Simon Farrant - Vice President, Investor Relations Paal Kibsgaard - Chairman and Chief Executive Officer Simon Ayat - Chief Financial Officer Patrick Schorn - Executive Vice President, Wells.

Scott Gruber - Citigroup Kurt Hallead - RBC Capital Jud Bailey - Wells Fargo Sean Meakim - JPMorgan Bill Herbert - Simmons James Wicklund - Credit Suisse Chase Mulvehill - Bank of America/Merrill Lynch David Anderson - Barclays.

Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, today’s call is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Simon Farrant. Please go ahead..

Good morning. Good afternoon and welcome to the Schlumberger Limited third quarter 2018 earnings call. Today’s call is being hosted from New York following the Schlumberger Limited board meeting.

Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer; Simon Ayat, Chief Financial Officer; and Patrick Schorn, Executive Vice President, Wells. We will as usual first go through our prepared remarks, after which we will open up for questions.

For today’s agenda, Simon will present comments on our third quarter financial performance before Patrick reviews our results by geography. Paal will close our remarks with a discussion of our technology portfolio and our updated view of the industry macro.

However, before we begin, I would like to remind our participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10-K filing and other SEC filings.

Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our third quarter press release, which is on our website.

Finally, after our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A period in order to allow more time for others who maybe in the queue. Now, I hand the call over to Simon Ayat..

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Third quarter earnings per share was $0.46. Excluding charges and credits this represents an increase of $0.03 sequentially and an increase of $0.04 when compared to the same quarter last year. There were no charges or credits recorded in the current quarter.

Our third quarter revenue of $8.5 billion increased 2% sequentially primarily driven by strong international drilling activities. Pre-tax operating margins increased by 36 basis points to 13.5%. Highlights by product group were as follows.

Third quarter reservoir characterization revenue of $1.7 billion increased 2% sequentially primarily due to higher wireline and integrated services management activity in the international markets. This was partially offset by the completion of the first phase of an integrated production system project.

Margin increased 88 basis points to 22.3% primarily driven by the increase in higher margin wireline activity. Drilling revenue of $2.4 billion increased 9% sequentially. This increase was driven by strong international growth and benefited in integrated drilling services. Drilling and measurements and MIs were core activities.

Margins increased 103 basis points to 14% as profitability improved in certain IBS projects that started in the prior quarter. The overall increase in drilling activity also contributed to the margin improvement. Production revenue of $3.3 billion and margins of 9.8% were essentially flat.

Cameron Group revenue of $1.3 billion was also flat sequentially. Increased sales in surface systems and drilling systems were offset by lower revenue in OneSubsea and valve and measurements. Margins declined 140 basis points to 11.4% primarily driven by the lower OneSubsea revenue. The book-to-bill ratio for the Cameron long-cycle business was at 1.

Now turning to Schlumberger as a whole, the effective tax rate, excluding charges and credits, was 16.4% in the first quarter compared to 17.2% in the previous quarter. We generated $1.8 billion of cash flow from operations during the quarter. Our net debt slightly decreased during the quarter to $14.5 billion.

We ended the quarter with total tax and investments of $2.9 billion. During the quarter we spent $100 million to repurchase 1.5 million shares at an average price of $64.98. Other significant liquidity events during the quarter included CapEx of approximately $565 million and capitalized cost relating to SPM projects of $285 million.

During the quarter we also made $692 million of dividend payments. Full year 2018 CapEx excluding SPM and multi-client investments are still expected to be approximately $2 billion. And now I will turn the conference call over to Patrick..

Thank you, Simon and good morning everyone. Schlumberger revenue in the third quarter of 2018 increased 2% sequentially with pretax operating income increasing 5%.

In North America while we continue to gain market share in artificial lift and drilling, takeaway constraints in the Permian led to lower activity for our OneStim hydraulic fracturing business.

Internationally, we continued to benefit from the broad based recovery that began in the second quarter seeing solid growth in all operating regions, driving international sequential revenue growth ahead of sequential growth in North America for the first time since the second quarter of 2014.

As usual I will first discuss the revenue growth by geography without Cameron before concluding with a few remarks on Cameron’s third quarter performance. In North America revenue of $2.6 billion increased 1% sequentially, on land drilling revenue grew 5% sequentially to outperform the 3% increase in the land rig count.

Rotary steerable systems were again in demand to meet customer needs for longer laterals required in shale oil development for optimum well performance. Higher product sales for artificial lift systems which grew by 10% also contributed to third quarter performance.

These positive results however were largely offset by the weakness in the hydraulic fracturing market that developed during the quarter. While the quarter began by leveraging second quarter fleet additions, customer activity weakened during the third quarter as takeaway constraints in the Permian limited production growth.

The resulting excess hydraulic horsepower in the market led to softer pricing and as a consequence of this we did not add more of our spare fleet capacity during the quarter.

The rapid changing in the dynamics of the hydraulic fracturing market again highlighted the operational agility and execution needed to efficiently manage resources and to effectively control supply chain costs.

The robust performance of vertically integrated sand mining and delivery business is one of the key elements of this where we in addition to supplying our OneStim operations with sand now also are successfully completing in the third-party sand market as an integrated hydraulic fracturing company.

The multistage stimulation business for completion in North America land saw a record number of stages installed in Q3. Broadband precision technology has seen steady uptake throughout the year from multiple customers in Canada and the Permian.

