrust approvals from the U. S, Canada, Russia
and Brazil.
78% of stock provides us with the necessary insulation from the ongoing market turmoil. And during the Q4, we also secured a required financing for our U. S. Entity that will make the acquisition. Turning next to people.
We have in the past year unfortunately had to release more than 34,000 employees, which represents an unprecedented number for the company and where we all have been impacted as we have gone through the disheartening process of letting colleagues and friends go in all parts of the company. I am at this stage optimistic that we have completed the workforce reductions required in this downturn, And I look forward to be able to shift focus throughout our organization from the negative sentiments of the past year towards a brighter future as we work through the remaining challenges of this downturn. In terms of R and D, we did reduce investment levels in 15, but we were still able to protect our capabilities and ensure the progress of all our key projects. In the past year, we made solid advances on several new technology fronts through a combination of organic and inorganic efforts and we look forward to update you further on this in our external communications in the coming year. And lastly, in 2015, we significantly accelerated our corporate transformation program, stepping up both investment levels and the detailed engagement of our global organization.
As part of this, we prepared a comprehensive and granular 3 year transformation plan covering each of our 600 business units with specific deliverables and business impact goals set at all levels in our organization. In parallel with this, we have delivered noticeable cost savings and efficiency gains that can be seen in our 2016 financial results, together with a 23% reduction in our customer NPT rate, which is the largest annual improvement we have ever achieved. In summary, while 2015 has been an extremely challenging year for the industry and for Schlumberger, we have clearly demonstrated our ability to navigate the complex landscape and capitalize on the opportunities the current business environment presents, and we are fully prepared to repeat these efforts and achievements in 2016. So while we all look forward to a recovery in the oil price and the market conditions in our industry, it is evident that the longer the current market environment continues, the stronger we will emerge as a company relative to our competitors when the off turn ultimately comes. Turning next to the market outlook, we still believe that the underlying balance of supply and demand continues to tighten, driven by both solid growth in demand and by weakening supply as the dramatic cuts in E and P investments are starting to take effect.
In North America, shale oil production is declining more or less as we expected and was in December below the levels from 1 year ago. The apparent resilience in production outside of OPEC and North America is in many cases driven by producers opening the taps wide open to maximize cash flow, which also means that we will likely see higher decline rates after these short term actions are exhausted. So while the global oil market is still being weighed down by fares of reduced growth in Chinese demand, the magnitude of additional Iranian exports and the continued various trend in global oil inventories, we still expect the positive movement in oil prices during 20 16 with specific timing being a function of the shape of the non OpEx decline rates. This means that the market outlook for oilfield services in the coming quarters will remain challenging as the pressure on activity and service pricing is set to continue. It also means that 2016 E and P investment levels will fall for a second successive year and that any significant recovery in our activity levels will be a 2017 event.
Still at Schlumberger, we remain are currently creating a considerable leverage that will enable us to increase revenue market share, deliver superior earnings and margins and continue to generate unmatched levels of free cash flow. Thank you very much. We will now open for questions.
Your first question comes from the line of Ola Slower from Morgan Stanley. Please go ahead.
Thank you very much and congrats with another great relatively great year with free cash flow and solid performance.
Thank you, Ole.
When it comes to the macro outlook that you just painted, how should we think about the overall oilfield macro cycle and relative to the internal momentum that you're creating within Schlumberger with respect to the ongoing transformation process. I presume that a lot of the lowest hanging fruit has been picked on the transformation process. So if you could just bring us up to speed about how we should think about earnings projections over the next couple of quarters, several quarters with respect to those two kind of factors?
Well, if you look at our earnings trajectory in the coming quarters, it is obviously largely going to be driven by what continues to happen in the market around us in terms of the spend from our customers. But if you look at our ability to, I would say, counter the significant pricing pressure as well as the activity reductions, the transformation is indeed playing a significant role. I think it's fair to say, like you say, that a lot of the low hanging fruits we have already picked. But we are now getting into the deeper part of the transformation where we are making significant structural changes to how we go about doing our work and conducting our business. And this is basically laid out in the 3 year plan that we worked on in 2015, which is going to take us from 2016 all the way out to 2019.
