Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger Q3 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions being given at that time. If you should require any operator assistance during today's call, please press star and then zero. As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Simon Farrant. Please go ahead, sir.
Thank you. Good morning, and welcome to the Schlumberger Limited Third Quarter 2015 Results Conference Call. Today's call is being hosted from New York following the Schlumberger Limited board meeting yesterday. Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer, and Simon Ayat, Chief Financial Officer. Our prepared comments will be provided by Simon and Paal. Simon will first review the financial results. Paal will discuss the operational and technical highlights. Before we begin with the opening remarks, I would 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 in the projected statements. I therefore refer you to our latest 10-K filing and other SEC filings. Our comments today may also include non-GAAP financial measures.
Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our third quarter press release, which is on our website. We welcome your questions after the prepared statement. I will turn the call over to Simon.
Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Third quarter earnings per share was $0.78. This represent decreases of $0.10 sequentially and $0.71 when compared to the same quarter last year. Our third quarter revenue of $8.5 billion decreased 6% sequentially. Almost 40% of the revenue decline was attributable to pricing. Despite the very challenging environment, both in terms of pricing and activity, pre-tax operating margins only declined by 101 basis points sequentially. This was due to the continued strong and proactive cost management across the entire organization. Sequential highlights by product group were as follows: Third quarter reservoir characterization revenue of $2.3 billion decreased 5% sequentially as decreases in exploration spending impacted both wireline and testing services internationally. Despite the revenue decline, pre-tax operating margins remained essentially flat at 26.3%.
Drilling group revenue of $3.3 billion decreased 7%, primarily due to pricing pressure and activity declines internationally that have mostly affected drilling and measurements and M-I SWACO. As a result of strong cost management, drilling group margins only declined 94 basis points to 18.6%. Production group revenue of $3 billion decreased 5% sequentially, while margins declined 173 basis points. These decreases were primarily driven by pricing and activity declines in well services. Turning to Schlumberger as a whole, the effective tax rate was 20% in the third quarter. This was lower than the previous quarter by about one percentage point due to the geographic mix of earnings between North America and the rest of the world, as well as the mix of earnings amongst the international geo markets. Our cash flow generation continues to be very strong.
During the third quarter, we generated $2.5 billion of cash flow from operations. During the first three quarters of 2015, we have generated $6.6 billion of cash flow from operations. This is all despite making severance payments of approximately $150 million during the third quarter and $600 million during the first nine months of the year. Net debt improved $400 million during the quarter to $5.2 billion. During the quarter, we spent $545 million to repurchase 6.9 million shares at an average price of $78.76. Subsequent to the announcement of our transaction with Cameron in August, we have been repurchasing the maximum number of shares allowable under the SEC's regulations. We filed our S-4 registration statement relating to the acquisition two weeks ago today.
It's worth highlighting that once the SEC declares our registration statement effective and the proxy statement is mailed, we will be prohibited under the securities laws from repurchasing our stock until the Cameron shareholder vote. We spent $590 million on CapEx during the third quarter. Full year 2015 CapEx, excluding multi-client and SPM investments, is still expected to be approximately $2.5 billion. Now I will turn the conference call over to Paal.
Thank you, Simon, good morning, everyone. Schlumberger third quarter revenue fell 6% sequentially, driven by a continuing decline in rig activity and persistent pricing pressure throughout our global operations. North America revenue fell 4% sequentially as we maintained focus on balancing margins and market share, while international revenue was 7% lower as customer budget cuts and service pricing erosion impacted results. Still in the midst of what may well turn out to be the most severe downturn in several decades, our operating margins were maintained at levels much higher than in previous downturns. In North America, pre-tax operating margins were held at 8.9%, in spite of an additional drop in activity and pricing, both offshore and on land. While international margins dropped to 23.7% as customer budget cuts, activity cancellations, and lower service pricing took further effect.
In the first nine months of 2015, year-over-year revenue has dropped 34% in North America and 18% internationally. We have delivered nine-month incremental operating margins of 34% in North America and 23% internationally, which represents a strong performance improvement over the 2009 downturn. We have delivered these results by proactively and decisively managing our cost and resource base, carefully navigating the commercial landscape with the aim of balancing margins and market share, and at the same time accelerating our internal transformation program. We also generated more than $1.7 billion in free cash flow in the third quarter, which represents a conversion rate of 170% of the quarter's earnings. Our ability to generate significant free cash flow, even in this part of the cycle, is a major competitive edge, which we actively use to pursue new business opportunities, as well as targeted M&A activity.