The reliability of this technology allows not only efficient fracking of wells with 20 stages per day, but also selective sleeve closing and reopening to better manage water and sand production as the well cleans up. We also continued to see solid new technology sales in the U.S. land market.

The growth of our drilling business has been underpinned by technologies such as PowerDrive rotary steerable systems and AxeBlade drill bits, which have become the key enablers for drilling longer lateral sections.

One new bit technology introduced during the quarter was the HyperBlade hyperbolic diamond element bit, a development of our market leading StingBlade and AxeBlade bits.

HyperBlade bits lowered drilling costs by improving the rate of penetration while maintaining steering response and directional tracking in the soft and plastic rock formation that make up many of the unconventional reservoirs.

At the same time the emergence of well and reservoir performance issues are leading to new focused cementing technologies, such as the CemFIT Shield mud-sealing cement system that provides the industry’s first zonal isolation technology, specifically designed to improve isolation between hydraulic fracturing stages in long horizontal wells.

On the major SPM Palliser asset in Canada, drilling continued with 4 rigs. Drilling efficiency and advanced drilling systems continued to drive performance. So far, 93 wells have been drilled and a further 30 are expected by year end.

On the completion side, OneStim has enabled higher efficiency and reduced cycle time between drilling and flowback, accelerating production of new oil. Overall, well production has met or exceeded type curve expectations and total oil production is up 54% year-to-date.

Offshore in North America, revenues decreased 4% sequentially as drilling activity was impacted by scheduled platform maintenance. At the same time, activity also shifted to work-over operations and the combination of these changes led to a less favorable activity mix for us.

Turning now to the international areas, third quarter revenue, excluding Cameron, increased 4% sequentially as the broad-based international recovery continues across all regions.

Our sequential performance was led by growth in Latin America and the Middle East due to higher activity for both national oil companies and independent operators, while Europe, CIS and Africa saw solid growth boosted by strong activity in Russia.

The ramp up of our international IDS activity continued with an additional 19 rigs being mobilized in the quarter and revenue climbing on the back of the previous quarter’s mobilizations.

We expect our excess international equipment capacity to be fully absorbed by year end after which we see increasing opportunities for pricing leverage as customers seek to secure services for new projects.

Excluding Cameron, revenue in Latin America increased 7% sequentially driven by strong performance in the Mexico and Central America geomarket from increased drilling and reservoir characterization activity. Revenue in the Latin America North geomarket was also up from higher activity on SPM projects in Ecuador.

In Shushufindi, we reached a resolution of legacy payment issues and we amended commercial terms to establish a solid and stable operating framework that will enable future investments for further increasing production.

Elsewhere in Latin America North, strong activity growth in Colombia as operating capacity tightened further created opportunities for increased pricing.

We also saw progress in Latin America South, where increased activity in Brazil was fueled by international oil company intervention and exploration work, while in Argentina higher operational efficiency drove increased fracturing activity.

Also in Argentina, results from the first two wells on the YPS SPM project exceeded expectations and can be considered among the best producers in the Vaca Muerta formation to-date.

Revenue in Europe, CIS, Africa, excluding Cameron increased 4% as strong activity in Russia and sub-Saharan Africa more than offset the impact of labor disputes and scheduled summer maintenance in the North Sea. The activity growth in Russia and Central Asia was driven by summer campaigns in Russia land, Sakhalin and Kazakhstan.

Wireline, drilling and measurements and testing services were the main beneficiaries of this growth. Eastern Europe also saw stronger activity.

Revenue in the sub-Saharan Africa geomarket increased with the start of new projects in Ghana and Mozambique, stronger drilling activity in Central and West Africa, and higher product and equipment sales in Nigeria, Angola, and Namibia.

Customers are returning to exploration activity in the region and consequently, we are beginning to see demand return for higher technology services. The offshore market strengthened further during the quarter, including demand for a stimulation vessel fleet, where available capacity in West Africa is nearly sold out ahead of the 2019 ramp up.

This is paving the way for market share gains and improved pricing. The North Africa geomarket benefited from solid activity in Libya despite the volatile security environment and from strong operational execution in Chad on integrated services management contracts.

Middle East and Asia revenue, excluding Cameron, increased 3%, led by the continued ramp up of lump-sum turnkey projects in Saudi Arabia and by strong IDS activity in Iraq and United Arab Emirates. We added additional rigs during the quarter in Saudi Arabia, keeping us on track to have mobilized 25 rigs by the end of the year.

These positive effects however were partially offset by lower hydraulic fracturing activity as a major contract was completed and demobilized in Saudi Arabia. In Asia, the South and East Asia geomarkets posted sequential growth on increasing IDS work in India and on new ISM projects that mobilized in Malaysia.

In the Far East Asia and Australia geomarkets, revenue was driven by increased drilling activity offshore Indonesia and by a return to exploration work in Australia. Turning now to Cameron, revenue was largely unchanged from the previous quarter.

Increased sales for service systems in North America and service activity for drilling systems in Europe, together with increased pressure control system sales in the Middle East were offset by lower revenue and backlog from OneSubsea.

Looking at the Cameron backlog for drilling systems however, the total figure added at the end of the third quarter in 2018 was already significantly higher than that added for the whole of 2017. This is a further indication of the moves being made by offshore drilling contractors as they prepare for increased activity.