And here we are broken down all the initiatives into specific actions and plans and targets for all the various business units we have around the world. And I think with this, I would say, formalized way of driving performance, I think we should look to put even more impact into our results in the coming 3 years than what you've seen in the previous years.
Okay. I'll take that. With respect to the free cash flow that you generated and clearly having a strong balance sheet today is I would imagine worth an awful lot when it comes to the bargaining power that you have around the role. So how should we think about the opportunity around generating that or putting that to work as internal CapEx versus SPM, which I saw you just picked up a bit now again in the Q4 and versus acquisitions?
Well, first of all, we continue to have a very strong focus on generating the cash. And I think 20 15 was another solid year. It was not perfect. There were several things that I think we could have done better, but $5,000,000,000 of free cash flow in this environment is not bad. Now how we go about spending the cash, there's really no change to the philosophy that we've had in any part of the cycle.
The first thing we look to is to reinvest into the business and that is CapEx for the service and product segments that we have. In 2016, we are going to keep CapEx flat with 2015 and that you may ask why. If you look at the base business, it is indeed coming down, but we have certain new activities that we are looking to invest into, in particular the land drilling market for the rig of the future. And there is a few other strategic investments that we are looking to make when it comes to our internal CapEx. In addition to this, we continue to invest in future revenue streams, both MultiClient Seismic, where we have a significant program going on in Mexico.
And at this stage of the cycle, there are also significant SPM opportunities, and we have really stepped up our efforts in screening and evaluating these opportunities, and we will capitalize on them when they meet our internal requirements. Beyond this, we review dividends annually. We are not increasing dividends this year. And then beyond that, for the coming year, it's going to be a balancing opportunities we have on M and A and the opportunities we have to buy back our stock. That is how we are planning to spend the cash.
Simon, do you want
to add something?
No. I mean, you've summarized it very well. I guess 2016 is going to be marked by the big event of integrating Cameron. And there is a lot of transaction, as I described. We borrowed 6 $1,000,000,000 and we will be paying for the acquisition.
We're also issuing shares, but we have the $10,000,000,000 in new program that we will commence as soon as we exhaust the previous one.
Thank you very much.
Your next question comes from the line of James West from Evercore. Please go ahead.
Hey, good morning, Paul.
Good morning.
And congratulations also on just excellent execution really all year for you and your management team and all your employees, especially in the Q4.
Thank you very much.
I wanted
to follow-up a little bit on what you were talking about there and the second part of Ola's question about really the SPM business. It seems like I did notice the pickup in the Q4 that's probably project timing. But are you at this point, are you chasing more projects? Are you getting more inbounds? And you talked a little bit about or you mentioned that your screening process had been updated or upgraded.
Could you talk a little bit more about that and how you see this playing out over the next couple of quarters,
couple of years? Yes. We are seeing significantly more SPM opportunities at this stage of the cycle given our ability to generate cash and given the status of our balance sheet. So we haven't changed our screening process, but we have put more resources into it, so we can process more of these opportunities. And we are prepared to step up our investments in SBM.
As you noted, there was a step up in Q4 and it might not be at that level every quarter going forward, but I would say that going into 2016, SPM is an area that we are interested in investing furthering. It provides us with solid long term contracts. It provides us with the ability to deploy our entire capability set and generate good returns and good cash for the company. So it's a very interesting opportunity set for us that we are actively pursuing.
Okay. And then maybe an unrelated follow-up. The press release was littered with technology success stories, and it seems like the technology adoption rate has picked up significantly during the downturn. I know you've given out numbers before on sales percentage of sales on new technologies. Could you give us an update there on what you're seeing on the adoption rate and if that percentage has improved?