In terms of M&A, our main focus in recent months has been the proposed acquisition of Cameron, announced on August 26th, which will open up a significant growth opportunity for us as we look to establish the industry's first complete drilling and production systems, spanning both the surface and the subsurface. In addition, we also completed the acquisition of Houston-based T&T Engineering, which specializes in design of land rig systems, as well as Utah-based Novatek, which is a leader in the field of synthetic diamond innovation. We also signed a letter of intent for a joint venture with a part of the Bauer Group from Germany in a further evolution of our Land Rig of the Future strategy. Finally, we entered into an agreement with IBM to jointly provide integrated production optimization services, combining our production software platform with IBM's enterprise asset management services in an end-to-end offering.
Looking at our results on a geographical basis, North American revenue decreased 4% sequentially, a figure considerably less than the 27% sequential decrease seen in the second quarter, and better than the 7% drop in the average horizontal rig count. On land, the revenue drop was driven by lower hydraulic fracturing activity and additional pricing pressure for both products and services. In the Gulf of Mexico, revenue declined on lower multi-client seismic sales, exploration rigs transferring to drilling and completion activities, as well as pricing concessions, which were partly offset by higher new technology sales. In Western Canada, rig count almost doubled sequentially following the early spring breakup, but was still down by roughly 52% year-over-year.
In spite of these headwinds, operating margins in North America decreased by only 136 basis points sequentially to 8.9%. This strong performance is a direct result of our proactive approach to cost and resource management, the growing effects of our transformation program, strong new technology sales, and efficient supply chain management. As service pricing in U.S. land fell further in the third quarter, we continued our approach of concentrating activity in core areas and for key customers while proceeding to stack equipment rather than operating at a loss. In the rare event we select to pursue work at what we consider non-commercial prices, we view this as an investment decision and apply the same justification and approval process used for any other reinvestment we do in our business.
This has led us to move equipment and crews between basins as we look to balance market share with margins and as we pursue new technology opportunities. We believe that this approach has enabled us to protect our profitability in North America land and has also helped us maintain our overall infrastructure and long-term ability to service our customers in this market. In the international markets, revenue declined 7% sequentially due to further customer budget cuts, rapidly changing activity driven by disruptions, delays, and cancellations, as well as by further pricing concessions. Third quarter international operating margins of 23.7% was down 72 basis points sequentially and 83 basis points year-over-year.
Our nine-month incremental margins were still held to 23%, which represents a marked improvement over the 61% from the corresponding period in the 2009 downturn, which is a testament to both the strength of our international business and how well our organization is executing. Within the international areas, Middle East and Asia revenue declined by 8% sequentially, while pre-tax operating margins decreased 171 basis points to 27%. Activity in the Middle East remained robust during the quarter, particularly in Saudi Arabia, the United Arab Emirates, and Kuwait. Pricing concessions, changes to the activity mix, as well as project delays, had a negative impact on revenue and profitability. Year-over-year, area revenue decreased 20%, while margins dropped by 61 basis points. Our lump sum turnkey project in Saudi Arabia continued to progress well, and with steady improvements in drilling efficiency, well deliveries are now ahead of planned levels.
In the United Arab Emirates, robust drilling production and seismic activity was boosted by further rig additions, and we also recorded strong sales of Petrel and ECLIPSE software. Drilling activity was also stronger in Kuwait as rig count increased. However, this was partly offset by operational delays and an activity shutdown in the neutral zone. In Iraq, we mobilized two rigs for the Zubair lump sum turnkey project, with the first well already completed, while revenue from the other operations in the country remained flat with the second quarter. In Southeast Asia, activity was lower throughout the region, driven by a further drop in work offshore Australia as projects ended. Lower rig count in Malaysia reduced deepwater exploration and development work in the South China Sea and continuing NOC budget cuts on land in China.
In Latin America, revenue declined 7% sequentially, while pre-tax operating margins fell 159 basis points to 20.7%. In Mexico, Argentina, and Brazil, activity was further hit by a combination of delays and budget reductions, while Colombia was weaker due to increased pricing pressure. These effects were, however, partially offset by steady activity in Venezuela and Ecuador. Year-over-year, area revenue decreased 30% and operating margins decreased by 120 basis points. In Mexico, revenue dropped again in the third quarter and now stands at an eight-year low as the significant budget cuts further impacted activity and profitability. At the same time, we began multi-client seismic operations in the Gulf of Campeche, and awards for the second and third license rounds of the Energy Reform Act remain on schedule. Offshore activity continued to decline in Brazil as budget reductions impacted both equipment rentals and field operations.
In addition to this, revenue was also hit by the weakening of the real. In Venezuela, activity was steady for both PDVSA and for the heavy oil joint ventures in the Faja, while in Ecuador, SPM activity was flat as the Shushufindi project continued to perform in line with expectations. In Europe, CIS, and Africa, revenue fell 6% sequentially, while pre-tax operating margins increased 92 basis points to 22.2%. Year-over-year revenue decreased 31% and margins dropped by 125 basis points. Within the area, the bright spot in the third quarter was Russia and Central Asia, where revenue continued to increase with peak summer drilling activity in Russia, Kazakhstan, and Uzbekistan. This increase was, however, partially offset by a weaker ruble.