And with that, let me pass the call over to Paal..

Thank you, Patrick and good morning everyone. In the third quarter, the broad-based international recovery continued, while the business environment in U.S. land hydraulic fracturing changed rapidly with both activity and pricing softening more than expected over the course of the quarter.

In parallel with this, the global supply and demand balance tightened further with another draw in global oil inventories and a $10 increase in oil prices during the quarter. Based on this industry backdrop, I would like to address three key questions that are central to our business outlook.

First, why is there a strong need for a significant multi-year increase in global E&P investments? Second, why is Schlumberger best positioned to capitalize on these growth opportunities? And third, why will Schlumberger generate the best operating profits and cash flow in the coming up-cycle? The international production base still accounts for around 80% of global supply and its critical to the stability of the oil market as a mere 1% net decline would represent around 800,000 barrels per day of lower production.

Production growth from the international market has, since 2013, been driven by Saudi Arabia, Iraq, Iran and Russia, which combined have added 3.7 million barrels per day, while the rest of the international production base is down by 1.5 million barrels per day over the same period.

Since 2014, many of the international operators have focused on maximizing cash flow by producing their fields harder and by prioritizing short-term actions at the expense of the required full cycle investments.

This short-term investment focus offers a finite set of opportunities over a limited period of time and this period is now clearly coming to an end as seen by accelerating decline rates in many countries around the world.

In addition, reduced production tailwind from new projects that were sanctioned and largely funded prior to 2014, are now uncovering the underlying weakness in the international production base. Furthermore, additional investments will also be required to replace the Venezuelan and Iranian barrels that are now rapidly disappearing from the market.

So, in our view, after 4 years of low activity, the international production base now needs significant growth in investments for the foreseeable future simply to maintain production flat at current levels.

The North American production base, which makes up the remaining 20% of global supply, has absorbed close to 70% of the demand growth since 2010 initially supported by the Eagle Ford and Bakken and more recently by the Permian basin.

However, the well-established market consensus that the Permian can continue to provide 1.5 million barrels per day of annual production growth for the foreseeable future is starting to be called into question.

In this respect, we do not believe that the temporary off-day constraints are the main issue as this will largely be addressed within the next 12 to 18 months. Instead, we believe the main challenge in the Permian going forward is more likely to be reservoir and well performance as the rate of infield drilling continues to accelerate.

At present, our industry has yet to understand how reservoir conditions and well productivity change as we continue to pump billions of gallons of water and billions of pounds of sand into the ground each year.

However, what is already clear to us is that unit well performance normalized for lateral length and pounds of proppant pumped is dropping in the Eagle Ford as the percentage of child wells continues to increase.

Today, the percentage of child wells drilled in the Eagle Ford has already reached 70% and in the 3-year period since this percentage broke the 50% level, we have seen a steady reduction in unit well productivity.

In the Permian, the percentage of child wells in the Midland Wolfcamp basin has just reached 50% and we are already starting to see a similar reduction in unit well productivity to that already seen in the Eagle Ford suggesting that the Permian growth potential could be lower than earlier expected.

Therefore, assuming that oil demand will remain robust despite the trade war worries and market concerns around economic weakness in the emerging markets, we believe that the level of E&P investment must increase both internationally and in North America first of all to counter the multiyear drop in investments and second to develop and deploy the new technologies needed to overcome the emerging shale oil production challenges.

So, with this market outlook, why is Schlumberger best positioned to capitalize on these growth opportunities? First, we have an unmatched global footprint that enables us to cost effectively pursue growth opportunities in every corner of the world.

In the majority of the 120 countries where we generate revenue, we have a rich history, deep industry relations, unmatched operating infrastructure and detailed knowledge of local business conditions.

Second, we have the broadest technology portfolio in the industry, where our market leadership positions enable us to compete for growth opportunities in all parts of the E&P value chain. Over the past 8 years, we have actively expanded our technology portfolio through targeted M&A activity and organic R&E investments.

In the past 3 years alone, we have increased our total addressable market by 50% and we today hold market leading positions in 17 of the 20 product lines we currently operate.

Third, we mastered the widest range of business models, which allows us to partner with our customers in their preferred way and this provides us with multiple avenues to increase our participation and share in markets all around the world.

These models, which we have evolved over the past decade, now include equipment sales and rentals, traditional provision of standalone products and services, project coordination and bundled services, lump-sum turnkey contracts, and lastly, full field production management through our SPM models.

And fourth, we lead industry in designing and engineering new high-performing technology systems spanning our entire data, software and hardware capabilities and fully leveraging the latest advantage in collaborative and digital technologies.

To enable this, we last year reorganized our entire R&D effort into several distinct technology platforms, directly supporting our stated goals of pursuing the highest level of technology system performance for the benefit of our shareholders as well as for our customers.

So, with our differentiated growth potential, how will Schlumberger generate the best operating and cash returns in the coming up-cycle? We already consistently deliver superior full cycle EBITDA margins and cash flow from operations compared to our competitors, and in particular in the part of the cycle where the international markets are growing.

In 2014, which was the last year of growth for our international business, we generated 69% incremental margins on only 4% revenue growth with no support from pricing. In the same year, we generated $6.2 billion of free cash flow, which represented a conversion rate of 83% of net income from continuing operations.