Yes. During this downturn, the level of new technology sales, which is basically technologies that we have commercialized in the past 5 years, is at a significantly higher level than what we've seen in previous downturns. The new technology sales as a potential total revenue in 2015 is 24%, which is markedly higher than what we saw in the previous downturn in 2008, 2009. This is partly down to the broad range of technologies that we have and the fact that a number of them are focused on driving, I would say, cost and efficiency for our customers. And these type of technologies are as valid in terms of being bought and being operated during the downturn as they are in the upturn.
So strong sales, and we continue to commercialize new technologies during 2015. So this obviously has had a very good impact on our financial performance in the past year, and I expect it to continue to do that in the year to
come. Perfect. Thanks, Paul.
Thank you.
Your next question comes from the line of Angie Sedita from UBS. Please go ahead.
Thanks. Good morning, guys. Good morning. I echo the set on a very solid quarter for the quarter and for the year given business conditions, so well done. Maybe, Paul, we can go a little bit more granular on thoughts and obviously 2016 is a question mark, but thoughts into Q1 on a geo market basis and walk us through where you're thinking on the revenue and margin sign, if you will?
Well, I'm not going to review detail by area, Andrew, what I think we're going to do. If you're looking for an indication of how we what we plan for and how we see Q1 shaping up, it's going to be another very challenging quarter, from an activity and a pricing standpoint. The recent new lows in oil prices is going to be reflected in lower rig count and more activity disruptions, we believe. This is going to be continued budget pressure throughout the first half from all customer groups, where they now have to operate within cash flow. In addition, we're going to see the winter slowdown in the Northern Hemisphere in Q1, which is going to be another activity headwind, right?
So I would say that rather than going into margins and revenue, if we focus in on EPS, I would say that the current Q1 EPS consensus is probably a best case scenario from what we can see today in terms of Q1 earnings.
Okay, okay. That's helpful. And then on Cameron, I know there's only so much you can say at this point, but if you have any further color you can talk about on the opportunity set within Cameron as you move forward, but also talk us through or walk us through the integration of Cameron within Schlumberger, both operationally and how it will show up in the financials?
Right. So on the status of the integration, we are largely ready with our integration plans. We've had a sizable team made up of both Cameron and Plummers employees working diligently on preparing these plans since we announced the transaction back in August. We reviewed all the plans in December and they have been approved and we are basically ready for day 1 at this stage. Closing is now basically pending a few more countries in terms of antitrust approvals and we do expect that we will close during the Q1.
In terms of synergies, the detailed work that we've done has really confirmed the numbers that we put up at the announcement. Lots of opportunities, which initially are going to be cost focused, but this transaction is largely a revenue transaction and we are very excited about what we can do by joining the R and D forces of the 2 companies and creating the integrated drilling and production systems that we have laid out earlier. In terms of integrating Cameron as an organization, it will actually be a fairly simple task, because Cameron as it is today will become the 4th product group of Schlumberger together with characterization, drilling and production. And Scott Rowe, the CEO of Cameron is going to join us and continue to head up Cameron in its present form. So the main thing we will focus in, in terms of integration initially is going to be to coordinate the customer interface and to streamline the back office and also then more for merge over time the R and D organization.
So it is a relatively simple integration because Cameron will slide in, in its present form into Schlumberger as a 4th group.
Great. Fair enough. Thanks. I'll turn it over.
Your next question comes from the line of Kurt Hallead from RBC Capital Markets. Please go ahead. Hey, good morning.
Good morning.
Morning. Just had a couple of quick follow-up questions and some discussions with investors around the SPM dynamic. And in that context, Paul, just given the decline in oil prices year to date and the write down on the project in Colombia, there's some questions out there just relating to potential incremental risk around existing SPM projects. And maybe you could put that into the context of maybe how you assess risk on varying projects and maybe how you look at it from a portfolio approach?