In the North Sea, increased drilling in the U.K. sector was insufficient to counter lower activity in the remote areas and was further offset by reduced activity in Norway from project delays and cancellations, as well as currency weakness. In Sub-Saharan Africa, activity increased in Gabon in the third quarter but was considerably lower in the rest of the region as operations were halted in Chad, exploration work dropped to a new low in Angola, and offshore projects were canceled in Nigeria. In Algeria and Tunisia, activity was also down in the third quarter, while in Libya, our operations continues to be limited to one offshore rig. Turning next to the overall market outlook, we see two clear trends emerging.
As we enter the last quarter of the year, the global oil market is still weighed down by fears of reduced growth in China and the timing and magnitude of additional Iranian exports. However, the fundamental balance of supply and demand continues to tighten, driven by both solid global GDP growth and by weakening supply as the dramatic cuts in E&P investments start to take full effect. We expect this trend to continue, and as the oil market further recognizes the magnitude of the industry's annual production replacement challenge, this will gradually translate into improvements in oil prices going forward. In spite of the expected improvement in oil prices, the market outlook for oilfield services looks challenging for the coming quarters as we expect additional reductions in activity and further pressure on service pricing.
This is driven by the financial pressure on many of our customers, where a year of very low oil prices is now exhausting available cash flow and corresponding capital spending, and also leading them to take a very conservative view on 2016 E&P budgets. In addition to this, the winter season will have the normal negative impact on activity, which in the fourth quarter is unlikely to be offset by the usual year-end sales of software, products, and multi-client licenses. Based on this industry outlook, we expect E&P investments to fall for a second successive year in 2016, which is the first time since the 1986 downturn when the spare capacity cushion was more than 10 million barrels per day.
In spite of the need for the industry to increase investment levels to mitigate the pending impact on global supply, we instead see an increasing likelihood of a timing gap between the expected improvement in oil prices and the subsequent increase in E&P investments and oilfield services activity. This timing gap or increased response time is a direct consequence of the dramatic cuts in E&P investments, which have clearly damaged the oil industry's financial strength and investment appetite, as well as the operating capacity and capability. While our macro view has not changed in terms of a tightening supply and demand balance and an expected improvement in oil prices, we have to factor in that the likely recovery in our activity levels now seems to be a 2017 event.
We communicated in our previous earnings call that we were prepared to live with our existing cost base going forward, provided we were close to the bottom of the market and that the activity recovery was only a couple of quarters out. As a result, we carried our cost base forward into Q3, which had some negative impact on our operating margins, and we did not report any exceptional restructuring charges in the quarter. The likely timing gap between the oil price recovery and the subsequent increase in oilfield services activity, in combination with a more conservative spending output from our customers, is causing us to now take further action. We have therefore decided to proceed with a further round of capacity and overhead reductions, which will result in a restructuring charge in the fourth quarter.
This charge will cover severance costs for additional headcount reductions, reflecting both our updated activity outlook for 2016 and a further streamlining of our support structure. In addition, as part of our internal transformation program, we are now ready to initiate a significant restructuring of our global manufacturing and distribution network, which will also result in a charge in the fourth quarter. Here we will seize opportunities to streamline our engineering, manufacturing, and sustaining infrastructure by consolidating sites into clusters, both in central locations and in the field. While at the same time further modernize our processes by introducing state-of-the-art manufacturing automation in line with the best companies in other high-tech industries. These changes to our manufacturing and distribution network are closely coordinated with the integration plans for Cameron, which are already well advanced and which will be quickly implemented once the transaction has closed.
Far in this downturn, we have proactively and decisively managed our cost and resource base, carefully navigated the commercial landscape with the aim of balancing margins and market share at the same time as we have actively accelerated our internal transformation program. With the above actions, we are continuing this prudent approach with the aim of protecting and extending our solid financial performance into 2016, which is shaping up to be another challenging year for the oilfield services industry. We further believe that our ability to respond to higher E&P investments and oilfield activity in 2017 will be improved by protecting our financial strength in 2016, rather than carrying excessive costs and inefficiencies as we await the recovery of the oilfield services market. Overall, we remain very confident in our ability to weather this downturn much better than our surroundings.
Through our global reach, the strength of our technology offering and our transformation program, we are creating a significant financial leverage that will enable us to increase 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 up for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star then one on your phone. You will hear a tone indicating that you've been placed in queue, and you can remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up your handset before pressing the numbers. Once again, for questions, please press star then one. Our first question will come from the line of Ole Slorer at Morgan Stanley. Please go ahead.
Well, thank you very much. Paal, I wonder whether we could just start with the macro and maybe before that, Simon, congrats with another great set of free cash flow numbers.
Thank you, Ole.