This performance was driven by solid execution from our global organization and the early benefits from our transformation program.

By advancing our transformation program further over the past 4 years, we have completely modernized our internal workflows and organizational structure and created stronger and more professional support functions with cutting-edge planning, execution and collaboration tools.

This allows us to significantly improve the utilization and reduce the operating cost of our asset base through improved planning, distribution and maintenance.

At the same time, we continue to deploy our people and expertise more effectively by applying multi-scaling and remote operations, which will allow us to reduce our annual recruiting numbers by at least 1,500 to 2,000 people in each of the coming years.

These operational efficiency improvements all support our goals of delivering superior incremental margins in the coming up-cycle and at the same time lowering our need for capacity-related CapEx investments compared to previous cycles.

Based on our market outlook and strengthened execution capabilities we have defined the following set of performance targets for the coming cycle.

We will outgrow the market in terms of top line through our unmatched global footprint, our industry leading technology offering, a broad range of business models and the investments we are currently making into our next generation technology platforms.

We will deliver 65% incremental margins driven by our modernized operating platform and the recovery of the pricing concessions we have made over the past 4 years.

Our SPM business will at least be cash flow neutral in 2018 and 2019 after which we will see a significant free cash flow tailwind as our recent project additions reached their planned production rates.

The CapEx requirements from our seismic business after adopting the asset-light model will be limited to specific multiclient projects, where each project we undertake continued to require a significant level of customer pre-commitment.

At this stage we are not planning any M&A transactions that would involve significant cash outlay other than the pending Eurasia drilling needs, where we now have met and accepted all the requirements deflated by the Russian authorities and await their decision.

These targets mean that we should meet or exceed our stated goal of converting more than 75% of our net income into pretax growth and generate an increasing amount of excess cash which we intend to return to our shareholders in the form of increased dividend and stock buyback.

At present the entire Schlumberger team of 110,000 women and men are ready and primed to outperform in the market upturn that we are now entering.

And through the hard work we have collectively undertaken over the past 4 years to expand our external offering and modernize our internal execution platform, we have never been better positioned to outscore the market in the coming up-cycle and to generate superior operating margins and cash returns to the benefit of our shareholders. Thank you.

We will now open up for questions..

[Operator Instructions] Our first question is from the line of James West with Evercore ISI. Please go ahead..

Good morning James..

His line has accidentally disconnected. We will go to the line of Scott Gruber with Citigroup. Please go ahead..

Good morning..

Good morning Scott..

Paal, good to hear some additional color on the transformation this morning, now your peers have programs as well, one I actually recall there is the transformation program, now when we look at peers they are reducing costs through internal programs and also through some merger synergies, but overall are you surprised by the level of cost reductions at peers? It doesn’t sound like what peers are doing changes your view on eventually achieving the very robust incrementals that you originally laid out with the transformation plan, but is it delaying the ramp in incrementals, the timing of seeing those robust incrementals via the pricing dynamics in the marketplace there?.

Well, I mean I can focus my comments on what we do. I am not really into the details of what our competitors are doing, our peers are doing internally. But we have been working on our transformation on modernization program since 2012.

And it’s being a very meticulous and systematic approach to understanding what part of our operations or what in our operations can we improve in terms of both quality and efficiency.

It takes time to change these type of things in a big organization that is actually functioning quite well from the get-go, but our job is to make sure that we pursue the upside potential and that’s what we have been doing. So this will translate and be a significant part of how we drive incremental margins in the coming up-cycle.

Now the incremental margins are still a function of a couple of other things in addition to the transformation and one is we need growth. And secondly we have also been very clear that we need some tailwind from pricing. And if you look at this year, we have internationally very low growth, quite nominal.

And at the same time we are working through some let me say crosscurrents in pricing. We are still absorbing new contracts, the pricing is actually diluted to the base price that we have through the bidding we have done over the past year.

But then that was all normalized and we get a bit more consistent sequential and annual growth with a bit of help from pricing and the modernization program is going to be the real driver for us delivering on the promise of the 65% incrementals. And this is something that will evolve I would say over the coming 1 to 2 years..

Got it.

What aspects of the transformation program do you think were most profound, what aspects will peers struggle to replicate that you think really gives you an edge into the next cycle?.

Well, let me again focus on us. I mean, the most profound part of what we have done has been firstly to update the entire blueprints of all the activities we do as a company and put that together into one companywide map.

When you have done that, you can start breaking down these things and streamline them in terms of how each part of the company comes together in a huge element of teamwork to drive again both the quality and efficiency of what we do.

So, having a deep understanding of how everything is interconnected, you can also then start to professionalize more the individual parts – things like procurements, sourcing, transportation, these are all actually huge aspects of what drives that performance.

And when you are as big as we are, I think it’s very, very smart to actually address these things with a lot more professionalism than what we have done in the past.

I wouldn’t say that we have done a bad job at it, it’s just that when you are as big as we are, then there is huge opportunities to drive efficiencies and quality by further professionalizing these type of functions..

Got it. I appreciate the additional color. Thanks..

Thank you..

Next, we go to the line of Kurt Hallead with RBC Capital. Please go ahead..

Hey, good morning, Paal..

Good morning..

I was just kind of curious, thanks for that color on the incremental margins and what’s going to be necessary to get there.