Right. So if you want to let's start with the write down we did in Colombia, which is really an isolated event. This is a project that's been going on in between 10 15 years. We're in the later years of the project. And it's really the only project at this stage in our portfolio that has our compensation directly linked to the oil price.
So with only a few years left the oil price being at a very low level, this is what caused the impairment of the remaining balance we have. If you look at the rest of the portfolio and the new contracts that we've entered into in recent years, these are all fee per barrel type of contracts, where obviously the project economics are linked to the oil price, but where our compensation is basically an isolated fee per barrel setup. So as with any of these projects, they do carry a higher risk than what our base business does. But we are, I would say, very comfortable with being able to, I would say, identify and manage these risks. And with the screening process we have, with the internal approval process that we have, I'm very comfortable with the set that we have in terms of the projects that we take on and that these all will generate very good returns for the company.
And I would also say that the project in Colombia overall provided also very good returns and good cash flow throughout the life of the project. Great. That's great color.
And then maybe if I could follow-up just on the margin front. If I understand correctly, you guys are trying to manage your business such that you can maintain a 20% margin maybe internationally here at the trough and 5% in the North American market. I know a lot of that is being driven by your transformation process. Given the drop that we've had recently in oil price and the impact that will have on E and P spend drop in 2016, how much harder do you think it's going to be to maybe maintain those targets?
But obviously, fighting the margin pressure with both dramatic reductions in activity and significant pricing pressure is tough. We have the added tool in our toolkit, which is the transformation on top of a very, very solid management team that is excellent at executing. But it's tough to maintain margins at the levels that we currently see. I'm very pleased with how the North America team has managed and navigated in the past year and 7.1% in Q4, I think, is excellent. It's going to be tough to continue to keep it at these levels, but with the energy and the focus our team on the ground in North America has, I'm optimistic that we will continue to significantly outperform the rest of the field there.
Now if you look at the international margins, they are actually holding up reasonably well. We are now 6 quarters into the downturn internationally, and we are only 253 basis points down, which is basically half what we saw in 2,009 in the last downturn. But it's a very dynamic environment, and there's always going to be quarterly variations driven by unplanned events. And if you look at Lam for an example, we had a big drop in Q3, and we managed to claw that back in Q4 as some of the actions that we put in place in the Q3 took full effect. Now in Q4, we did see a significant impact on our EMEA margins and part of this pricing and part of it is permanent activity reduction, but there is also a significant part which is temporary, which is down to delays and stoppages.
And if you look at the team we have on the ground, they have a long list of actions in place to address what they can in order to offset some of these margin headwinds. So I can't promise you that we're going to get all the margins back in EMEA, but I would say that the EMEA team is clearly unhappy having been surpassed by the Lam team at the most profitable area. So I really look forward to the internal competition between these two.
That's great color. Thanks a lot, Paul. Thanks.
Your next question comes from the line of Michael Lamont from Guggenheim. Please go ahead. Michael, your line is open. Check your mute button.
Great. Thank you. Good morning, guys.
Good morning, Brian. Paul, you mentioned a couple of times the 3 year transformation plan, and I imagine you'll go into more detail in April. But can you just broad stroke the key categories that were identified as new areas of opportunity in the 3 year plan?
Yes. There's no new areas that we have identified. What we're doing with the 3 year plan is that in the past couple of years, there's been a lot of work done the central team, formulate the detailed concepts and principles of how we want to change how we operate our business. And these initiatives and these concepts are all now fully mature, and they come together with a change management process that they have also put a lot of effort into designing. And what we're doing with the 3 year plan is basically formalizing how each of these initiatives will now be translated into actions and results throughout the global organization.
So in the past couple of years, we have been pursuing the low hanging fruit. We are now going into the structural changes of our business that would also provide an additional set of savings and improvements in the years to come. But the focus is around asset and inventory management, it's maintenance and repairs, transportation distribution, supply chain, back office, quality assurance. It's all the things that we've talked about in previous years, but it's now being formalized and itemized down to the business unit levels. We have around 600 business units down to the country level, and they all now have specific actions and targets on each of these line items to implement the changes that we have been preparing centrally for the past few years.