Let's start with the macro for now. Where do you think that the weakening supply has played out differently or similarly to what you would have thought three, six, or 12 months ago in light of recent CapEx cuts?
I think it's playing out more or less as we have expected globally. I think what you see within OPEC, there is really no change to overall production capacity. There is a continuous shift from spare capacity into marketed supply. In North America, the production is coming down more or less as expected as well. Internationally, we are starting to see signs of a weakening supply as well. I think in all these three main sources of supply, while production is starting to come down, I think there are also significant efforts to maximize production within each of these basins by, in some cases, taking more short-term actions to maximize production, which might actually have a negative impact on long-term recovery.
I think there's only a limited period that this can be done, and while the various players exhaust these type of opportunities, if investments aren't increased, I think you will see a further acceleration of the drop in production.
The timing of that acceleration, do you have a view on that?
It's still a bit difficult to say, but I think there are clear signs now in all, at least in North America and non-OPEC, that production is weakening, and we expect that to continue and potentially accelerate in the event the investments aren't increased.
Okay, thanks for that. Just based on what you highlight here with respect to CapEx trends irrespective of oil prices, just having a shot at your fourth quarter and first quarter next year, with a 10% EPS reduction into the fourth quarter and another 5% into the first quarter. Will that be a reasonable trajectory?
Well, let me say this. Q4 looks challenging, and visibility has actually dropped in the past month or two now. From an activity standpoint in Q4, we will see the start of the winter slowdown in the Northern Hemisphere. We also see further budget cuts in several of the key offshore markets, such as Sub-Saharan Africa, Brazil, and the Far East. We also expect rig activity in North America land to be down in Q4 due to the financial stress on many of our customers there. We expect very limited year-end sales of product software and multi-client. EPS will drop. Due to the lack of the visibility we have now, Ole, I'm not really ready to commit to a number. I will also say that Q1, in spite of Q4 not having the seasonal uptick in year-end sales, we also see Q1 being below Q4.
Okay. That makes sense. Thanks a lot.
Thanks, Ole.
Thank you. We'll go next to the line of James West with Evercore ISI.
Hey, good morning, Paal.
Good morning.
Paal, we've now pushed out the recovery to 2017. I wonder if you could elaborate a little more on how you see 2016 playing out. Clearly, you just mentioned 1Q is going to be below 4Q. Does that mark the bottom in earnings, and we're kind of going sideways for most of next year? Is there a potential for a second half modest upturn?
Well, I would hope that Q1 will represent the bottom, and there will be a gradually but slow recovery during the year or even sideways. I think it's still too early to say, James. I think we have, even for Q4 now, there is significant uncertainties in several of the markets on what's going to happen. Beyond that, we clearly see Q1 being below Q4. Visibility even on Q1 is still very low. I would hope that what you kind of depict will be the case, I think it's too early to say. I would say also that there is a limit to how long these reductions in investment and activity can continue. I think as the oil price now likely will start to move upwards, hopefully investments will turn around.
Anything meaningful will be late 2016 and into 2017 as we see it as per today.
Okay, got you. Then Paal, you specifically called out M&A in the press release last night. You had a number of smaller deals in addition to Cameron this quarter or last quarter, excuse me. Are you preparing the market for something additional of size, is this just highlighting the fact that you guys are generating tons of cash, you got huge flexibility?
Yeah, it's the latter. We're not preparing the market for anything other than refocus significantly our entire organization on generating free cash. Margins are a key ingredient to generate cash. Both of those are key focus areas for us in terms of protecting and extending our strong financial performance. Obviously, in this type of market, companies that can generate significant free cash has a broad range of opportunities. I think we've shown so far in the downturn that we will be opportunistic. What opportunities are there and which one we will convert, we will revert back to you when we have converted them. As of now, we will continue to be opportunistic. There's no preparation or any message beyond that.
Okay, got it. Thanks, Paal.
Thank you.
We'll go next to the line of Angie Sedita with UBS.
Thanks. Good morning, guys.
Good morning.
Again, impressive free cash flow and decrementals there versus the peer group. Paal, in your prepared remarks, you talked a little bit about the outlook for 2016 as far as E&P spending, and I know it's obviously early to have much granularity. Where we have less visibility is internationally, and maybe you could just give us some color there on what you're hearing with your conversations with your customers around the world as far as the spending outlook for 2016, both land and offshore.
Yeah. We don't have a lot of granularity, Angie. It's still just kind of broad-based statements. Most of our customers haven't completed or just barely started their budgeting process for 2016. The general feedback is very consistent, and that is, they expect, the vast majority of them, that spend will be lower. I can't give you granularity of geography or land and offshore. I would say, though, that the part of the world that is still very resilient is obviously the GCC countries in the Middle East. I'm not expecting anything significant there in terms of lower investments. Broad-based pretty much everywhere else, there are significant challenges, and we expect 2016 budgets to be below 2015.