On the interim basis, right, can you give us your perspective on how you see the North American frac market mapping out over the course of the next year or so? And then given some of the challenges, can you kind of give us some insights as to how you are kind of managing the cost dynamic and how you are trying to maximize your margins through this interim lull?.

Yes, I will. So, let me focus on the next quarter and maybe the quarter after that. The North America land market is changing pretty rapidly. So how this will play up over the full course of 2019, I think it’s still a bit early to say, but let’s talk first about Q4.

So, it is evident that the rapid softening we have seen both in frac activity and pricing over the I would say second half of the third quarter is continuing more or less with the same pace in Q4 and this is obviously representing challenges in terms of white spaces in the frac calendar.

In addition to this which sort of further aggravates the situation is that several of our key customers have decided that they are going to lay down all their frac fleets from about middle of November and up until middle of January, which again is a fairly significant challenge in terms of how do you approach the cost base at that stage.

So, what we have decided for the course of Q4 is to actively try to reduce the variable part of our cost base, but we aren’t going to do any significant adjustments to the structure, because what we see in the outlook for hydraulic fracs is that there is going to be a couple of quarters where there will be lower activity, but this is more of a pause than I would say a long-term structural issue.

Whether this is Q4, Q1 or it lingers into Q2 I think is to be seen, but we will do what we can to manage the variable cost, but we aren’t going to take any significant actions or charges or anything like that when it comes to our structural setup in the market.

We are committed to this market and we have a very good position, both in the frac services and also, as Patrick alluded to, on the vertical integration through the entire sand value chain.

So, you are going to have to absorb some of the headwinds from the costs that we choose not to do anything with in the next couple of quarters, but beyond that, we are going to continue to leverage our strong position in the market following that..

That’s great. And then I have a follow-up for you then in that context.

Do you think that over the course of the next few quarters that the momentum that you have in the international market will be enough to offset the weakness in North America?.

Well, let’s be specific on Q4 to take that first. I mean, if you look at international markets in Q4, we expect flattish revenues. There is a few moving parts on that, that leads to it.

There is no change to our outlook on the international market and the momentum we have seen in the past couple of quarters we expect to continue into 2019 and we are still very confident about the north of 10% revenue growth for our business internationally in 2019.

But for Q4, we do see sequential growth in EMEA, but this is going to be offset by the normal winter slowdown in Russia and the North Sea and Latin America is going to be flat and we don’t see any significant year end sales this year, mainly because I don’t think our customers have budgeted for that.

So, international, both on revenue and earnings, we see as relatively flat with Q3.

Now, based on what I just said on North America land, our earnings from North America land and our revenue will be down in Q4, so EPS sequentially is going to come down, I think how much, I am not going to give a specific number; I think it’s going to be a function of how severe the shutdowns are going to be in November and December, but in a normalized kind of outlook for going into next year, I would still believe that the strength of the international going forward beyond Q4 should outweigh any further challenges that we have in North America land..

That’s great color. Thanks, Paal. Appreciate it..

Thank you..

Next, we will go to the line of Jud Bailey with Wells Fargo. Please go ahead..

Thank you. Good morning..

Good morning..

Paal, I wonder if I could just follow-up on one of your comments from the prior question on international growth for next year, still confident in 10% plus growth.

Could you maybe give us some insight as to what you are seeing maybe the difference in what you are seeing from your IOC customers versus NOCs and maybe from a regional standpoint, how you kind of see any difference in growth between kind of those customers and market segments?.

Yes. So like I said, we are still very much committed and clear on double-digit revenue growth internationally for us next year. Looking at it from a customer base standpoint, the growth will be driven by the NOCs and the international independents and I would say less so at least from where we stand and what we can see today from the IOCs.

I do expect at some stage that the IOCs will potentially open up a bit more in terms of their investment levels as well, but at present, next year’s growth, the way we have it on the board is going to be driven more by the NOCs and the international independents.

And if I look at where the growth will come from percentage wise, we still see the areas that have been the most compressed since 2014 that is going to have the highest percentage growth and that’s still Latin America, sub-Saharan Africa and Asia, still expect to see solid growth in the other areas, but North Sea, Russia and the Middle East will probably be lower in percentage growth, but overall, double-digit revenue growth for us.

We are still quite confident with it..

Okay, great. Thank you for that. And my follow-up is, is maybe if you could give us a little more color on your thoughts on the offshore market kind of broadly. You mentioned in your comments and Patrick did as well on some of the positive things we are seeing offshore both with Cameron and other parts of the business.

Maybe if you can maybe talk a little bit about what you are seeing in terms of maybe deepwater versus shallow and just some more general market color there would be great?.

Yes. So, if you look at the offshore market, I think what’s going to come back first is still going to be shallow.

And I think we are starting to see movement on shallow water both drilling activity as well as on rig rates, and obviously, rig rates for us are key, because our differentiated technology increases in value proportionally to the increases in the drilling rates, right.

So, this is a very good indicator for us both in terms of effective pricing as well as activities. But as Patrick alluded to offshore, we see starting good signs of higher drilling activity in particular on shallow water, but it’s actually there is a little bit of movement on deepwater as well.

We expect in 2018 deepwater drilling activity to be up about 8% versus 2017 obviously from a low base, but I think it’s moving in the right direction and we expect this trend to continue into 2019.