Okay. And as we think about the financial impact, is order of magnitude similar to the low hanging fruit, it's just the timing in terms of the flow through of the impact may take a little longer? How do we think about the implications on the financials?
Well, I would say the impact of the transformation going forward will at least be as big as it's been in previous year and probably even higher in the years come as we really start changing fundamental parts of how we conduct business, right. So this is not decreasing, I would say it's stable to increasing in terms of impact going forward.
Okay. So low hanging fruit doesn't mean expect less going forward? That's No, absolutely not. Great, great. All right.
Thanks. I'll turn
it back.
Thank you.
Your next question comes from the line of Jim Wicklund from Credit Suisse. Please go ahead.
Good morning, guys.
Good morning, Jim.
Obviously, the Cameron Schlumberger 1 Subsea JV has been a big success that led to marriage. And now you're doing an MOU with Golar and looking at gas monetization solutions. Can you talk about how far the breadth how far this takes you? The Schlumberger Octopus grabs another segment of business.
Can you
talk a little bit about where this should go and why you did it?
Well, this is an MoU where we've had we had good discussions about the concepts of how we can combine some of our capabilities and efforts with the capabilities that Golar has. And this is something that we will continue to work with them going forward. It is an interesting, I would say, combination. And I don't have a lot of comments beyond this at this stage other than that it is a partnership that we are looking to establish and to grow going forward.
Okay. And just again, breadth, you've got now Subsea, you've got equipment, you're doing gas monetization. Kurt and James asked about the SPM business. You had said before in previous conference calls that you'd embrace a number of different business models. Is this the fruition
of those kind of statements?
I would say it is. But with all of this, it doesn't change the fact that the main part of our business is, I would say, oilfield services and products and equipment. So we will continue to focus on leading each individual market that we continue that we participate in for individual products and services. But with the integration capabilities and with the ability we have to pursue different type of business models, we are also looking to combine all of these things like you indicate, Jim, to create more business opportunities for the company. So we are not pursuing only these.
We have a huge focus on making sure that we stand out and we continue to drive performance in the base business. But when you combine all of these things, there is a broad range of opportunities for us that we are also pursuing.
That's very helpful. And my follow-up, if I could, are we willing to take the chance and say that 'sixteen could be the bottom of the cycle? Or do you guys think today that 2017 will be worse than 2016?
Well, I think it's too early to say, Jim, but I don't currently think that 2017 is going to be worse. I think but with that said, I'm still not ready to say that we are dropping in twenty 16. We're focusing in on executing basically quarter by quarter. I'm still optimistic and I would hope that 20 16 is the drop, but I'm not ready to rule on it yet.
We'll keep our fingers crossed as well. Thanks, sir, very much.
Thank you.
Your next question comes from the line of Bill Herbert from Simmons and Company. Please go ahead.
Thank you. Good morning. Back to SPM, I'm curious with regard to the projects that you're seeing. Is there any change with regard to the kind of project that you're seeing now on a leading edge basis, more offshore versus onshore? And then moreover, with regard to as you evaluate these projects, recognizing that the fee per barrel on the one hand, there must be an embedded oil price assumed as you're looking at these projects in terms of threshold oil prices required for the NSE to commit capital if it is an NSE partner on the so can you talk about the mix of projects, how it's changed and embedded oil prices associated with the capital allocation?
Right. So on the projects, there is no shift in what the projects are. Mean, we are looking at a certain set of projects. These are relatively small compared to what our customers would be interested in. And they are generally late life fields where we can come in and try to change the decline curve and add reserves and production to the field in late life.
We are generally focused on land. And the only thing I would say is that the opportunities that have increased. There are more customers that are coming to us now that have these type of fields and are interested in doing these type of business models with us. So there's not a dramatic shift in the type of assets that we're looking at, but it's generally just more of them. And for the fields that we enter into contracts on, obviously, we will have to look at the total economics of the field for the lifetime of the contract, which is generally, I would say, at least 15 years.