Okay. That's helpful. If you think about the U.S., obviously it's a smaller market for you, if you think about the U.S. and you've said on a number of occasions that the pricing is unsustainably low, as we all know that many of these smaller companies are free cash flow negative. I mean, how do you think this plays out in 2016 going into 2017? Could even a modest increase in activity in oil prices lead to even modest improvements in pricing? How do you think this plays out? Any thoughts?
Yeah, I'm not very optimistic on any turnaround in service and product pricing for oil field services in North America land. I think, yes, many of the small companies or most of the small companies are free cash flow negative. They are under significant financial stress, maybe some of them will go bankrupt in the coming quarters or in the coming year. There is still massive overcapacity, even the small companies that go bankrupt will likely be picked up by other investors, and their assets will be returned back into the market. No, I think the overcapacity is going to be with the industry for quite a considerable amount of time. I don't expect any real improvement in service and product pricing in the coming year in North America land.
All right, great. Thanks, I'll turn it over.
Thank you.
Thank you. We'll go next to the line of Bill Herbert with Simmons & Company.
Thank you. Good morning. Wondering if we could talk about a little bit about the flexibility of the U.S. upstream value chain here as we're getting deeper into this downturn. The supposition has been, and perhaps continues to be that, once the recovery narrative is embraced by the industry, that the industry can respond quickly and assertively to an increase in spending and activity. Do we still think that's the case, given the duress of the industry, and the fact that many are not only cutting into fat and muscle, but now bone?
I think the market is probably overestimating how quickly the industry can respond, whether it's in North America or internationally. I think the fact that now four quarters into very low oil prices, the financial strength of many of our customers is significantly weakened, and their appetite to invest is also a bit down. I think any improvement in oil prices, I think initially is going to go towards strengthening the balance sheets, and the oil companies will likely assess how sustainable are these increases in oil prices before they start investing. There is a delay, I believe, between an improvement in oil prices and the decision to increase budgets. There's going to be a further delay between increasing budgets and realizing that into higher oil field activity. There's going to be a delay in between higher oil activity and higher production.
I think the market is underestimating how long this period is going to take. Just the fact that the industry is again looking to reduce investments when we have this significant pending supply impact coming, just shows that I think we even have an increasing chance of a potential spike in oil prices if investments aren't increased in time.
Okay. Secondly, given the duress that you're prophesying here for the next several quarters, notwithstanding the fact that your decrementals in Q3 were still very laudable, they trended higher. I'm just curious as to whether we see accelerating decrementals over the next quarters or do they stabilize? What's your view with regard to the roadmap on that front?
Well, in terms of our decrementals-
Yeah
We are working flat out to continue to manage them along the levels that you've seen so far this year. We are not giving up on that. We have continuous efforts both on reducing cost and capacity, as well as creating more leverage to offset pricing from our transformation. We are going to continue to work very hard at delivering continuously very strong decrementals. We see that as very important to sort of maintain our financial strength and also to help us generate the strong free cash flow that you've seen so far this year.
Okay, thank you.
Thank you.
We'll go next to the line of Jim Crandell at Cowen.
Hi, good morning.
Good morning.
Paal, based on maybe a more limited sample size, we seem to see a number of companies calling for 20%-30% reductions in their CapEx for 2016. Is that a range that you think is reasonable at this point?
I think full year 2016 over full year 2015, that sounds like a high number. At this stage, I don't think it's going to be as much as that, no.
Based on your conversations with managements of some of the NOCs, would you think that the NOCs in Latin America, West Africa, and Asia would be still one of the weakest points in the market? I noticed that Angola is cutting spending by 50% next year. Do you think that's going to be indicative of some of the NOCs in those regions?
Well, that number again, I think is high. I think the fact that this customer group has cut significant this year and would likely go down potentially further next year, I think is a reasonable assumption. Again, my commentary on 2016 is based on very high-level discussions, and I don't have details of what budgets and what numbers are going to be. Other than that, it seems to be a consensus that overall spend will be down. I think your 20%-30% is very high. It's likely to be less than that, but still expect it to be down.
In a declining market, how do you think that that affects the market share of integrated services for Schlumberger?
I don't think it has a direct impact on anything in terms of up or down. There continues to be a broad range of integration type of opportunities. We are pursuing all of them. Whether this is all the way from bundled services from a few of our product lines, all the way up to full turnkey lump sum contracts, as well as SPM opportunities. Nothing dramatic in terms of a shift of integration opportunities. It continues to be a key part of what's the offer. There is a generally growing appetite from all customer groups to engage in those type of contracts.
Good. Okay. Thank you.
Thank you.
We'll go next to the line of Bill Sanchez at Howard Weil. Please go ahead.
Thanks. Good morning, Paal.
Hey, good morning.