So, drilling, we are already starting to see some movement and from the subsea or SPF standpoint also increasing amounts of tiebacks and more activity coming into the subsea arena. So, we are quite focused and we are quite upbeat about what’s happening in subsea at this stage..

Okay, great. I appreciate the color. Thanks, Paal..

Thank you..

Next, we go to the line of Sean Meakim with JPMorgan. Please go ahead..

Thank you. Good morning..

Good morning..

So, on the international cycle, just we talk a lot about capacity getting tight here by year end and thinking about a little more elaboration around which product service lines and/or geomarkets are already fairly tight and which do you think you will still have some more slack into next year, just thinking about that progression and the consistency which you think you will see pricing power come to fruition next year?.

Yes. In terms of product lines, I would say where we are.

We don’t have a lot of spare capacity in any of them, but it won’t that we will I think be out of capacity first, it’s going to be everything related to drilling and broadening that, the other product lines that we have as part of our lump-sum turnkey projects as well, so that includes part of our services, part of wireline, part of testing, which are all contributing to these type of projects.

So, a pretty broad-based drive on our capacity we have seen in the past couple of quarters and that’s why there is no one I would say product line that stands out, maybe drilling and measurements and their high-end technologies given the fact that we have a strong pull on that internationally, but also in North America land.

So if anything, I would say high-end technologies from drilling and measurements is probably the one that is in the highest demand, but I would say it has been a pretty good pull on our broad-based capacity for most of the product lines related to well site activity. As to where the growth is coming from, it’s back to what I said earlier.

The highest percentage growth we have seen in the most compressed area, Latin America, sub-Saharan Africa, and Asia, we have over the past 12 months or so, steadily redeployed capacity to make sure we have an ideal setup of capacity where the growth is going to come, but in terms of pricing, it is probably likely to say that Latin America, sub-Sahara and Asia is where we would get pricing maybe stronger than in the other regions given the stability of activity we have had over the past couple of years..

Got it. Thank you for that. That’s very helpful. And then on Cameron, I was curious if we could get a little more update on how the customer uptake has been to the enhanced JV with Subsea 7? I am just curious if the Katmai award from Fieldwood, if that was at all influenced by some of the changes there or maybe that project was already a bit far along.

I was looking to see your thoughts on how that enhanced relationship is progressing with customers?.

Patrick, you want to take that?.

Yes, just I will make some general comments around the JV, but also around Cameron.

Clearly, with the majority of the work that we do today around feed and the comment that Paal was making that quite a bit of it is actually related to tiebacks, there is a tremendous amount of engineering work being done that benefits from the cooperation that we have in the JV. So, there is clearly value there that we are very pleased to see.

I will refrain from making specific comments on whatever contracts they are working on, but we are quite happy with the type of cooperation and the action that we are seeing in that relationship.

Just to give you maybe a bit of an idea of what’s happening with the rest of Cameron, so the book-to-bill ratio was over 1 for the full Cameron in Q3 and actually, it was well over 1 for service drilling and V&M for the fourth consecutive quarter.

Of course, booking orders for OneSubsea were flat and the total revenue of OneSubsea is actually down 3% year-on-year. Total Cameron revenue flat sequentially and flat year-on-year, but clearly, the long-cycle businesses are down 5%, but seeing what the short-cycle businesses are doing, it’s up 12% and this is mainly driven by North America land.

On the margin side, Cameron is down 140 basis points sequentially and down 350 basis points year-on-year, but noteworthy is that Q3 short-cycle business margins are greater than the long-cycle business margins for the first time in this cycle.

So clearly, there are some good things happening there, maybe not in the traditional part of the OneSubsea yet, but clearly the other businesses are picking up as we go. I will leave it at that..

Fair enough. Thanks a lot..

Next, we have a question from the line of Bill Herbert with Simmons. Please go ahead..

Good morning. Paal, thanks for the color on Q4.

I am just curious with regard to Q1, can you comment, I mean typically we see sequential weakness and seasonally less internationally, do you think that’s inline with historical norms at this stage or is it a little bit less threatening given the absence of product sales for Q4?.

To be honest with you Bill, we don’t – you don’t have a lot of visibility as of yet on Q1 in terms of those type of details. But I would agree with your kind of high level analysis that with less, yes year on product sales, the sequential impact Q4 to Q1 should be somewhat bumping. That I would agree with.

But we have – we always had a view on next year, we have high level view of how the market is shaping up. We have been run into kind of the detail analysis of Q4 – sorry Q1. We will do that during the course of the coming quarter.

But I agree with you that the absence of year-end sales should ideally dampen some of the sequential drops that we typically see in Q1..

Okay. And Simon a question for you with regard to cash flow and cash balances.

Cash flow was much incurred in Q3 with your cash balances, keep leaning lower and so I guess the question is the required amount of cash on hand to run the business and what do you expect the cash outflow to be for Eurasia when that happens?.

So as you know that Q3 was the pretty good performance cash wise. We typically see that kind of a performance during the second half that should continue into Q4 actually.

The cash outflow for Eurasia we already as you know this has been long presence, so this plant that Eurasia is going to come with it’s own cash flow and it’s on strong EBITDA actually. So we are – we will fund this through additional borrowing.

The cash on hand we have today is still 0.9 and we continued to be at base level and this was the comfort level I like to keep or we like to keep for the company. So as I said before for Eurasia we will fund it when it gets approved through more borrowing and we will see how the final transaction format and structure will be at that time.