So in that, it's obviously important that the total project is economical. And then the way we set up our contract is today generally on the fee per barrel, where we are, I would say, insulated against variations in oil price. That means that if it goes down, we don't get hit at all. But again, we are leaving the upside to our customers if oil prices are higher than what is in the assumption. So we have a very, I would say, solid process of evaluating this.
And like I said earlier in the call, we are actively pursuing these type of contracts where we can get the terms that we want contractually and where we are satisfied that the reservoir holds the upside both broad,
how plausibly broad, your broad, how plausibly broad your business model extends to. And that is, are you contemplating or evaluating anything on the clean technology front?
No, not at this stage. I mean, we continue to I mean, if you look at minimizing the environmental impact of what we do as a company and our carbon footprint, absolutely. We have several programs in place, both in terms of how we conduct business as well as how we develop new technologies on this. But in terms of venturing outside of our current space, which is oilfield services, there is no plans of doing that at this stage.
Okay. Thank you. Thank you.
Your next question comes from the line of David Anderson from Barclays. Please go ahead.
Great. Thank you. A question on kind of your Middle East, Asia Pac business. Obviously, margins came down a good bit this quarter, a lot going on behind the scenes.
I was wondering if you
can help me kind of sort out some of the dynamics behind there. You talked about some activity disruptions in the Middle East, there's pricing going on, Asia Pac is probably also down probably also getting hit pretty hard as well. Can you help us kind of understand some of those and how much of those kind of one time you think on quarter?
Yes. I tried to answer that earlier, David, in the call. And I would just say that, yes, MVA margins dropped a fair bit in Q4. But there are variations in terms of operations of activity that you will basically get some variations in the margins going forward. I gave Lama the example.
Now there is significant pricing pressure. There is lower activity in parts of MEA, but there were also some temporary aspects of what happened in the quarter with delays of big projects in terms of the start up where we had significant resources standing by and there were also some customers that stopped activity during the quarter because they were running out of annual budgets And these budgets are going to be replenished now in January, in which case we decided to carry the cost and the resources. So I cannot promise you that we will regain all the losses in Q4 in terms of margins, but lots of actions in place to try to repeat what we've done in Lam over the course of 2015.
So those operational disruptions, do you think a lot of those are going to come back in the Q1?
Some of them will. Yes. And some of the for the ones that will, we know which one they are, and those are the ones we carry the resources for. And for the ones that aren't, we also know what they are, in which case we have been cutting the resources.
And then on the pricing concessions part, you've been talking about you talked about last quarter as well. Is this on kind of new work that's being tendered or is this kind of pricing concessions on existing contracts?
It's a combination. When you tender for new work, you will need to assess what the going rate in the market is. And in some cases, you get the opportunity to hang on to the existing contracts or even extend them provided there are some concessions given, right? So this is a combination.
Okay. And with the transformation, does the transformation you think offset pricing over time largely?
Well, if you look at internationally in 2015, we have managed to offset internationally pricing pressure that we're seeing, yes. Your
next question comes from the line of Bill Sanchez from Howard Weil.
Thanks. Good morning.
Good morning.
Paul, I was hoping before we ended the call that perhaps you could just speak generally about customer expectations internationally in terms of CapEx for 2016. I mean, do you guys have a bottoms up view yet at this point in terms of the size of the decline we could see as we try to think about calibrating your overall top line international revenue declines potentially for 'sixteen?
Well, I mean, if you look at 2015, international spend was down about 20%. And then there's a range of surveys out now from 3rd parties. And the kind of average of consensus from these surveys is about, I would say, more than a 10% reduction in international spend. So if you go by these, then yes, it will be another challenging year. But also, think while we look at full year numbers, I think it's also important to keep in mind the, what, 5 or 6 quarter slide we have seen now in international E and P spend, where we have had a significant drop in our revenue from Q4 of 2014 down to Q4 of this year and into Q1 of 2016.