Paal, I want to try to understand a bit more from you the magnitude of the pricing declines internationally that you're seeing and what the duration from here is going to be. I guess specifically, where are we now, or where are you, I should say, in working through all of your contract renegotiations with your customers?
I can't give you a number, Bill, on this. I think it's clear that the pricing impact internationally, although it is significant to our operations, it is still significantly lower than what we've seen in North America and North America land. I would say that round one of the pricing discussions is complete. There might be more coming in the coming quarters. I think as long as oil prices are down and the outlook is still relatively somber, then there is a constant pressure on pricing internationally as well as in North America land. We continue to work through that. We bid competitively on the tenders that are out there. Customers that are looking to renegotiate, we engage in those discussions. Obviously, we are trying to minimize and protect what we concede in these type of discussions.
That's a call we make in each situation around what market share we are looking at, what kind of terms and conditions we can get for some of these things, and how we look at the overall business that we run. This is a normal part of business. When there is overcapacity, there is pressure on pricing, that's part of what we do for a living to manage that.
Do past renegotiations that you've, for lack of a better term, have kind of settled with your customers, do those get reopened here as we go into 2016? Or these are just incremental discussions that you're still having on contracts that really haven't been negotiated to this point or renegotiated to this point?
Well, I think it's a mix of all of it, Bill. I think you see it in North America land, you see it in international. Overcapacity, there is a continuous pricing discussion until we hit the bottom of the market, and then it stabilizes, and then we look upward from there. There is a mix of renegotiations of contracts already discussed and some of them which have not been changed already. There's a combination of all of it.
Okay. Simon, a follow-up for you or a question for you. Can you give us an idea of when the share repurchase blackout period will begin for you?
As I mentioned in my remark, once we file the S-4 and it is accepted, there will be a blackout period. I am expecting it to be about four to five weeks, and could start maybe early November.
Okay. I guess we would expect repurchases to take place up until that point.
Yeah. Now, I'd like to take this opportunity just to remind you that first we are issuing a large number of shares. The number of shares that will be issued, it's going to take place by our U.S.-based subsidiary. You're going to see a large movement in the capital structure of Schlumberger between our U.S. subsidiary and the parent company. In other words, the U.S. subsidiary will be the one acquiring Cameron, and as a result, is going to acquire the shares from the parent company. You're going to see eventually, when we close the transaction of Cameron, a large swing in the capital structure between the U.S.-based subsidiary, our parent company, because of the structure of the acquisition. This would require the U.S. subsidiary, as I said, to acquire shares from the parent company.
There will be a large movement of cash from the U.S.-based subsidiary into the parent company. When times will come, we'll explain it to you in more details and how it's going to work out.
Great. I appreciate the time. I'll turn it back.
Sure.
Thank you.
We'll go next to the line of David Anderson with Barclays. Please go ahead.
Thanks. Paal, I was hoping you could expand a bit more on what you see on the exploration front. In the commentary, you note Gulf of Mexico continuing to transition. West Africa is starting to roll a bit as exploration programs end. What's the mindset of your customers at this point in terms of where that fits in the portfolio? You talked about the first and foremost about the balance sheets, obviously dividends. Is it just about getting development costs down first and as exploration is kind of pushed out? How does that kind of fit in terms of your vision for the next couple of years?
I think what you're saying is correct. The focus on driving costs down is on development, and exploration is basically eliminated. That's how I think many customers look at it. There are significant cuts in exploration activity, and they continue both for seismic and for drilling. The Q3 exploration rig count was down about 25% year-over-year, and the seismic spend was also down in excess of 30%, and that's following a pretty low year in 2014 as well. It is very challenging for exploration activity for us. Again, the impact of this is still fully absorbed in our results, which are still reasonably good. Yes, in summary, our customers are more or less cutting completely exploration. Focusing a lot more in driving further costs out of the development.
On that side, on the development, as you integrate OneSubsea into Schlumberger, there seems to be a pretty big opportunity to pull in the rest of Schlumberger to help bring down development costs. If I think about leaning on your reservoir expertise and well design capabilities, how receptive have customers been so far to Schlumberger taking a greater role in that offshore development? It would seem to be it's a pretty big mindset change for your customers. Is that happening? Do you feel confident in that? Do you think projects can actually move ahead in 2016 because of that, or is that a little too optimistic in terms of the timing?
It might be slightly optimistic on the timing. First of all, many of the things that you mentioned in terms of bringing together the capabilities of Schlumberger and OneSubsea is already happening. Obviously we can accelerate and have an even further impact on this as we close the transaction and take full management of OneSubsea. I'm very pleased with the progress that OneSubsea has made and the close working relationship we've had with OneSubsea from the Schlumberger side. I think over time, and maybe not already in 2016, there is significant cost reduction potential for the deepwater. I think both when it comes to the well cost, as well as for the overall infrastructure. I think we can simplify, we can standardize, we can engineer costs out of the system.