But just worth noting that the cash generation in the second half will be like every year, stronger than the first half and we should be back on target by the end of the year..

Alright.

So you want to quantify it’s going markedly lower from current levels?.

Sorry, it’s a bit difficult to hear you, can you repeat question?.

Sorry you don’t see cash balances going markedly lower from current levels?.

Well, I am not ready. I mean our Q4 cash outlays are already planned and the cash generation, we don’t see a drop right now..

Okay. Thanks very much..

Thank you..

Next we have a question from James Wicklund with Credit Suisse. Please go ahead..

Good morning guys. Labor, I noticed that your severance charges this quarter were up from Q2 and Q1 and so I am curious to know where those severance charges here are and in contrast of against what we are hearing about the tightness of labor onshore U.S.

was some people expecting labor inflation of 10% to 15% in 2019, can you talk a little bit about your workforce and your personnel where these severance charges are, why they keep ramping up, when do they peak and what do you say for in U.S.

labor inflation?.

Yes, alright. So the outlay we had on severance in Q2 is basically the implementation of the reductions we did earlier this year associated with the lost step and the change of the organization. So this is not something new.

In certain jurisdictions, there is a bit of time needed from the notification of the individuals we have to let go and feel that is implemented. And just reflecting the cash payments or that charge that we took earlier this year associated with that organization.

So, beyond that, there is no continuous charges or outlays we have on severance, it is all linked to that one bigger thing we did earlier this year with a bit of lingering in the implementation due to local labor laws..

Okay, that’s helpful. And onshore U.S.

expectations?.

Onshore U.S., it is a tight market obviously for the coming quarter or two.

On the frac side, there is lower activity in which case some of the crews that we have operating today we will need to temporarily lay down and the way we do that, we look at these things individually whether we have to lay people off or we can try to furlough or try to bridge it in other ways with respect to the other businesses we have in U.S.

land. So, this is what our operating people are looking at on a daily basis to try to minimize the impact on our individual employees. And at the same time, I would say maximizing our ability to ramp back up quickly again both in time and in terms of quality. So, it’s a balancing act and this is just the nature of the very dynamic U.S.

land market and that’s something we are used to dealing with and we are dealing with as best we can. But, you are right directionally, that it’s a tight labor market in U.S. land and actually the only thing that’s impacted really in terms of both activity and pricing at this stage is frac.

The drilling business and our lift business is more or less unaffected by the softening or these off-take constraints. It’s the frac that is the main driver. So, we are going to be managing this, Jim, as best we can and it’s just another curveball that we need to deal with and that’s what we do for a living..

My follow-up if I could, you noticed Latin America was up well in Q3 and then you commented that it will probably be flat in Q4. On Q2, you talked about how Latin America and other places would have to recover in ‘19 to get the total global international growth we expect.

Can you talk about your expectations for Latin America in ‘19 as we sit here today? And before we get cutoff, I want to thank you for helping reestablish, resetting the bar for expectations going forward, so investors can have a better idea of what we can earn in this business if the world in, so, thank you on that.

But, Latin America, what’s your outlook for ‘19?.

Yes, thanks for that, Jim. Latin America for next year will be solid. I think like I said earlier, Latin America, sub-Sahara and Asia are the ones that we still have seen the largest revenue compression. There has actually been a couple of quarters now with quite decent sequential growth in Latin America.

Due to mix and just various ways things are panning out, it’s going to be flattish in Q4, but it doesn’t change our view for ‘19. I think we are looking at solid year-over-year growth again in Latin America in 2019..

Excellent. Thank you guys very much..

Thank you..

Next, we go to the line of Chase Mulvehill with Bank of America/Merrill Lynch. Please go ahead..

Hey, good morning. Paal, I guess a question about your U.S. customers and their outlook for 2019, have you had any discussions about 2019 yet with the U.S.

customers? And I realized in the near-term, you have got the Permian bottlenecks, but are you starting to see kind of accelerated activity in other basins outside the Permian yet?.

No, we have not seen any major shift in the activity projections for the other basins. So, I think that’s going to be continuing along the path that we already had established whether this is the Northeast Bakken, Haynesville or Eagle Ford. So, no real change to that.

And I think the interactions we have with customers around the Permian is that there is still a very positive outlook.

The growth we have seen production wise over the past couple of years was almost bound at some stage to kind of hit the infrastructure constraints and I think the industry there is very active in de-bottlenecking both the infrastructure when it comes to pricing, but it’s a lot of other challenges that we have as an industry in the Permian region from all sorts of infrastructure, which we are obviously participating in those discussions.

So, although there is going to be a couple of quarters with the challenges there, I think the overall customer sentiment on the Permian is quite upbeat and we are also committed to them and to the activity in the region, right. But we are just going to have to manage now the next couple of quarters.

And I think there are three dimensions of infrastructure challenges. It’s oil or crude, which I think will be addressed the first, but there is also challenges around gas off-take and NGLs, which also is going to have to be addressed right and the industry is working on all three aspects..

That’s very helpful. Appreciate the color. The follow-up, you talked about U.S. shale production and the challenges around that that you are starting to see.

These challenges – is this something that can be solved through technology or is this just reservoir challenges that we have to deal with?.

No. I think it can absolutely be solved through technology.