So while the year over year numbers for full year matters, I think it's also important to look at the quarter levels we have now, which is obviously significant down. And actually, if you do the Q1 revenue consensus for us based on what you guys as analysts have done, 4 times that is already 17% down overall in revenue for us. So in that sense, the current level of activity and spend is already way down on a full year basis going forward.
Okay. Thanks for that. I guess, Simon, one for you. Given the pending Cameron acquisition here in first quarter, is there any blackout period on Summerjay being able to buy back stock as we approach that close?
No, none. Actually, we are we will after the blackout because of the earnings, which is just in couple of days, we will be free to go back to the market. No non bill.
Okay. I'll turn it back. Thanks for the time.
Thank you.
And your final question today comes from the line of Dan Boyd from BMO Capital Markets. Please go ahead.
Hey, thanks guys. I have a question for Simon and more on the currency side as continuing there. It looks like you've done a really good job so far this year managing the currency risk. So I'd just like to understand, how do you manage the currency risk in SPM projects, especially as you ramp those? And then if you could just help us, you quantified the revenue impact from currency this year.
Can you help us with the international margin impact from how well you manage the currency?
Okay. Well, thanks. Last question. But let me just take over all the currency situation. As far as our international operation, overall, we have a natural hedge, which what it means is basically we match the revenue that we get in local currency.
It is in line with our local cost in local currencies. It varies between jurisdictions. So in some areas, we lose a bit on the currency, but then gains in other places compensate for it. In 2015, you've seen the numbers, we've lost a lot of revenue because of currency. And almost 20% of the reduction of revenue between 2014 to 2015 was currency, but actually did not impact the margin significantly.
So it is all international. Yes, there is a bit and we manage it. As I said, it is natural hedge. We prevent ourselves from taking more local currency than we consume locally for local cost. As far as SPM is concerned, normally most of our SPM projects actually are dollar based revenue wise.
And those that have local currency, they will basically reflect the same policy that I just mentioned to you that we don't take more than what we locally require for our cost and the 3rd party that it is also bigger in SPM project. So naturally, we are naturally hedged. Okay.
Yes. So that are you saying that your margins didn't benefit from the currency?
If your EBIT held up
this year, you could have a few 100 basis point benefit in your margin. Is that accurate?
No. Look, the currency big impact of the currency this last year was, 1, because of Venezuela, because we changed the currency rate, but otherwise did not impact us on the margins.
Okay. Thank you.
I'll turn it over to Paul now.
Thank you, Simon. So before we close this morning, I'd just like to summarize the 3 most important points that have discussed. First, the business environment in the oil industry weakened further in the Q4, leading to additional reductions in both activity and pricing levels and making 2015 the worst industry downturn since 1986. In spite of this, we delivered strong full year performance compared to previous downturns, generating $5,000,000,000 in free cash flow and returning $4,600,000,000 in cash to our shareholders through dividends and buybacks. In addition, we spent $500,000,000 on technology acquisitions that further broadened our portfolio and yet we increased our net debt by only $160,000,000 2nd, 2016 will be another challenging year during which we will aim to continue to deliver superior financial results in parallel with pursuing and capitalizing on the broad opportunity set the current market environment presents.
We remain constructive in our view on the market outlook for the medium term and continue to believe that the underlying weakening supply as the massive cuts in E and P investments take further effect and by the size of the annual supply replacement challenge. Lastly, we look forward to closing our merger with Cameron International during the Q1, where the integration planning is largely complete for day 1 and with antitrust approvals all progressing on track. We are excited about what the combination of our 2 companies will bring and look forward to joining forces with the more than 20,000 Cameron employees. Overall, we remain confident in our ability to continue to weather this downturn better than our surroundings through our global reach, the strength of our technology offering and the extent of our corporate transformation program. That concludes the call.
Thank you very much for attending.