What that will allow, if you can, for instance, reduce the well cost by, say, 30%, you can potentially drill four wells for the price of three, which again, will help you increase production and recovery from the deepwater fields, which obviously will help lower cost of barrel and improve the economics. I think we are in very early innings in terms of driving down costs for deepwater, both production and the drilling part of it. I think what we are doing now with the Cameron acquisition is going to address both those dimensions.
Great. Thank you.
Thanks.
We'll go next to the line of Scott Gruber at Citi.
Good morning.
Good morning.
At what rate of upstream spending decline abroad would those 25%-30% decrementals be at risk of rising? I know there's not a lot of clarity on exactly how spending will turn out next year, but if spending is down 15%, would you start to become concerned, or would it take a steeper drop to really threaten those decrementals?
You're talking about 2016 spending?
Correct.
Well, we have delivered, I think, very strong financial performance in the international market now for a number of years. In 2014, we generated 69% incrementals on quite limited revenue growth, and so far, 23% decrementals on 18% drop in revenue this year. Our performance so far this year is not a fluke. We have been very good at managing our international business. I'm expecting that even with still further headwinds in terms of top lines in 2016, we should be able to continue to hold the decrementals at a very respectable level. Whether they're going to be at 23% or slightly higher, a bit difficult to say. In terms of offsetting activity reductions through cost cutting, I think we've proven that we can do that. Beyond that, it is how much leverage we can generate from the transformation to offset pricing.
Both of those are we are very active on trying to deliver both of those type of results. We are going to go very hard at it for 2016 to continue to deliver strong decrementals internationally.
Got it. You already touched on the need for customers to repair their balance sheets, which will likely contribute to the delay in activity recovery. Is there also an oil price threshold that you have in mind that needs to be achieved before your customers start to increase CapEx? Do we need to see $65 Brent or $70 Brent? At what level do you think customers are comfortable expanding their budgets even if there is some delay?
No, I don't have a specific oil price number in mind. I think it's going to be much more a function of how sustainable our customers see the increases in oil prices to be. I think it's more about having a stable basis for increasing investments before they go ahead and do it, right? I still think that there's going to be conservatism based on the very tough four quarters that the industry has gone through at this stage. That's why, again, we are basically saying that there is going to be a lag between higher oil prices and investments, and even a lag between higher investments and realizable oil field activity.
Anything further, Mr. Gruber?
No, that's it. Got it. Thanks.
Thank you.
Thank you.
We'll go next to the line of Michael LaMotte with Guggenheim.
Thanks. Good morning, Paal. If I could follow up just on transformation quickly and ask you to expand upon two areas in particular. First, your comments on the reorganization of the manufacturing operations, and how long that is expected to take, and if you could quantify the gross margin benefit, perhaps, of that effort. Secondly, in the press release, this is the first time we've seen the references to the multi-skilling. If you could give us an update in terms of where we are in the progress of that effort as well.
Yeah. On the transformation around the global manufacturing and distribution, the charge we are taking is for consolidating facilities, moving much more towards campuses and clusters, and also the introduction of some new automation manufacturing type of technology. Similarly, we are also looking to consolidate how we do global distribution. Going more from a global and local setup to a much more regional setup in terms of how we manage that. The process of getting it done, we have already embarked on, and there are some charges associated with this that we will take in the fourth quarter, and we will continue implementing that program in 2016 and 2017. I'm not going to be able to give you a specific impact on margins and what this is going to generate for us, although that we are very excited about doing this.
It's going to modernize the core part of the company, and it's going to make us even more competitive in the international market. Now, in terms of multi-skilling, this is part of how we are continuing to drive people productivity. There is many other aspects of what we do there. We have remote operations. That's another key part of this as well, where we can centralize much more of our expertise and have them oversee more jobs centrally rather than being at the wellhead as well. All of these elements are a key part of the transformation program, and we are still not at the halfway point of rolling this out globally and for it to have the full impact on our operations and our results.
There's still a lot of runway left in both the multi-skilling, the remote operations, and what we're going to do on manufacturing and distribution, as well as all the other parts of the transformation. We are excited about it, and there is a strong pull from the entire organization on this, and we continue to work hard at implementing it.
Great. Thank you. If I could ask a follow-up quickly to Simon. I noticed debt came down, total debt came down in the third quarter from the second quarter. During the blackout, would you be using free cash flow to further pay down debt, or can we just assume that that cash builds on the balance sheet in that interim?
Good question, Michael. Most of our debt actually is a fixed debt. We do have a certain percentage, which is more reflective of commercial papers, et cetera. This will go down. As I said earlier, and I like to repeat this, that you're going to see a large movement in our capital structure, and perhaps eventually we will have a little bit more debt associated with the transaction coming from our North America or our U.S.-based subsidiary, and this to acquire the shares from the parent company. You're going to see a different type of movement, and eventually there will be larger debt that we will have in the U.S. subsidiary in order to acquire the shares.