A lot of this has to do with the conformity of the frac to make sure that we frac every cluster that we perforate and we have diverse technologies that we have been promoting to the market for several years with some off-take, but I think this is likely to accelerate and it’s also about how you ensure that your frac stays within the allocated rough volume that you have for the well, which is more of a far-field conformance that you are looking for and we have technologies in terms of how we design the frac fluid to address that too.

So, all of these things I believe are addressable, but it requires a bit more of a reservoir focus on how the wells are drilled, how the wells are fracked, and we need a little bit more data to make sure that we do the right things here.

But the measurements are available, the analysis and interpretation of the measurements are available and the remedies that we need to do to the frac fluids are also available. It’s just a matter of adopting these technologies. We have them all ready to go..

Awesome. I will turn it back over. Thanks, Paal..

Thank you..

And our last question comes from David Anderson with Barclays. Please go ahead..

Hey, good morning. Paal, I was wondering if you can just kind of walk us through some of the LSTK projects and how they are ramping up in the Middle East.

Do you think by the year end of this year that you will get all of those costs absorbed – all startup costs absorbed and as we progress kind of the next couple of years of these projects, how should we think about kind of revenue and margin? Should revenue be largely flattish the next few years with margins continuing to pickup? I was just wondering if you just kind of help us walk through how to think about these projects as they move through?.

Yes. I mean, we have integrated drilling projects, of which LSTK is one of the business models of it. We have project of this ramping up in many parts of the world. You rightfully allude to the Middle East, where a lot of them are happening.

We have these types of projects in Saudi Arabia, in the Emirates, Iraq, India we will be probably starting up soon in Kuwait. So, there is a lot of activity along this business model, which we like, because we are entirely in charge of our own destiny.

So if we drill better, if we outperform what the norm is in the market, we benefit our customer and at the same time, we are able to drive our margins up.

So, to your questions about the ramp, it’s been a big ramp for us this year, which we are happy to take going one way, because it means we won a lot of work, but at the same time, it impacts the incremental margins and the cost base, but I would say that by the end of this year, these projects should be fully mobilized, the cost should be absorbed and we should have a very, very good platform for growth in all these areas as we go into 2019.

So, I would expect 2019 for sure to be up in terms of IDS or integrated drilling services revenues and the margins should start to come up as well. We have both the benefit of less mobilization cost, but also as we get quickly off the learning curve on these projects, that again is going to further give us tailwinds on margins.

So, I think you will see very strong growth for our integrated drilling business in 2019 and we expect that to continue into 2020 with a steady improvement in margins as we go along..

Paal kind of a separate subject turning gears to the North America, I was wondering if you could just talk, expand a little bit more about your strategy regarding sand and proppant in the U.S. land market. My understanding is you acquired another Permian sand mine during the quarter? And then you talked about third-party sales during the quarter.

Can you just kind of talk about, I mean, I would assume a big part of this is to ensure your supply chain for kind of maximizing utilization on your pressure pumping, but what else is this for? Is this also a strategy to kind of add more revenue in from North America markets? Can you just kind of expand a little bit on kind of how last mile solutions might fit into this? I know you have some of that, but is that something you think you need to expand out as well just kind of your overall strategy regarding sand in North America, please?.

Yes, that’s fine. That’s a good question, Dave. So, we started on this about 3 years ago in terms of investments. And our view at the time was that to further improve full cycle returns in this market, we wanted to have part of our sand value chain internally sourced.

The main reason for that is that in the up-cycle, there is always a massive inflation in both the sand cost at the gates of the mine, rail, transloading, and trucking.

So we decided at the starting point that we wanted to internalize part of this, because that would significantly reduce our cost base in the upturn and these things are easily mothballed in the downturn as well.

So, if we chose to actually buy it off the market entirely in the downturn, where certain players are willing to sell it probably below cost, that would be one contributor to driving full cycle margins.

Now, since then we have seen an emerging trend from our customers, who have also seen that there is a lot of inflation in this part of the value chain to the point that are starting to break at the way they bid the frac work up into individual products as well as services.

This has always been integrated in the past, where the frac company is the one that basically handles the supply chain for sand. But at an increasing pace, we see a separation of sand and service in terms of how the work is bid out.

So, in this process, we have stepped up a bit further, our investments into the value chain to the point that we are now pretty much self-sufficient. On sand, we have a pretty good fleet when it comes to last mile and we have also bought mines which are fairly closely associated with where we do most of our activity.

So, we have a couple of mines in West Texas, in particular, which is very, very key for our operations there. So, what started off to kind of drive full cycle margin has now kind of played into our favor into a major industry trend, which is the separation of sand and services in the frac market. So, we have done this through organic investments.

I think we have made some very good deals in the process. We don’t have anymore sand mines that we are looking to buy at this stage. We are where we need to be.

So the vertical integration is done and we see now the opportunity, like I said, obviously, first of all to supply our OneStim frac business with very competitive costs for sand, but at the same time, there is now a flurry of individual sand bids which we can also participate in using the investments and the capacity that we have already sunk in.

But we have no plans on investing further into this. We have done the investments. We have done them I think at the right time. And we kind of saw that industry trend coming and that’s what we are now benefiting from..

Great. Thanks, Paal..

Thank you very much. Okay, that concludes today’s call. Thank you very much for listening in..

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