Post-close.
In the meantime, during the blackout period, as you highlighted, it would reflect into a reduction in the debt, which is the current debt that this is reflected in the CP program that we issue on a daily basis.
Got it. Great. Thanks, Simon.
Thanks.
Thank you.
We'll go next to the line of Jud Bailey with Wells Fargo Securities.
Thanks. Good morning.
Good morning.
I wanted to, Paal, ask you about a couple of different markets. Outside of North America, it seems like Latin America continues to trend as one of the more difficult international markets. Could you maybe comment on Mexico and also particularly on Brazil, given all the issues going on with Petrobras and some of the contract renegotiations, and how you're thinking about that market and how it may impact you in 2016?
Yeah, both markets, as you point out, both Mexico and Brazil, have been very challenging this year. Mexico even more than Brazil, I would say. There's been significant budget reductions, and they've continued throughout the year. Like I mentioned in my prepared remarks, our Q3 revenues now stands at an eight-year low, which is quite remarkable for a sizable market as Mexico is for us. In terms of next year, it's still very early for both of these countries, Mexico and Brazil. I think it's still going to be challenging as we enter into 2016. Don't have a lot of details of it yet, but no positive signs either from Pemex or from Petrobras at this stage.
Okay. Thank you. My follow-up is on just to circle back on international pricing. Understanding you're done with round one, as you look at the market today, is it starting to decline worse than it did earlier in the year, or is there any sign of it stabilizing, or do you get the sense that the pricing is slipping even more? Are there any particular markets internationally where you're seeing more pricing pressure than others?
No, it is not I would say slipping further. It's a continuing pricing pressure in this part of the cycle. It's quite normal. There's nothing special about it. As long as the outlook is negative, then there will be continued pricing pressure. Every bid that is out there is even increased competition to get it, and that creates the downward pricing pressure. Nothing exceptional. I don't see it accelerating other than that it's not going away, and we will just continue to manage it and navigate it the way we have been doing so far in the downturn.
Great. Thank you.
Thank you.
The last question will come from Kurt Hallead with RBC Capital Markets.
Hey, good morning.
Morning, Kurt.
Just I'm curious, Paal, when you think about the, going back to the M&A dynamic, the Eurasia deal kinda fell through. Is that something that still could come back on the table at some point going forward? When you think more broadly about M&A, is the Schlumberger interest right now more in some geographic opportunities, or is it in some product-specific areas, generally speaking?
Just to say the Eurasia deal, first of all, obviously we were disappointed that we couldn't get it closed within the several extensions of the timeline that we agreed with Eurasia. That deal is now closed for us, I don't really have any more comments on that. In terms of other M&A, we continue to be opportunistic. I can't go into details of what that will entail or what we may or may not do other than that we have a broad view of the entire market and what opportunities are there, what we're interested in. We continue to evaluate companies on a monthly basis. If there's a willing seller and a good price, we might be able to do something more, it's still too early to say.
I can't promise anything, I can't make any further comments on what may happen other than that we continue to be active in assessing the market and look for opportunities to further extend and strengthen our portfolio. We keep generating the cash to allow us to do that.
Okay. That's great. I'll keep it there, we'll see you in a little bit.
Very good. Before we close this morning, I would like to summarize the three most important points we have discussed. First, while the business environment clearly got worse in the third quarter, our focus on cost management and transformation has enabled us to deliver strong financial performance and generate significant liquidity, which is a clear competitive edge in this part of the cycle. Second, our forward visibility has again been reduced, we will consequently revert back to managing the company quarter by quarter. This means a further round of capacity and overhead reductions in the fourth quarter as we adjust resources to a lower activity outlook. At the same time, we will continue to accelerate our transformation program, with the next step being a significant restructuring of our global manufacturing and distribution network, which will further modernize a core part of our company.
Third, our outlook for the oil market remains unchanged, with a continuing tightening of the supply and demand balance as the dramatic cuts in E&P investments start to take full effect, ultimately leading to an increase in oil prices. Given the conservative view our customers are taking on 2016 investment levels and the general state of the industry following a year of low oil prices, we see an increasing likelihood of a timing gap between higher oil prices and the subsequent increase in E&P investment and oilfield activity. In this environment, we continue to proactively manage our business to preserve our financial strength into 2016, which will allow us to better navigate the market uncertainty and to respond faster to new business opportunities and ultimately higher activity. Thank you for participating.
Thank you. Ladies and gentlemen, today's conference will be available for replay after 10:00 A.M. Eastern Time today, running through November 16th at midnight. You may access the AT&T replay system by dialing 1-800-475-6701 and entering the access code of 365406. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code of 365406. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.